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Computer Upgrade: To Hell and Back

A company's struggle to upgrade its computer system is detailed, while advice on lessons learned is offered.
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Changing computer systems can be hell, as one company found out. But the benefits of upgrading can often beat the heat

QUICK START
Challenge:
To get a better handle on how customers are doing and how well ProSalon is meeting their needs

Solution: A turnkey system that not only analyzes customer sales but also manages the inventory and order-fulfillment needs of distributors

Resources: A turnkey tracking system from DSM; ClipperShip software from Tracer Research to enhance DSM's parcel-tracking ability

* * *

Steve Cowan makes a strong visual impression -- John Goodman crossed with Elvis comes to mind -- that at this particular moment is heightened by his having situated his substantial bulk on a small sofa in his company's tiny conference room. The room itself is a slightly tacky affair, a partially walled-in space that looks like a lazy afterthought to the warehouse that houses it and the rest of the company's cramped offices.

Though generally soft-spoken and mildly restrained, right now Cowan is experiencing an emotional high. He is reminiscing about the first computer he bought for his Joliet, Ill., hair-salon product-distribution company, Professional Salon Concepts (PSC), back in 1985. The computer, a $2,000 IBM PC-XT, came with only DOS, he recalls, and he couldn't do anything with it the first day except format floppies. So he stayed up late into the night, lost in a sort of techno trance state, formatting floppies. "I was the first person in my family to own a computer," he says, beaming.

The mood shifts, though, when a minute later Cowan describes how it went when he turned on his company's new $200,000 computer system last April. His face darkens with the memory, as he describes a scene that evokes one of the middle levels of hell from Dante's Inferno. The scene includes some people weeping openly, others frantically yelling "Fire!" and still others moving through the tortured group inflicting even more pain.

He's not kidding. In addition to the personal trauma, the move to the new system precipitated a plunge in sales, one of the few in the company's 11-year history, and almost caused Professional Salon Concepts to flub hundreds of critical shipments to customers. Five months later, the system still doesn't do everything he needs and expects it to do, including some things the old system did.

No wonder he looks back so fondly on his disk-formatting days. But all in all, Cowan believes that stepping up to the new system was the right move -- at the least, it was a sort of necessary evil. The system, he explains, represents a milestone in his ongoing quest to get a better handle on what his customers are doing and how well his business is meeting their needs. "We have questions we've wanted answers to for years, and we're always coming up with new questions," he says. The new system, he contends, should be able to provide the answers, even if he has to go through hell to get them. And despite the setbacks involved in getting the system up to speed, he insists the company is already running more smoothly than it ever has.

Cowan was in the salon-distribution business for a long time before he began worrying about an information gap. He started in 1972, at the age of 16, working for his father's barber and beauty-salon distribution business, freezing or roasting, depending on the season, in a delivery truck as he tried to pick orders while barbers made a game of pinching combs behind his back. When he was 18, his father sold the business, and Cowan spent most of the next decade working for another distributor. He was good at his work, quickly climbing to the position of vice-president and general manager, but he grew restless. "When I was 16 and making a lot of money, everyone thought I was terrific," he says. "But when I was 27, I realized I wasn't a boy wonder anymore. I felt I either had to find some way to have an impact in this business or get out of it."

So he started his own regional distributorship, focusing on a then little-known line of salon products that carried the name of celebrity hairstylist Paul Mitchell. He hired four people and rented a small warehouse to serve as both office and inventory space. No one bought the products. He gave away free samples; the hairstylists said they hated them. He let three of his four employees go, and moved his inventory out of the warehouse in the middle of the night to a basement location.

Desperate, he decided to try one more tack: he offered to bring in a top hairstylist to a salon after closing time to provide the owner and the employees with a free two-hour hands-on course on how to get the most out of the products. The first salon to take him up on the offer sent Cowan home that evening with a $1,000 order. Cowan realized he had stumbled onto a vision, a way of making an impact. "So many distributors walk into salons with the idea of taking money from the salon," he says. "I decided I would go in there with the idea of helping the owner and the hairstylists make money, by creating an information-rich environment." It just so happened that providing such an environment for one evening allowed him to spend as much time with the owner as the average order-grabbing salesperson does in nearly a year's worth of sales calls -- figuring about three minutes per call and one call per week. By growing owners' and stylists' loyalty, he guessed, he could grow orders. Cowan declared that he wouldn't sell to a salon unless it let him run a course there first.

