Using the Net to Stay Crisp

Jack Landsman faced a mystery worthy of the ex-cop he is. The vice-president

for key accounts at Utz Quality Foods, the US No 3 maker of salty snacks, had

arranged blowout at Safeway supermarkets: $4.99 barrels of party mix, cheese

balls, and pork rinds displayed just inside the door of 127 stores near

Baltimore and Washington. It was expected to be a guaranteed hit. But on January

18, three days into the promotion, Landsman had a problem.

Daily figures for three Safeways in Maryland, showed that two of them had

sold 25 and 40 barrels of cheese balls, respectively. But the third store showed

a string of zeroes. No cheese balls. No pork rinds. Just an incomplete pass.

Landsman solved the mystery of Store No 1370 with a tool he didn’t have

while walking a West Baltimore beat: the Internet. Store No 1370, and about 10

others, had no barrels: Landsman hadn’t ordered enough. As simple as the

problem was, Landsman wouldn’t have spotted it until after the Ravens’

victory parade if not for the UtzFocus sales-tracking system, installed in 1999.

With UtzFocus, all he had to do was use his Web browser to check overnight sales

reports stored on a server. After that, he called a supervisor to find out why

his drivers hadn’t made the delivery. "We’re kicking butt for a

reason," says CEO Michael Rice’s son-in-law, Dylan Lissette, 29, the

company’s marketing manager. "We know what’s going on in the

stores."

The lesson of Utz is simple: A company need not be a giant to get a giant

boost from the Internet. Spending about $30,000 on software to create UtzFocus,

and hiring one new person to run it, has made Utz a savvier chipmaker. The $200

million family-owned company is gaining share in segments dominated by

Frito-Lay, whose North American sales of $12.7 billion command a market share of

59%–and rising. Utz’s 12% jump in sales to supermarkets and convenience

stores last year was about three times the industry’s growth–and 1 1/2 times

Utz’s own growth in the late 1990s. Chief Operating Officer Rick King says

half of the acceleration in Utz’s 2000 growth, or about $2 million in sales,

is due to the Net.

For years, Utz executives confess, a culture so cost-conscious that even the

executive suite has linoleum floors forced them to put off investing in

technology. Instead, they tried to keep up with Frito by buying new fryers and

faster packaging machines. Rice didn’t have a computer until 1996, and

secretaries made do with typewriters whose sole concession to the New Economy

was screens that displayed a sentence of text at a time to fix mistakes. Rice,

57, is the grandson of Bill and Salie Utz, who founded the company after Bill

quit a job at Hanover Shoe Company in 1921. But the company’s real info-tech

apostle is Lissette. "We’re a Pennsylvania German-Dutch company where

there are certain things we’ve always done," Lissette says. "And

there’s a fear of technology, until you find someone who will shepherd

it."

In Utz’s case, new technology is about taking information the company

already had and letting more people use it easily. Since 1982, the 500

driver-salesmen who deliver Utz’s snacks to stores have used handheld

computers to upload daily sales data to headquarters. But the only department

that used the information on a daily basis was accounts receivable. Sales got

sketchy reports weekly but received detailed data only once a month. What did

people know in between? "Not a lot," Rice confesses.

Lissette and vice president for sales and marketing Tom Dempsey convinced a

mostly fifty-something management team that better, faster business information

was as essential as making cheaper chips. The duo insisted they needed to create

UtzFocus to give daily sales breakdowns, product by product and store by store.

They needed reports that were easy for computer-fearing sales people to fetch

from a database with a Web browser and easy for executives to tailor for client

presentations. And they needed the reports by 2 am, in time to let warehouse

supervisors fix problems with drivers who arrive as early as 3:30 each morning.

Now, from North Carolina to Massachusetts, the drivers who deliver Utz’s

chips and pretzels are being more closely watched. As a result, missed

deliveries can be corrected, and laggard stores can be targeted for special

attention. Smart promotions can be repeated, while losers are quickly winnowed.

And poor coordination between sales and production can be tracked down and fixed

in a flash–as Landsman did with Store No 1370.

