Formula for Efficiency

Low-margin industries — such as chemicals — usually don't invest heavily in IT. But Dow does. Its CEO tells us why

In 1996 the Dow Chemical Company, which at $US46 billion in annual revenue sits comfortably in the top half of the Fortune 100, set a series of ambitious environmental, health and safety goals — ranging from decreasing leaks and emissions to improving overall safety performance — that it hoped to attain by 2005. Dow claims that it reached slightly more than half its goals, and it credits a transformation brought about in large part through IT. Over that time, Dow spent about $US700 million on IT per year, leading to a $US2.3 billion increase in productivity.

Recently Dow CEO Andrew Liveris set a new round of goals, which he hopes the company can reach by 2015. The goals include reducing the company's energy consumption by 25 percent and achieving at least three breakthroughs in the areas of clean water, food and housing. Once again, Dow is depending on IT to lead the way.

Liveris, a native of Darwin, Australia, has been with the company for 30 years. A self-proclaimed Treo addict, Liveris talked to CIO about how his company has changed in the course of the past decade, how it will change during the next one, and his relationship with his CIO, Dave Kepler.

CIO: Ten years ago Dow decided to reinvent itself. Can you describe that transition and how IT enabled it?

Andrew Liveris: In the mid-1990s we changed the company's corporate model from [decentralized], where we ran as six geo-graphically dispersed units, to one centre that supported all the different lines of business. We wanted to create common work processes across the company, and that made us to look at our IT architecture for the first time. Up until that time, we were full of legacy systems. We were fragmented. Even basic communication between the geographic units was difficult.

It took us several years, but we redesigned our work processes and put in place a common platform — a single instance of SAP. During that transition IT went from something that was viewed as fairly broken to one of the strengths of our organization. Dow has now averaged 8 percent year on year productivity growth for 10 straight years. We've done that through automation, through greater efficiency of our human capital, better organizational design and improved tools in the IT space.

Companies in low-margin industries, such as chemicals, don't usually spend a lot on IT. That's not the case with Dow. Why not?

We view IT as an enabler of our strategic and global business model, and therefore we feel that investing in IT will increase productivity and lead to savings. In other words, we've recognized that IT is one of the ways to get out of the low-margin trap.

One of the things we've decided is that different lines of business need different business models. For example, we currently have 85 joint ventures. We're also launching new market-based businesses that focus on specific customers — Dow Water Solutions is an example — as well as growing through acquisition. All these business models have to have the same back end when it comes to IT but very different front ends. That's something we've embraced in our IT design. We need to leverage the back-end systems and functions across our joint ventures-in manufacturing plants, on the governance side-in order to keep our operational efficiency. Investing in IT allows us to have that while enabling these different business models.

Do you want your IT department to be cutting edge?

Absolutely. Twelve years ago, if you had asked me that question, I would have thrown up. But today we're cutting edge. We're a preferred customer with all the big name vendors, and we're seen as the quintessential client. We're at a point in the Dow world that if I get tripped out of my Treo port for two hours, I get bummed.

Have you ever vetoed one of CIO Dave Kepler's ideas?

No, not on my shift [as CEO]. I have a huge comfort level that all the right questions have been asked before they get to me. Having said that, I read every line and understand the parameters of every proposal, but in general Dave is so intimately involved in our corporate strategy that from my point of view he's completely free.

The best compliment I can give my IT department is what I've asked Dave to do above and beyond being CIO. He runs all the shared services in the company except human resources. He's added more things to his plate because those things are so complementary to the notion of IT being an enabler.

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I'll give you a specific example. Three years ago, we were looking to expand our operation in China. We were already approaching $US2 billion in revenue there, but we needed to increase our footprint and actually put some white-collar human resources there. Dave came up with a plan for how to integrate the IT needs of an Asia-Pacific presence with the corporate needs of being in China and actually build an IT centre based in China.