PSC, which moved into its current warehouse/office space in 1988, now has 45 employees and 3,000 salon customers in Illinois and Indiana combined, and 1993 revenues were $7 million. Keeping the tacky warehouse-based offices when the company can afford plush digs is Cowan's way of reminding himself that what counts is what goes on in the salons. In 1985 Cowan installed a $3,000 PC accounting-software package on that first PC-XT; though he added PCs over the coming years, he continued to run the company on the same software. He didn't have much motivation to upgrade. He and his 15 salespeople knew the company's customers well, thanks to the courses.

Warehouse operations ran reliably, too. Partly because of Paul Mitchell's focused product line, which accounted for 75% of PSC's business, PSC carried about 1,000 stock-keeping units, compared with the average salon distributorship's 10,000 or so. That enabled PSC to promise, and to religiously deliver on, 24-hour turnaround on all orders. To make sure the products got out, Cowan and his employees would often stay up past midnight packing orders and then driving them to the UPS hub, a few towns away, by the 2 a.m. deadline. He knew his obsession with service was paying off when he stopped by a customer's salon just after the previous day's order had been dropped off and the owner pulled him outside the shop and pointed to a building down the block. "He told me that was where one of my competitors was based and it took him three days to deliver orders," recalls Cowan. "He said he didn't know how we did it, but it meant a lot to him." The last thing he needed to do, Cowan believed, was switch to some complicated new computer system.

Then one day in late 1988 a consultant from PSC's second-largest supplier came calling on Cowan. Her name was Terri Klimko, and Cowan had met her once before: he had actually interviewed her for the job on behalf of the supplier when her flight to the supplier's home base was grounded because of bad weather. Terri, who had been a corporate trainer for Pillsbury's franchise-restaurant division, and then for a national chain of weight-loss clinics, was welcomed by Cowan, who was happy to see her again. They chatted amicably for several minutes, and then Terri pulled out a pen and a notebook and told Cowan she wanted to ask him a few questions that would help reveal how well he knew his business, questions she had developed while working with franchise CEOs. Fire away, said Cowan, trying not to smirk.

Her first question: Can you tell me whom you ship to each month? Cowan shrugged. "Whoever orders," he said, suspecting, with discomfort, that he wasn't quite catching her drift. She let that one go by. Could he tell her how much each customer bought, by supplier? Could he rank his customer sales? Could he break his sales down by product? Terri kept going. After the third no, Cowan started to fidget; after the sixth or seventh he started to glare. Terri glared back. "I was taught that if you can't answer these questions about your business, you're losing money," she said. That did it. The sales call was over, and Terri was politely ushered out of the building. But the interview got Cowan thinking.

And not just about the business: he and Terri were soon married. Terri joined the company, and quickly set about applying her own corporate-training techniques to Cowan's obsession with service. She developed a business "template" for salons -- a handwritten spreadsheet that allowed salon owners, with PSC's help, to break down and analyze every aspect of their business. It addressed questions such as, How much does each hairstylist bring in per client? Do enough clients receive extra services like perms? How many clients leave the shop with take-home hair-care products, and which products do they buy?

Most salons use accountants who don't specialize in the salon business, explains Terri, and they end up giving the owners faulty advice. For example, if the accountant sees that profits have dropped, he or she will typically tell the owner to cut down on supply orders across the board -- not taking into account that take-home products are not only a cost but a source of revenue as well. "I just hate to see a salon owner or hairstylist miss out on an opportunity to make money," says Terri solemnly.

The Cowans were becoming more than just trainers and educators to salon owners. They were becoming quasi partners in their businesses. If a few stylists staged a walkout, the frantic salon owner would have the Cowans rush over to help calm the others. If preparations to hold a grand opening for a new salon fell behind schedule, the owner would call the Cowans in the middle of the night to have them come by to lend a hand. Providing, of course, that the salon owner was ordering up a stream of PSC's products. "The better the customer, the more of our time they get," says Terri. "If we were selling our services as consultants, they wouldn't be able to afford us."

But the more PSC did to help its customers improve their businesses, the more the Cowans worried about whether they had a good enough handle on their own business. PSC had begun offering a turnkey computer system and support services at a break-even price to salons to help them answer all the questions Terri could throw at them; but PSC's computer couldn't do the same for Cowan. To get some of the most basic data points Terri was requesting (such as customer rankings by overall sales each month), Cowan turned to Mike Fenske, an up-and-coming management consultant with Arthur Andersen in Chicago who was dating his sister (they eventually married). Cowan, who had become adept at working with PSC's software, such as it was, would pull down as much relevant raw data as he could from the system, put the data onto a floppy disk, and send the disk to Fenske. Fenske would then write programs on a PC database-management system to develop rankings and other useful reports.