As Utz executives rarely tire of saying, theirs is a pretty simple business.

They make a small number of products–potato chips alone account for almost 65%

of revenue–and they have only a few major tactics to goose sales. There are

supermarket circular advertisements, on which Utz spends 4% to 6% of sales. And

there are "endcaps," the industry term for big displays at the end of

a supermarket aisle that draw impulse buyers. It can cost nearly $10,000 to rent

endcaps throughout a grocery chain for a week. And when Utz has the endcap at a

chain such as Safeway or Giant, the leaders in its core Washington-Baltimore

market, sales in each store can rise by as much as 40%.

Making sure that this happens is the job of UtzFocus. The system gives the

managers a tool to ride herd on Utz’s drivers, whose execution of sales

promotions is vital to company strategy. "When something isn’t working,

it’s usually not the store. It’s usually our person," Lissette says.

The difference is felt all the way to the bottom of Utz’s organizational

chart. Employees like Gene Alvarez, a New Jersey supervisor, who fills in on

routes when his charges are out, says the Net system generates more questions

than ever from management about why sales in specific stores aren’t better,

and about how drivers are doing their jobs. "I don’t like

computers," he jokes. "Too incriminating." On the bright side,

the drivers’ pay is a 10% commission on sales, so they have a stake in the

system’s success.

Even though the system’s original function was to keep closer tabs on the

drivers’ day-to-day execution, Utz quickly found other ways for technology to

help them. Since competition for space in store circulars and endcaps is keen,

quick sales data help execs adjust. If Utz can’t get a chain to advertise a

special on its flagship product–the 5.5-ounce bag of chips–the data let

managers craft counterproposals to promote pretzels in weeks when Frito-Lay

commands the potato-chip spotlight.

Or Utz can take a more innovative approach. The snack food company, like its

competitors, is trying to persuade supermarket chains to give it space in

circulars for a percentage of the sales a promotion produces–rather than a

flat fee of up to $10,000 a week. That helps Utz cut the risk it takes in

choosing sales tactics and helps keep spending on circulars close to 4% of

sales. The key: UtzFocus lets sales executives generate data to persuade

supermarkets they’ll make more money sharing risk with Utz than by taking the

up-front fee. Acme Markets is testing risk-sharing promotions now.

With sales info getting better, now Utz is trying to improve its command of

production data. Since the mid-1990s, Utz has been buying machines equipped with

monitoring capabilities to slice, cook, spice, and bag potatoes. The company is

getting ready to hook it all up to its in-house intranet. The new system will

zap a report to managers every minute–compared with the previous once or twice

in a 12-hour shift–giving them details such as how many chips the main factory’s

seven lines are making, the usage of potatoes and flour, and even how close the

chip-slicing machines are coming to the ideal thickness of 0.057 of an inch.

One big goal of automating the factory: to trim costs from excessive

inventory of plastic bags. Utz spends 5% of sales on bags alone. Tying

production more closely to UtzFocus data will let the company keep down

inventories of bags that can reach several months’ supply. Since finished

chips rarely stay in Utz plants more than a day, inventory gaps like that stand

out like cheese powder on a white shirt.

Even a smarter Utz won’t dominate like the Ravens’ defense while

Frito-Lay is around, but Web-savvy management gives this underdog better odds.

And you need not be a detective to figure that out.

By Timothy J Mullaney in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Looming battle

Those who like software dished up this way aren’t going on faith alone. One

company, VeriSign, shows that offering up software as a service can work

profitably. VeriSign, which sells encryption services for e-commerce sites and

corporate communications, posted $474.8 million in revenues last year, up 460%

from a year earlier. Pro forma net income hit $45.5 million. VeriSign is a

winner because it spotted a technology needed by every company doing business on

the Net, then beat others to the punch by offering it as a service.

That sets the stage for a bruising battle this year. With piddling revenue

streams to be had in the short run, the early ASPs will fight desperately to get

the formula right while next-generation companies pile into the market. And the

old behemoths? Don’t count them out. They, too, want a piece of the action.

