When Worlds Collide
A Study of a Manufacturer's Involvement in Software Package Development
Jans Petr, Vice President of Mergers and Acquisitions for Evergreen, one of the largest commercial printers in America, sat back in his chair thinking through the events of the past two years. Evergreen had addressed strategic issues deftly historically, but something had gone wrong in this case. The newly formed electronic forms division was losing money with no end in sight. This was not the Evergreen way. Perhaps reviewing the steps in his decision-making, he could gain some insight into what happened and what could be done now, in 1996.
Evergreen had faced a dilemma in 1993. Many key customers were looking for a strategy to transition from preprinted paper forms to electronic forms that would integrate with their business processes. A transition from printed to electronic forms could mean a decline in revenue for Evergreen’s business form division but providing this transition could lead to several lucrative contracts, including immediate recovery of a $15 million contract with a former customer.
Petr knew he had carefully assessed the situation. Electronic forms were a significant trend for the future. Early entry into this market would give Evergreen a significant competitive advantage. Petr also noted electronic forms did not impact its high-margin business forms business significantly. In contrast, Evergreen’s low-margin, high-cost business forms customers could be transitioned to an electronic format, increasing profits.
Getting ahead of the curve would provide a competitive advantage if these trends continued. The challenge for Petr was how to get to market quickly. Acquiring or allying with an existing electronic forms company would provide the necessary speed to market, but few electronic forms packages were available at the time. Alliance with the leading electronic form package provider was examined very closely, but rejected because of several reasons, including:
- Evergreen would not control the product. Necessary customer customization would be under the software provider’s control, and Evergreen might not be able to meet customer needs.
- The existing electronic forms software product was targeted at the retail market and not a viable commercial product for deployment across an enterprise. Evergreen’s customer base consisted primarily of Fortune 1000 companies.
- The electronic software form product included many defects. Evergreen was unwilling to release a defective product to its customers.
As a result, Petr decided to present Evergreen’s customers with a solution that allowed transition from paper-based to electronic forms and allowed Evergreen to retain control of the software. The design objectives for the software were that it would access any customer database, operate on any customer workstation, and have all the features available in packages currently on the market. These were definitely aggressive goals.
Reviewing these decisions two years later, Petr was sure the initial logic for introducing the electronic forms product was sound. However, since hindsight was 20-20, he needed to understand what had happened and why the project continued to lose money.
Evergreen was a large business printing company with annual revenues in excess of $800 million. Evergreen provided four main product lines in 1996.
- Printed business forms, the largest division, manufactured monthly billing statements, credit card statements, mortgage applications, air freight package forms, and similar printed matter. The industry growth rate for these produces was declining due to increasing interest in electronic forms. Despite these concerns, Evergreen’s business forms sales were growing 15% annually.
- Direct response printing, the second largest component of Evergreen’s business, printed such products as sweepstakes package mailings, product catalogs, healthcare plan directories, business solicitation mailings, and credit card offers.
- Office products such as legal pads, computer paper, ink jet cartridges, ATM paper rolls, and brand name office supplies sold direct to corporate customers was the third segment.
- The Label division produced bar-coded shipping labels, consumer product labels, blank stock labels, and airline bag tags.
The divisional revenue and divisional and industry growth for the past two years for these four divisions is shown in the chart below.
|Line of Business||Revenue Growth %||Volume Growth||Volume Growth|
|Business Forms||38 %||15 %||– 2.5 %|
|Direct Response||25 %||36 %||5.4 %|
|Office Products||23 %||12 %||19 %|
|Labels||14 %||15 %||8 %|
Evergreen had been successful in each of these areas relative to the industry. Its success was attributed to working closely with existing and prospective customers to listen to customer needs and develop custom solutions to customers’ unique problems. Petr knew that Evergreen’s success at relationship building was due to its 700-person salesforce establishing relationships with customers which allowed the company to understand and anticipate customer needs better than the competition. Evergreen built the same type of relationship with paper suppliers to gain competitive cost advantages for its raw materials.
Petr instinctively knew the answer to his problem was not at the divisional level. He was less sure of Evergreen’s external environment, and how the company interfaced with this environment. The external environment was relatively simple with the major variable being paper cost and availability, both of which were controlled through relationships with a variety of paper suppliers and customer contractual obligations. Other external variables were printing technology and customer needs.