The approach worked to a certain extent, but it was time-consuming, and the list of Terri's as-yet-unanswered and new questions was growing far faster than the list of questions Cowan could get answers to. How did the profit per client break down into product lines? How did revenues per salesperson vary over the days of the week? How did the error rate in order fulfillment vary from month to month? There were other computer-related weak links in the business: because the computer system was so slow, purchasing and accounts payable were still being done manually and only a few months' worth of detailed order information was being stored, so when older information had to be examined, someone had to pull printed invoices out of file cabinets and examine them one by one. "You really need to be able to get that kind of information at a glance for it to be useful in running your business," says Terri.

The final straw for Cowan came when he received a report on small-distribution businesses put out by an industry trade group. "According to the criteria in the report, PSC was extremely well positioned in every aspect of the business, except for one," says Cowan. "We were way behind when it came to investment in technology." It was time to go shopping.

It was April 1993, and Mike Fenske was now working full-time for PSC as the company's controller. Fenske approached Arthur Andersen's small-business unit about its taking over the job of finding and setting up the right system, but he and Cowan ultimately decided they'd be better off keeping the task of selecting the system in-house and letting the vendor set it up. "A consultant comes in and tries to understand everything about your business in a few days," explains Fenske. "He or she has a great process for doing that, but it's better when it's being handled by someone knee-deep in the business." Besides, he adds, a consultant usually won't know much about the specifics of the software packages that are being considered, which is where a company like PSC needs the most help. In a sense, Cowan and Fenske were, between the two of them, creating and filling the position of chief information officer.

By late 1993, after poring over literature and sitting through countless demos, Cowan and Fenske had settled on a new software package. It was a fairly generic accounting-oriented small-business program that incorporated modules for both analyzing customer sales and managing inventory. PSC was three days away from throwing the switch on the new software -- the $20,000 bill for the package had been paid, and the employees were in the middle of intensive training on it -- when Cowan dropped by a get-together of Paul Mitchell distributors and ran into a pal who owned a North Dakota distributorship. The friend described the system he was using to run his company, and Cowan was impressed.

"People are always telling you how great their system is -- it's an ego thing," says Cowan. "But this package really sounded terrific." The software, sold by a company called DSM, not only provided a wide range of accounting and customer-reporting features but was specifically geared to the inventory-management and order-fulfillment needs of distributors as well. When the friend invited him to come out sometime to see the software in action, Cowan excused himself, ran to a pay phone, and called Fenske to tell him to put the brakes on starting up the new software and to get ready for a trip to North Dakota.

Cowan and Fenske liked what they saw there, and Cowan called Terri to tell her he wanted to buy the system. He also told her it cost approximately $200,000. She was stunned. "Are you 10 times as excited about it as you are about the other one?" she asked. He said he was, and after a pause she told him to go for it. He and Fenske then went to Minneapolis to visit DSM, which put them in touch with a series of glowing references and provided some masterful demos. To Cowan's disappointment, though, DSM's salespeople couldn't demonstrate a few of the features they had described, such as the ability to adjust orders automatically to reflect outstanding customer credits and back orders and the ability to determine the least expensive way to pack and ship each order. Cowan told the salespeople he considered those capabilities crucial, and they assured him that the features would be up and running on the package they delivered to him. Cowan signed off on the deal, writing off the $20,000 investment in the other package.

DSM's technicians came to PSC to install the package at the end of 1993, and Cowan got his first nasty surprise: the missing features he had been promised simply weren't part of the package, nor were there any immediate plans to make them so.

"The salespeople had sold us a bill of goods," says Cowan. "I hit the roof." He and Fenske also blamed themselves, of course, for not having insisted on seeing the features up and running before they considered them a selling point. Cowan's most immediate concern was the new system's inability to automatically calculate the best way to pack and ship orders, a capability he believed could cut way down on the labor-intensity of his warehouse operations and shrink his shipping bills. But a quick search turned up a separate software program, Tracer Research's ClipperShip, that provided the feature and little else; DSM agreed to pay half the new program's $10,000 cost, and to make it work smoothly with its own package. Cowan was pleased with the way the combined software worked, but the extra effort pushed back the launch date of the new computer system by several months. As for the ability to reflect credits and back orders, DSM said it would add the feature if PSC would pay the programming costs of $20,000 or so. An irritated Cowan declined.

