The IcebergBy Laura Hughes | Posted 01-01-2002
Case Study: Royal Caribbean Cruises and Microstrategies
Company | Royal Caribbean Cruises Ltd.
Corporate Headquarters | Miami
CIO | Thomas Murphy
Employees | 28,000
Passengers carried in 2000 | 2,049,902
Bookings after Sept. 11 | 50% drop from previous year's levels
Revenues | $940.7 million in Q3 2001, up 11.2% over Q3 2000
Net income | $159.2 million in Q3 2001, down 21% from Q3 2000
Yield per cabin | Off 10% to 15% in Q4 2001 from Q4 2000 (est.)
In March 1999, when Tom Murphy was hired as CIO of Royal Caribbean Cruises Ltd., he was asked by CEO Richard Fain and President Jack Williams to help shake things up at the $2.9 billion Miami-based company. And what a shake-up it would be. Fain wanted to practically double the size of the company over five years, increasing employees from about 17,000 to 40,000 and the fleet from 17 ships to 29the most aggressive launch schedule in the history of the cruise business. Fain's $1 billion expansion plan would also take the corporation digital.
And why not be bullish? Industrywide, bookings and revenues were soaring to record highs, and the country's long economic expansion had finally begun to lure new legions of middle-class families to the high seas for the first time. Indeed, one of the biggest challenges RC and other cruise lines had back then was figuring out how best to spend their relatively fat budgets, not just to meet growing demand but to boost repeat bookings. "Cruise lines were stepping all over each other to stretch capacity, steal passengers from one another and boost occupancy rates," says Glen Reid, a cruise analyst with Bear, Stearns & Co., "and Royal Caribbean was among the most aggressive."
During his first big meeting as CIO, Murphy recalls, each business unit manager got up and outlined his plan to woo more customersoffering up everything from more luxurious menus to bigger dance floors on ships. Then it was Murphy's turn. "If you would rather invest in lobsters and new sheets, more power to you," Murphy recalls telling the group. "But if you want to launch four new ships next year and put $10 million worth of IT equipment on each, then it's going to take a huge difference in attitude about how you spend money on IT." Murphy says there "was a huge disconnect in their thinking, a gap that had kept IT and the business apart."
At first, Murphy's remarks hit dead silence. Before he joined the company, IT had been the department that everybody loved to hate, known more for wiring up systems that didn't work and for being a "command-and-control organization that had no sense of customer service," recalls Murphy. Even policies designed to resolve complaints were problematic: Shoreside and shipside systems were not coordinated, and some customers would get compensated twice for the same complaint, costing RC unnecessary millions.
Now here was this new guy, Murphy, talking about leading change and supporting the business. "Jaws dropped," RC Vice President Perry Sandburg recalls. But the more Murphy talked, the more his new colleagues listened. For each of the business strategy goals detailed in CEO Fain's 1999 five-year plan, Murphy cited a way that IT could be used to achieve it. Fain wanted to boost customer loyalty and occupancy rates; Murphy's new digital reservations network would replace what he called "a spaghetti code" of 12 different, glitch-prone systems that didn't talk to each other nor provide any data about customers before they boarded ship. Fain wanted RC to be smarter about purchasing everything from soap to onboard entertainment; Murphy's new supply-chain management system would automate the purchasing process, cut costs, improve planning and pool big orders of supplies for better prices. Fain wanted to expand the employee rosterfastadding 27,000 new hires in five years; Murphy would automate HR to make that rapid growth possible without breaking the bank or straining current systems. The goal: a single view of all employees, their salaries, benefits, skill-sets and succession plansand the tracking technology to keep tabs on it all.
Murphy also knew that to make it all work, he'd have to boost IT's visibility inside RC: more senior titles for new IT hires, training of IT recruits in business strategy, and performance reviews that measured business initiative along with technical savvy. At one point, Murphy even handed out RC-IT polo shirts with special logos as part of an internal branding campaign he devised to boost department morale. "A lot of lightbulbs went on that day," Murphy recalls, "not just among the business folks, but among the IT people as well."
The company would later call the technology-driven expansion strategy Project Leapfroga name Fain gave to it one day during an officer's lunch. The goal, ultimately, was to roll out a whole new fleet of high-tech ships to jump RC from the No. 2 berth to the leader in the industry. Each new vessel would cost up to $350 millionand be packed with about $10 million in IT investments.