Overall, printing technology embodied low levels of uncertainty. Commercial printers adapted printing equipment to meet changing needs for decades, but implementation of those changes has been relatively slow. A small number of press and printing vendors also increased certainty. The effect of variations in paper costs and availability had been reduced by indexing product to the market paper price, resulting in zero net effect on Evergreen’s profit. The resulting simple and stable environment produced a low level of uncertainty in operations.
Petr also felt he had to examine every aspects of the Evergreen’s business, including its organizational structure. Evergreen’s organization can be divided into three distinct areas, which include:
- Sales, Evergreen’s driving force. Evergreen’s 700 salespeople were in constant contact with its accounts, which were primarily Fortune 1000 companies. Salespeople worked very closely with customers to identify client needs, then gathered as much information as possible about the problem, and found a solution that satisfied those needs. Salespeople frequently went to more experienced sales managers for advice, and occasionally brought in technical resources to resolve complex technical issues. The primary goal of the salesforce was customer satisfaction.
- Manufacturing. Evergreen’s several plants were distributed across the United States. Each plant had a variety of press equipment to accommodate regional needs. Manufacturing personnel continually focused on increasing production efficiency. The plant manager incorporated decisions on who was the best press to use in manufacturing a product based on printer or press availability, what date the job was needed, and operational efficiencies.
- Research and Development. R&D was a small department with less than 1% of the company’s employees. These people monitored press manufacturers for industry improvements, and changes in technology. R&D employees occasionally also would re-write software to improve performance of a particular press or printer, or take several technologies and use them in concert to provide a specific customer solution. An example would be the improvement in quality assurance provided to customers through creative uses of bar code technology. This service level was greater than Evergreen’s competitors could provide, and was marketed as a service offering.
Small employee groups often were brought together to develop custom solutions for customers. These groups would produce prototype products, followed by large batch production. Products were also inventoried for later order fulfillment if needed.
Petr was very proud of the culture of Evergreen. “Find a Way to Say Yes!” sums up the Evergreen culture. The customer was of paramount importance and finding a way to satisfy customer needs was critical to Evergreen’s success. This statement was so embedded in the culture that large banners declaring the motto hung on walls in many manufacturing plants.
Evergreen also prided itself on its independence. The employees were very loyal and proud to be with Evergreen. Evergreen was not the largest company in the industry, but saw itself as the best company.
Evergreen started the electronic forms division in 1993 by acquiring a small electronic forms company at relatively small expense. The acquired company had specialized in converting pre-printed business forms into electronic copies which may be stored in multiple ways. The software developed for filling forms on-line was cryptic by industry standards, but met customer’s minimal needs. The acquisition became a separate division in Evergreen, joining the sales, manufacturing, and R&D divisions. The new division’s initial management team consisted of executives from the acquired company. They projected that electronic forms would generate more than half of Evergreen revenues in a few years. Evergreen structured the division as a profit center which was fully accountable for its own costs and its share of corporate overhead.
Internal views of the new division were very positive, but the customer’s view of the new division was mixed. Initially, the new division provided needed direction for the electronic forms industry. However, the software product was unsatisfactory. Evergreen hoped the existing product would evolve into a more robust product which could be the industry standard. However, it did not.
Evergreen decided the existing management of the acquisition would not be able to achieve desired results. Petr put Irv Jon as head of the electronic forms division, to run the division “the Evergreen way.” Jon was a senior sales manager with fifteen years with the company. He had contacts with all of Evergreen’s major accounts and knew everyone within Evergreen.
Software Product Development
Petr and Jon met shortly after Jon’s appointment to discuss what the company was about, and more specifically, what the division was about. Developing a software product was very different from manufacturing conventional printed products.
Petr began the meeting by asking, “If you were to summarize the art of software development into the basic components what would they be?”