PSC spent the first three months of 1994 preparing for the changeover to the new system. That included teaching people the somewhat more complicated operations of the new system. Entering a new account, for example, called for using six different screens on the new system, while it had taken just one on the old system. It also included going through practice runs using real data so any problems could be uncovered before the system was actually involved in running the company. In retrospect, says Fenske, three months was inadequate. PSC should have spent at least twice as long looking for and eliminating glitches, he asserts.

On April 20, 1994, the company's operations were switched over from the old system to the new one. As the orders poured in, the telephone operators found themselves forgetting how to navigate through the system, encountering unfamiliar error messages, and running into situations that hadn't been covered in their training. Employees had been instructed to shout "Fire!" when they were stuck so Fenske or a DSM programmer could run over and get them out of trouble. But within an hour the "Fire!" shouters were stacked up, waiting for help. Even worse, the technical helpers had so many problems to deal with that they gave up trying to explain to employees what the proper procedure was; they just entered the correct commands and ran to the next fire, leaving the employee to face the same problem minutes later. "That just made our people feel worse," recalls Terri, who was running around hugging people and telling them that the problems weren't their fault. Despite her efforts, some order-takers were so upset by their inability to get orders into the system that they broke down and cried.

The situation wasn't much better for Cowan, who was running the show in the inventory area. PSC normally has between 200 and 300 boxes ready for shipping by the time the first carrier truck pulls up, at 3:30 p.m. That day it had just a single box ready.

Tensions were so high in both the offices and the inventory area that though the day's work wasn't nearly done, Cowan sent everyone but the top managers home at 7 p.m. Terrified that he would go back on his one-day-turnaround pledge to a substantial number of customers for the first time ever, Cowan stayed well past midnight packing boxes with Terri, Fenske, and a few others. Then they drove the boxes to the nearest UPS hub. They made it, barely. For Cowan, the experience brought back the old days -- and he wasn't particularly pleased to be reliving them.

By the next day, order taking and shipping were starting to run more smoothly. But when Cowan sat down in front of a PC to pull out the sales data he generally used to feel the pulse of the company, he found to his consternation that he simply couldn't figure out how to retrieve the information that the old system had always provided -- never mind pull out the answers to questions that had been beyond the old system. "Here we were with our new, $200,000 system, and we didn't know who our top customers were," says Terri. Adds Cowan: "I felt like I was back to my floppy-formatting days."

It took Cowan several weeks to get the minimum information he needed to monitor sales. What he finally saw horrified him and Terri: Paul Mitchell sales had dropped 15% in the past two weeks. "We had focused so much on making sure we didn't fail on delivering orders that we had taken our eye off the ball completely when it came to sales," he explains. Even worse, they couldn't figure out exactly where sales were falling -- for which salespeople, which customers, which products -- because they were still having trouble getting the data they needed.

Little by little, things have improved since Hell Week. Orders now go in as quickly as ever, and they don't have to be printed out for manual filing. Thanks in part to the ClipperShip add-on, the new system has been particularly adept at speeding warehouse operations. Order pickers are now told by the system exactly which items to place in which boxes according to destination and weight; the system even takes into account where each item is stocked, to keep the picker's route as short as possible. It then selects a carrier and prints out an invoice and an address label. Turnaround time on typical orders has been cut from 5 hours to 20 minutes.

As for getting all Terri's questions answered, Cowan says he's sure the system will be a success on that score, too -- but it will take several more months before he and Fenske figure out how to gain access to the answers. At least they now get the information they used to get, and a little more besides. Cowan is also negotiating with DSM to spread the cost of adding the credit and back-order features among PSC and several other customers.

Could PSC have found a less traumatic way to make some of the improvements? Cowan doesn't think so. Aside from taking the word of DSM's salespeople on the missing features and not setting aside enough time to practice with the new system, Cowan believes the company did things about as well as it could. To a large extent, he contends, the problems are just inherent in the process of computer upsizing. "It would be easier if you could do it in small steps," he says. "But we needed a leap, not a step."

Oh, and by the way, Cowan reports that the new system formats floppies just fine.

* * *

David H. Freedman is the author of Brainmakers: How Scientists Are Moving Beyond Computers to Create a Rival to the Human Brain (Simon & Schuster, 1994).