"The software business is going to change fundamentally in the next three

to five years," predicts Oracle chief executive Lawrence Ellison.

"Oracle is going to be ahead of that charge."

Some of the pioneers now seem to be on the right track. USi has rounded up

170 customers, and its revenues grew 208% last year, to $109.5 million. Analysts

project revenues this year around $165 million, with the break-even point coming

in the third or fourth quarter. The best news is that USi has finished building

three huge data centers for running the software, which analysts say totaled

more than $300 million. Another leader, Corio, reported revenues of $43.6

million last year, up 650%. Analysts project $75 million in revenues this year

and profits early next year. Both companies are now asking customers to pay part

of the cost of software licenses up front. They have skirted problems

encountered by some of the ASPs that failed, such as Pandesic, which tried to

make money off of fees based on its customers’ e-commerce sales.

No matter how well they tune their engines, though, the first generation ASPs

will have a tough time outperforming the newer entrants. The newbies establish

one super-reliable Web site that all their customers hook into–plugging their

information into simple templates. They don’t have to buy a new set of server

computers for each individual customer, as the pioneers do. If the Young Turks

get it right, the economies of scale could produce gross profit margins topping

90%–dramatically better than the 70% average among traditional software makers

and the 15% to 20% margins that early ASPs have achieved, say analysts. Boasts

Marc Benioff, chairman of sales-force-automation ASP salesforce.com: "We

are going to kill traditional software.’’

Don’t think that big software companies will oblige Benioff. Microsoft, for

instance, is betting its future on an online-service strategy. In addition to

allowing ASPs to rent out such desktop applications as Word, Microsoft is

building a technology foundation upon which other companies can build their

services.

With a market as embryonic as this one, it’s too early to call winners. The

Microsoft of the ASP world might not even be alive yet. But, already, some of

the contestants are promising. Analysts especially like VeriSign’s prospects,

since it has a proven track record and a dominant 75% share of the market for

Internet encryption.

While the notion of software as a service could turn the traditional

packaged-software world upside down, the approach has deep roots in computing.

For decades, companies such as IBM have run other people’s software from their

data centers for a monthly fee. When the Internet came along, Web-hosting

companies managed sites for tens of thousands of companies. USi’s innovation

was to offer the full array of corporate applications–from accounting to

materials planning–as services delivered via the Web. IDC dubbed this an

application service provider.

For a while, the computing world was nuts about ASPs. At the height of the

mania, in the fourth quarter of 1999, venture capitalists pumped $2.5 billion

into these companies. That was half of all the money invested in new software

companies that quarter, according to McKenzie Consulting.

So what went wrong? The biggest obstacle has been inertia. It’s just plain

hard to persuade people to try something new. In interviews with more than 25

corporate customers, BusinessWeek found balky executives. Corporate IT

departments are reluctant to give up control over their computing systems. CEOs

are worried about Net security and fret about handing important business data

over to another company, though those fears have so far proven to be unfounded.

Missing link

For some, the numbers simply don’t add up. The ASPs claim they would have

been cheaper partly because they believe Abraham underestimates the cost of

building and operating fail-safe computing systems like the ones they provide.

When ASPs do manage to land customers, sometimes they fail to deliver the

goods. Even among customers who get satisfactory service, there’s a tendency

to move cautiously. At Hershey, for example, just one tiny portion of the

company, an e-commerce site called Hershey Direct, has gone online with an ASP.

The rest of the company’s computing systems are run through a separate

computing division that sticks to running software the old-fashioned way.

Now ASPs are reconciled to slower growth than they had first expected. That’s

why they’re focusing on profits. ‘’The market is much different than it

was a year ago,’’ says USi CEO Andrew Stern. To cut costs, USi laid off 11%

of its staff in January. Now it’s asking customers to pay at least 20% of the

total cost of a contract up front.