But like so many CIOs charged with bringing a corporation into the Digital Age, what seemed headed for the stratosphere in early 2000 would end up coming down hard. As early as spring 2001, less than two years into Fain's push, storm clouds were already brewing. The recession in Japan, a spending slowdown in Europe and the continuing fallout from the dot-com bust in the U.S. had begun to erode bookings and revenues. Still, RC executives pushed forward on their plan even as they began heavily discounting rates to keep cabins filled. It worked for a while: Before Sept. 11, RC was able to fill more than 90 percent of its beds with passengers, but only by charging rates as low as $369 per person for a seven-night Caribbean cruisea far cry from peak-season, first-class rates of $3,285 per person. It was a price discounting strategy that prompted executives in the cruise business to joke that it had become cheaper to take a three-day Caribbean cruise than to take a family to dinner in Manhattan. The strategy carried a price: Partly as a result, fourth-quarter 2001 yields for RCthe combination of price and occupancy rateswould be down at least an estimated 10 percent to 15 percent from the last three months of 2000.
On Sept. 12, nearly two years to the day after Murphy first outlined his IT vision for Project Leapfrogand halfway into the project, with some of its changes just starting to pay off in the millionsthe bottom fell out. That day, Murphy found himself called into a very different kind of meeting.
It was the morning after the terrorist attacks in New York and Washington, and Murphy and five other executives, including the CFO and the chief HR officer, were assembled by Fain to talk about how much the world had changedand to take action. Hundreds of people were phoning travel agents across the country to cancel fall and winter cruises, and more calls were flooding in by the second. Dozens of ports were closed, and thousands of people were stranded on ships all over the globe: One ship stranded off Vancouver would have to wait five days to disembark its rattled vacationers.
Fain's news then was hardly surprising: It was likely to be a very bad quarterand suddenly, the future beyond December didn't look too great, either. Fain asked all six executives at the meeting to quickly calculate what it would mean if each of their units were to cut their operating budgets by 25 percent. Two days later, with bookings now down 50 percent from the same week the year before, Murphy presented the group with three IT options: slow down Leapfrog, cut parts of it or stop it dead in the water. To Murphy's surprise, Fain, Leapfrog's champion, opted for a dead stop. More than $300 million had to be cut from the company's operating costs immediately, and most of that would have to come out of the future. That meant Leapfrog. "Nobody in IT thought that they'd shut down Leapfrog altogether," Murphy says. "The company treasurer was the only one who counted that day." Fain would later tell the SEC that the financial impact to RC for the week following Sept. 11 was $25 million.
Over the next two weeks, some 400 people lost their jobs, 112 in IT alone, and nearly every part of Leapfrog was mothballed for better, less uncertain times (see "Leapfrog, Grounded.") Murphy's annual IT budget was slashed, from $83 million in 2000 to about $42 million in Octoberroughly the same amount he had to work with when he first came on board. "It was the hardest thing I've ever had to do," Murphy said, "and unlike anything I've ever been through in my life."
Yet no sooner did he complete the layoffs and reorganize his staff around a "holding pattern" of basic IT services than new crosswinds began buffeting Murphy's department. On Nov. 20, RC announced plans to merge with P&O Princess Cruises PLC, kicking up whole new waves of uncertainty. RC executives told Wall Street analysts at the time that the IT departments of the two companies would likely be combinedsignaling more streamlining ahead, and perhaps just one CIO running both shops.
Murphy wasn't in the loop this time. He and the other top executives were told of the merger two days before the public announcement. Now Murphy isn't sure what his future holds: On Dec. 17, No. 1 Carnival Corp. made a hostile takeover bid for No. 3 Princess. If regulators reject both deals, RC would remain No. 2. But if regulators don't object, Princess shareholders, during a meeting set for Feb 14, could vote to opt for Carnival and leave RC at sea.
Murphy's struggles, though many, aren't unique. Across industries, technology budgets continue to be squeezed, and post-Sept. 11 uncertainties, market turbulence and wrenching staff cuts in some industries continue. "I think at some level, everybody is going through this period of uncertainty," Murphy says. Adds John Kotter, a Harvard Business School professor and the author of several books about change management: "Without a good vision and a clever, clear strategy in times of rapid, sudden change, managers can rarely inspire the kind of action needed to go forward."