ROI

Professional Salon Concepts' new computer system cost $200,000, including hardware, software, and implementation fees. Before laying out any money, CEO Steve Cowan and controller Mike Fenske worked out three fairly concrete financial justifications for purchasing the new system. The return on their investment (ROI) breaks down this way:

First they calculated savings on COD costs. PSC sends 95% of its orders COD. Most orders comprise more than one box, but because of the old system's limitations, there was no good way to write up a multibox order under one invoice; each box was shipped with its own invoice, and had its own costly COD tag. The new system, however, can write up a multibox order under one invoice. So now PSC sticks a COD tag for the entire order amount on one box, and ships the other boxes in that same order by regular delivery, which is much less expensive. (There's always the risk that customers will refuse the one COD box and accept the others, essentially stealing most of the order, but Cowan believes it will happen so rarely that the losses will be negligible.)

Expected savings: $144,000 a year.

Second, PSC has been paying about $40,000 a year to outside accountants to prepare the company's financial statements. The new system will prepare most of those statements automatically.

Expected savings: $50,000 a year.

Finally, because the old system did not have credit-management capabilities, at least $3,000 in unpaid receivables fell through the cracks each month. That meant roughly $40,000 might be carried over into the next year. The new system, however, alerts the company to past-due accounts, and Fenske says that extra help has already reduced delinquencies by 95%. Savings will come in the form of fewer write-offs, faster collections, and fewer customers being cut off.

Expected savings: $40,000 a year.

Total expected yearly savings: $234,000.

With maintenance costs for the system expected to run about $10,000 a year, the net estimated hard benefits come out to $224,000. That means the system should pay for itself in less than a year. But as is often the case with new systems, the greatest expected paybacks aren't easily quantified. In the case of PSC, the main motivation for getting the system was to improve customer service through the availability of more detailed customer information. "I wouldn't want to put a number on it," says Fenske, "but we believe that being proactive translates into revenue growth." Few would argue with that assumption.


WHAT THE EXPERTS SAY

We asked three experts to pick out the lessons companies can learn from PSC's experience. Here are their responses:

Dan Karleskint, chief engineer at Scitor, a Sunnyvale, Calif., consultancy that helps distributorships computerize.

There are three ways to avoid some of the "new-system trauma" PSC experienced:

1. Don't buy on the basis of demonstrations or recommendations; you'll end up buying a demo expert's personality rather than a system. Prepare a specification document that defines all the features you want in your new system and have each vendor bid to those specifications. The specifications can then become part of the contract, and you won't have to deal with nasty surprises such as missing features.

2. Develop and document a plan for testing the system. The plan must include tests for all the features you've specified as well as the various real operation problems the people and the system will face. Do not go on-line until the system can pass all the tests. CEOs often forget that people and processes are as much a part of the system as the computer and the software.

3. Make sure, via testing, that you can get all the reports and information you want before you go on-line. Look at the information needed on a daily, weekly, and monthly basis, and establish procedures tied to those frequencies.

Phil Varney, MIS director for S-K-I Ltd., in Killington, Vt., a corporation that operates ski resorts. S-K-I is renowned in the resort industry for using computers to monitor its customers and operations in real time.

First of all, Cowan recognized Terri as an outstanding talent, and he should have used her to manage the computerization process better.

Then PSC should have developed a written project plan for tracking all tasks, from the software-selection process to implementation. Such a plan can highlight weaknesses in the system and reveal timing problems.

PSC shouldn't have paid for the software in full before it was completely and successfully implemented to the company's satisfaction. Vendor guarantees about performance and features should have been written into the initial contract.

End users should have been involved in the selection of the system, and more time should have been allocated for their training.

Remember the six key points to implementing a new system: Plan, plan, users, users, train, train.

Jack Barry, senior principal with EDS Management Consulting Services, in Cambridge, Mass.

Spending $200,000 on a new system sounds like overkill. PSC probably could have gotten most of the key benefits from a $20,000 system; the extra benefits may not have been worth the extra cost. In any case, you should never buy "vaporware" -- features that are promised but that aren't quite ready.

Pain is inevitable in this sort of process. But up-front pain isn't as bad as back-end pain. PSC didn't have a strong enough implementation plan. Instead of gambling on a "D-day" switch-over to the new system, the company should have done more extensive pilot testing and had a backup plan in case of problems. Training was shortchanged, too.

One thing Cowan always seems to do right is to see things from the customer's point of view. That helped him keep things from being worse than they were.

Last updated: Jun 15, 1994

DAVID H. FREEDMAN

A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science.




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