This wasn't labour-cost driven. It was knowledge driven. The notion was that because Chinese universities are training so many engineers, the IT world would be a great entry point into Dow. And in the two or three years they'd spend in IT supporting the Asia-Pacific operations, we would teach them the Dow culture and how to operate at Dow. In time, we'll leverage these people into other parts of Dow besides IT.

But you're the person responsible for the decisions that get made beneath you. How do you set limits for your IT group? How do you decide when to interject yourself into decisions?

You're speaking to ultimate sign-off. At the end of the day, it is the CEO's responsibility to increase the wealth and value of the enterprise and to balance short-term versus long-term decisions. Most of the decisions in the IT space are long term, and therefore you have to understand both the level of risk and the financials that support the project.

I spend lots of time on those questions; this includes presentations and white papers and how a project maps to our overall strategic direction. When I sign off there is also a process that allows Dave to understand the accountability that comes with that sign-off. For example, we are now working on designing our next enterprise architecture. We're going through the authorization process, which is being reviewed by my team. It's coming to me. And the conversations I'm having are about making sure we understand the risk-reward trade-off on value for the enterprise.

One of the ways that risk management for IT has changed is that the [business] cycles are so short. If you have installed systems that you can't get out of for 10 years, you're going to get blown by. So you've got to build in flexibility and adaptability. I think that's what we've built here. As we go to our next-generation activities, we're very excited because we can do them in modular ways. We aren't taking full frontal risks, so to speak. We're very comfortable with that approach. And I would say to you that, as a science-based enterprise, what we're ultimately selling is our human capital — our proprietary knowledge — and that goes hand in hand with how we manage IT. We have to be on the cutting edge of IT so that we can take the lead in managing that knowledge.

You've just described an organization that is very much in flux. How do you lead in this environment?

Leadership of this kind — transformational leadership — is all about change management. Change management requires clarity of vision and a team that can translate that vision into strategy. Then you empower your leaders to actually put their strategy into place. The IT space then becomes the enabler that allows us to execute better. (For more on change management, see "The New Science of Change". "The New Science of Change".) We didn't become productive by accident. This is a nearly $US50 billion company with 42,000 people. Ten years ago we had more people and half the revenue. There's no model out there for what we've done. I couldn't tell you how many companies come in here trying to figure out how we're doing that. It's change management from the top: a leadership model that absolutely, totally believes in the power of the people around you. You've got to communicate, you've got to engage, and you've got to have goals and metrics against the strategy. These sorts of things aren't specific to IT, but IT is central to many of them.

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SIDEBAR: Dave Kepler's Take

by Ben Worthen

Dow Chemical's CIO talks about . . .

Service-oriented architecture: Before we can even begin to address the IT infrastructure, we need to understand the strategic plan for the company. We're going to have lots of different business models, and at the same time we want to promote the concept of one Dow. So, on the front end, near the customer, we have to design an architecture that allows us to be flexible; on the back end we want to be highly standardized. So by the time we arrive at SOA and start talking about consuming software ­services, it's already well grounded in a business plan.

Alignment: It starts with a vision for IT, and that vision has to be relevant to the corporate strategy. You also have to be honest with yourself about what your IT department's strengths and weaknesses are and how good a job you are doing. Once you've done that, you have to be willing to commit to what you're going to change, what risks you're going to take, and what things you can do early on to demonstrate that you are making a difference. I think people have a tendency to try to sell technology, but really the CIO needs to listen for the business problems. If I had to sum it up in one sentence, I would say that it's the will to understand where you need to go and the willingness to take the risk to get there, all the while doing it in a transparent way.

The CEO/CIO relationship: Andrew [Liveris] clearly understands that technology is an enabler, and he also understands the complexity of running an organization like ours that has a variety of business models. He doesn't worry about what version of software we are running on but is more concerned with the processes the technology relates to and the change management that goes along with it. At its heart, the job of the IT department is to deliver value to the company, and our CEO sees that. Our relationship is about making the company successful. I'm one of the corporate leaders helping him do that, and I happen to be the CIO.