While USi and Corio are struggling to get on a winning track, they’ve got

to be wary of the next generation of ASPs who are coming up from behind. In

little more than a year, salesforce.com has landed 1,700 paying customers and

25,000 companies are participating in free tryouts. NetLedger.com, which

provides small-business accounting services, has 3,000 customers. It’s just a

very different proposition than the one USi and Corio face. Since these newbies

build their technology themselves, they don’t have to pay a software supplier

for programs.

It’s low-risk for customers, too. While second-generation ASPs don’t have

all the bells and whistles of a mature software program from PeopleSoft or SAP,

they make it very easy for customers to sign up and use the services. For

NetLedger’s service, the price is just $9.95 a month to start. A corporate

customer can add more users at any time, and they also can drop them.

Growing payroll

The biggest challenge for the new crop of ASPs will be attracting big

customers. NetLedger doesn’t even try. It’s meant for companies with less

than 100 employees. Salesforce is aiming higher, but so far its largest customer

has just 300 users of the service. Are these upstarts going to snatch away giant

business software projects? Not yet. "Maybe in a few years I would consider

working with them," says Nick Amin, vice-president of information systems

at Cigna in Philadelphia. "They don’t have all the capabilities that I’d

need at this point"–such as sophisticated risk-analysis tools.

That’s already starting to change. The upstarts are quickly adding such

features as sales forecasting. And their deals are getting bigger, too.

Employease, an Atlanta-based human-resources service, has seen its average

customer size increase from 96 employees to 441 employees during 2000. "I’m

supporting 500 people with Employease," says Reed Vickerman, vice-president

of information technology at Copper Mountain Networks in California.

"Adding more would just be a matter of clicking a button."

The software giants can’t turn on a dime like the upstarts, but they’re

quickly becoming forces to reckon with. The furthest along: Intuit, the $1

billion maker of financial and tax software for small businesses and consumers.

Already, Intuit is reaping more than 20% of its revenues from online services.

Every piece of packaged Intuit software, from the QuickBooks accounting program

to TurboTax, has an online counterpart.

While Intuit has the jump on its brethren, other major software makers vow to

excel at delivering their software as services. Software heavyweights such as

SAP, Oracle, and PeopleSoft have a distinct advantage over the first-generation

ASPs when it comes to profit margins. They don’t have to buy somebody else’s

software–they make it themselves. In the past year, Oracle doubled, to 100,

the number of customers using its finance, manufacturing, and customer-service

applications online. With SAP, 16 ASPs are hosting its applications for 150

customers.

Microsoft is going at this market a bit differently. While it offers its

Office desktop applications to customers through a handful of hosting services,

its main goal is to provide a software platform for corporations and ASPs to

build upon–the so-called .Net technology. As part of Microsoft’s $50 million investment in

USi last fall, the upstart agreed to offer customers services based on Microsoft’s

technology. But Microsoft faces stiff competition from Sun Microsystems and

Oracle, which also supply foundation technologies for Net services. Upstarts

such as salesforce.com and NetLedger built their systems on Sun’s heavy-duty

Unix operating system and use Oracle databases. Would they ever retool for

Microsoft? "No way," says NetLedger CEO Evan Goldberg. "We don’t

think Microsoft software is ready for an online service."

Making the transition from the traditional software business to services won’t

be a snap for the established giants. They’ve got to retool their technologies

to run smoothly on the Web. And they’ve got to tinker with their business

models without upsetting quarterly earnings–shifting from their dependency on

huge, up-front license payments to monthly fees.

Rather than mess with what’s working well, some of the established software

companies are opting out of the ASP business–at least, for the time being.

Consider Check Point Software Technologies, which sells firewall software that

protects corporations from intrusions by thieves or hackers. It’s deeply

committed to a network of 1,000 distributors that handled 90% of its $425

million in revenues last year. Offer services directly to customers?

Shwed, however, may be in the minority. Most established companies are

gung-ho for offering software services. "If software companies don’t do

this–maybe not today but somewhere down the line–they are going to

die," says Tim Chou, president of Oracle Business OnLine. That may be too

dire a prediction. However, given the volatility of the software business these

days, it makes sense for them to at least hedge their bets.

Jim Kerstetter with Jay Greene in Seattle–BusinessWeek