So how do you manage in a storm when the old, reliable compass isn't working? "You get small," says Mercer Management Consulting Inc. travel industry expert Vasco Fernandes. "You begin breaking longer-term strategy into smaller stages so as to be more focused on the immediate."
Murphy calls it microstrategy. "Within the context of preserving long-term goals, there are a whole bunch of microstrategies you can use to get there, and these stepping-stone strategies need to be very nimble and adaptable," he says. With microstrategy, "you chunk your planning into smaller pieces than before, so it's more manageable and more affordablein whatever context you're going to put affordableso that it's easier to adjust things along the way, if necessary," Murphy says. "But at the same time, you always understand where you need to be."
Microstrategy isn't newit originated during the downsizing craze of the 1980sbut it's gotten renewed attention in the wake of Sept. 11 at a number of companies, especially those tied to travel, such as airlines and hotels. Kotter says microstrategy can help crisis-hit companies "dodge left or right in a way that is sensible for the long term. When a meteor hits, don't panic. Find the opportunity in change. If the long-term vision is right, the trick is not to get swamped by sudden jolts, but to always keep your goal on the horizon."
After getting the news about Project Leapfrog, Murphy had what he called "a long, bad weekend"then came back the following Monday morning to begin instituting the first phase of a microstrategya three-pronged rapid-change plan he devised to save his department, his own job and any prayer of bringing back Leapfrog. The first phase, called Survive and Thrive, was aimed at getting RC's IT department through painful layoffs with as much haste and ease as possible, then focusing remaining staff on some new goals aimed, ultimately, at restoring the project, possibly someday even rehiring those who'd been cut from the roster. It was a two-week process of involving HR, pulling performance ratings, talking to people about which people to keep and which to let go. "You can't do this lightly," he says. "There are certain intellectual capsules you don't want to let go because you know how damn hard it's going to be to get back when you're up and running again."
Back to Basics
Back to Basics
Then came phase two, or Back to Basics, aimed at focusing the remaining IT staff around RC's new scaled-back mission through 2002. The goal: to use the next 12 to 16 months to shore-up core systems, make core processes more efficient and train staff to take Leapfrog up again, when the time comes. "We asked ourselves, what is our core job?" Murphy says. The answer: "Keep the utilities runningthe network services, the e-mail services, all of the things that people just expect to be there." Murphy's crew, for now, still has six new ships to deliver in the next couple of years, each to carry $10 million worth of hardware, IT services and equipment, including 40 to 50 servers, three distinct networks, hundreds of PCs and hundreds of smart cash registers. "It's a very, very complex environment," Murphy says.
By late October, with staff cuts and refocusing efforts behind him, Murphy was feeling depressed. He met with RC President Williams and offered to resign. "I told him that, without Leapfrog, he didn't need me anymore," Murphy says. But Williams talked him out of itin part by telling him Leapfrog would "need to start up again at some point."
So in November, Murphy began sketching out phase three, which he calls Restart, a plan to phase Leapfrog back into prominence, gradually, over the next two to three years. Under this plan, completing the reservation system would be the first priority, and supply-chain reforms would be the second. Putting HR networks on the ships would be third. Murphy is working on the assumption that 2002 will be flat and that only in the first quarter of 2003 will there be any substantial increase in prices and demand. "We'll have detailed discussions about this in January and February," Murphy says. "We're still far enough away from where anybody thinks we're going to restart anything now, so we've really just created an internal discussions group to weigh and debate the relative merit of these different projects."
At first glance, Murphy's microstrategy may seem to be just another name for "holding pattern." But microstrategists have a distinctive mindset, says Nathanial Foote, principal and leader of the organizational design practice at McKinsey & Company Inc.'s Boston office. "Traditional managers set corporate strategy more rigidly, whereas managers who microstrategize keep the organization focused on the right overall set of business goals and opportunitiesand then let short-term strategy adjust for events in the marketplace that might take one off course."
With microstrategy, Murphy says, "It's very important to keep your eye on the long-term mission"in this case, Project Leapfrog. "We face the same rapid growth and aging systems and infrastructure that we had pre-Sept. 11. We still need to address that at the macro level," he says. The lesson of the past few months: a little more incrementalism in planning is a good thing. "I think as we move forward, we'll find we can apply many of the things learned these past few months to our six- to 12-month strategic initiatives."