Jon carefully structured his answer into inputs, outputs, and the processing which converts one into the other, and responded, “The inputs to software development are a fixed set of requirements, a customer (or focus group) who works with the development group to provide controls throughout the development process, highly skilled technologists, and a complex methodology for delivering software. The output of the development process is a software product. In Evergreen’s situation, the software is more complex than most. The product is to operate against multiple databases on the back end, operate on several operating systems, and retain all the features of currently available electronic forms software. In the software development industry, one operating system is typically chosen, and one database is selected for the data repository. The goal for Evergreen therefore is much more challenging than what would be considered the norm for the software development industry. Transformation of inputs to outputs in software development is based on a sophisticated methodology of developing software, and a set of software tools which require highly skilled people to operate properly.”
“Okay,” Petr replied, “I think I understand these basics. When we produce an order of business forms from a roll of paper it is a much simpler process. What about the elements that influence the production of electronic forms?”
Jon had been waiting for this opportunity to describe the most surprising discovery when he took over the division: “Our software development is based on monitoring technology trends and products. There are several areas of technology to monitor and each of them are changing very rapidly.”
Petr thought about the implications of Jon’s statement as Jon quickly added, “The technology for customers’ environments must also be monitored. Because the product has to integrate with any possible configuration the customer may have, and the customer base is the Fortune 1000, this leaves the entire spectrum of software and hardware combinations.”
“I understood that you needed help on the technical side so we hired a technical manager from outside the company to manage day-to-day division operations.” Jon knew that Petr had given him the tools needed to succeed. The new manager provided the organization with the technical management experience necessary to deliver the product. The combination of Jon’s internal experience with the organization and its customers and the new manager’s technical expertise were seen as a combination that provided the best of both worlds.
When the new management took control, several products with marginal sales were discontinued, employees were encouraged to focus on creating long-term solutions for customers, and staffing was increased to support these efforts. However, the marriage was not perfect. Several problems began to emerge within the division. The costs of developing new products were three to four times greater than Evergreen expected. The added time was unacceptable and had to be pared down to serve the needs of a sales driven organization with relatively short time horizons. Jon particularly had difficulty with the longer-term time horizon.
Evergreen always had been a customer-driven company. Its unique strength was to find solutions to unique problems customers might have and work with customers closely. Often, this was difficult because of limits imposed by available printing and press technologies. The level of difficulty in addressing these problems increased when Evergreen had to face the multitude of possible hardware and software combinations in electronic forms applications, especially in large companies.
The sales force was having a difficult time selling and servicing the electronic forms market. Evergreen’s existing sales force was used to selling paper forms, labels, and office products. Electronic forms and the associated technology was foreign to them. Selling an unfamiliar technology to customers became very difficult. The problem was compounded because electronic forms software was sold to a customer’s information systems (IS) department, not the office supplies person salespeople usually contacted. The IS personnel also spoke a technical language the sales force had a difficult time understanding. Also, the sales force traditionally received incentives for each sale. Selling electronic forms was a one-time transaction with few, if any repeat sales. Several customers and other sources in the industry informed Jon that Evergreen’s salespeople were not promoting the software products aggressively.
Another problem was that technical personnel who were developing the software for the new product were constantly being pulled off the project to work on pre-sales support for the sales force. Training and providing support for the sales force was important for a customer-oriented firm like Evergreen, especially when the sales force was unprepared to communicate with highly-technical IS department customers. However, the increasing interruptions created additional delays in developing marketable products.
Recruiting software developers was also challenging because of the highly technical skills needed and the reaction of qualified personnel to working for a manufacturing company. Professional software developers typically resist working for manufacturing firms because of the lack of prestige compared to high-tech firms.
Petr knew these problems were not insurmountable, but that they must point to a fundamental problem he needed to solve. He needed to know what the fundamental problem was and what he should have done differently to avoid the problems he was currently facing. He also needed to know what he could do to rectify the situation now.
About the Author(s)
Ann Feyerherm, PhD, is Director of the Masters of Science in Organization Development (MSOD) program and chair of the organization theory and Mmnagement discipline. Previously, Dr. Feyerherm spent 11 years as a manager of organization development at Procter & Gamble. As a consultant she worked with top-level companies on projects ranging from team function to leadership development and managing change. Dr. Feyerherm's research focuses on government, business, environmental community collaboration and increasing human capacity through strength-based approaches. She is currently serving a five-year leadership position within the Organization Development and Change Division of the Academy of Management.