Is holding on to Leapfrog and Fain's five-year plan unrealistic now? Murphy doesn't think so. "The unassailable fact is we're still going to have 29 ships instead of the 23 we have now. You can't stop that long-term reality in a company that moves big, fixed capital costs in the form of ships. There are things that are optional and things that are not optional, and microstrategy helps to make the mandatory happen, one way or another, amid rapidly changing circumstances." Anything that his IT department does on the existing reservations system, for instance, has to take the project's new goals and changes into account.
If expansion was tough to manage, it's nothing compared with rapid retrenchment. "Every day now I call myself the Chief Morale Officer," says Murphy. "We've asked people to do a 180 in terms of what they're doing, from very exciting, cutting-edge stuff to, 'Hey, let's evaluate this process and make sure it's as efficient as it can possibly be.'" Adds Mercer's Fernandes: "CIOs now have an even more critical role, one could argue, because with less funds to go around, they've got to be making some very difficult callslike what to put off or scrub altogether. To get the biggest impact for a reduced level of spending within a given timeframe, the expertise of a CIO is key."
In RC's case, the possible merger with Princess has made that painfully clear. E-mail systems, communications, new-build efforts would be merged, but everything else is uncertain.
Who would run it? Maybe Murphy, maybe not. Williams, isn't saying. (See Thinking Out Loud.) "What we're doing now is trying to maintain a level of sanity," Murphy says. "We're not worrying so much about Princess or their IT shop and what it may mean. We're worrying about what we know todayour business. Furthermore, we're forbidden to speak to anyone over at Princess, so there's nothing practical that comes out of trying to envision something that you have absolutely a vacuum of knowledge on. Besides, nobody believes that four to six months from now anything that we're talking about now will be valid."
Murphy knows that lesson all too well by now. Sink or swim, he's gaining a whole new respect for the art of treading water.
Laura Q. Hughes has covered the travel industry for six years. Her work has appeared in a variety of publications, including Elite Traveler, Crain's New York Business and Fodor's Travel Guides. Comments about this story may be sent to firstname.lastname@example.org.
What is it?
A method for breaking short- and mid-term goals into smaller strategy segments with a duration of weeks to months. The goal: to respond faster and smarter to rapid change and high levels of external uncertainty.
Who's it for?
Companies facing sudden market shifts, pending mergers or an economic downturn. Business payoff: Promotes flexibility, shortens budget and strategy cycles to save unnecessary costs, and enables faster course corrections.
Challenge for the CIO:
To keep scaled-down strategies aligned with long-term goals, CIOs need to work closely with the business side to lead change, and keep sight of the long-term vision.
Highlights of Royal Caribbean's five-year, $1 billion Project Leapfrog and how the Sept. 11 attacks mandated a 180-degree shift in course.
|RESERVATIONS||SUPPLY CHAIN||EMPLOYEE MANAGEMENT|
|PROBLEM||Twelve different, incompatible, glitch-prone, legacy reservation systems could not reliably handle 45,000 calls per day and did not give marketing a common view of the customer before they boarded ship.||Spike in fleet size, from 23 ships to 29, threatened to stretch the supply chain to the breaking point.||A surge of 27,000 employees would overwhelm RC's unwired HR department.|
|SOLUTION||Build a $50 million, Web-enabled reservations system, the company's first.||Design new in-house network to coordinate and leverage purchasing, fleet management, entertainment, food and maintenance schedules and supplies.||Build Web-enabled, in-house HR network on shore and onboard ships to coordinate and manage all employees.|
|PLANNED PAYOFF||Boost revenues and customer loyalty by letting agents book more customized vacations for clients.||Cuts costs by millions of dollars annually, reduces duplicate purchasing, leverages buys for volume discounts.||Cut employee costs, reduce HR headcount, win volume discounts on health plans, track employee performance ratings and skillsets, and trade expertise across locations.|
|STATUS||On hold.||Scaled back from a $9 million project to $1.4 million for 2002.||Shoreside portion complete, shipside portion on hold indefinitely.|
SOURCE: RCCL LTD.
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