The Depot goes digital: how CEO Bob Nardelli is managing a $2 billion technology transformation.

When Bob Nardelli arrived as chief executive of The Home Depot in December 2000, the by-now infamous story is that he asked how to send an email to the managers of each store across the country. "There is no way," he was told. The stores simply were not linked electronically, not with each other and not with the company's headquarters on the outskirts of Atlanta.

That was just the beginning of what Nardelli discovered. Coming from a technology-intensive environment at General Electric's Power Systems unit. Nardelli was surprised to learn that Home Depot was light years behind the blistering pace that Wal-Mart had set in retail technology. He saw employees counting boxes and processing bills of lading and invoices by hand. Bar codes, the essential building block of modern retailing, and widely in use by other retailers, had not been introduced.

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The technology gap, combined with Home Depot's difficulty in hanging on to skilled sales representatives, meant that the customer experience at its cavernous stores deteriorated: Things were hard to find and checkout lines were way too long. All of which gave Lowe's. Home Depot's leading competitor, an opening to nip at its heels with a user-friendlier image.

Nearly four years later, Nardelli, now 56, is relying in large part on technology to change all that. He's halfway through a $2 billion technological transformation. His nearly 1,800 stores, across the United States and in Mexico, have been linked with enough fiber optics and coaxial cable to run from Atlanta to San Francisco and back. Some 90,000 desktop computers were installed last year. Self-checkout systems from NCR have been introduced. Cordless scan guns from Symbol Technologies help cashiers check out bulky items without removing them from carts. Point-of-sale information is being electronically captured.

Elsewhere, online training programs are helping the work force to provide better service, and the company has started placing electronic kiosks in, say, the plumbing aisle to allow customers to go online to find the perfect showerhead, thus limiting the number of faucets on display. This is the "special order" business.

The overall transformation is an undertaking of staggering complexity, particularly since Home Depot keeps expanding and is now a $64 billion behemoth with more than 300,000 employees. "We're changing the engine while the plane is still flying," Nardelli quips.

It's still too early to tell whether technology can completely alter the customer perception that Home Depot's service is lacking. Only a third of Home Depots, for example, currently offer self-checkout.

"Businessman First"

But the way Nardelli is managing the technological transformation is attracting attention. He has borrowed from the CE playbook to create a system of checks and balances on how technology is managed, and he has integrated technology decisions deeply into his business strategy. Nardelli also has resorted to forging deeper relationships with fewer vendors, and he maintains personal dialogues with John Chambers of Cisco and Sam Palmisano of IBM, among others.

The Nardelli decision-making model may help establish a pattern for other CEOs who have been deeply frustrated by their lack of success in harnessing technology. The era of chief information officers spending money freely on fanciful technologies is long gone, of course. But so too might the deep freeze in capital spending of the past three years be thawing. Because Home Depot has been spending robustly through the bust, Nardelli seems to be ahead of the curve in figuring out how to manage technology in a way that actually benefits the underlying business. "It's not the tail wagging the dog," says Chambers. "The dog clearly understands where it wants to go and is using IT to implement that strategy."

The story begins with the team that Nardelli brought with him from GE. One player is Frank Blake, who is now executive vice president for business development, and a second is Dennis Donovan, executive vice president for human resources. When the enormity of the challenge dawned on them, they realized they needed a seasoned CIO and Donovan went out to find one.

They picked Bob DeRodes, who had held key technology jobs at AMR's Sabre Croup, which handles many of the underlying technologies for American Airlines, at Citibank's credit card operations, and, most recently, at Delta Air Lines. "He's a businessman first," Nardelli says pointedly, not a technology-for-technology's-sake person. DeRodes started in 2002 and the team built a road map for their tech ambitions. The data they collected from customers suggested that the biggest frustration was the checkout process, which is why the team targeted self-checkout and scan guns as a first priority.

The governance process that Nardelli has created (see diagram, page 32) starts with business units and top management deciding what their technology needs are. This Strategic Operating and Resource Planning process, as the company calls it, is coordinated not by DeRodes, but by Blake. Individual IT projects are then put through a financial review, or what Nardelli calls a "proforma," by CFO Carol Tome, who has been at Home Depot since 1995.

It's only then that DeRodes runs with approved projects. Even then, however, there are feedback mechanisms in place such as "project reviews" so that the business people and the technology people stay connected at the hip. Nardelli also sits in on quarterly meetings to review the progress of major projects. The net effect is a financially disciplined technology process that addresses real business needs. "Bob is an equal partner at the business roundtable," Nardelli says of DeRodes. "He has a functional responsibility, but he's operationally an equal at the table. That's very important. He's not a backroom guy."

The counsel Nardelli offers fellow CEOs is to not place the entire decision-making process in the hands of a CIO because that builds in a gap between the business side and the technology side. "You want a CIO at the table next to your chief merchandising officer, your chief operations officer, your financial officer, your human resources officer, because you want him to say. 'Okay, what is the best prioritization for the business?'"

Allowing the technology leaders to become estranged from business managers is "the biggest mistake businesses make," Nardelli argues. "They kind of tell the IT guy, 'Okay, go back to your cube and when the project is done, come back up.' More times than not, you get disappointed. You see these huge investments that don't work, and then you're building patches. The right way to do it is to have an iterative process. That's why we have program reviews. They're not always friendly."

What excites someone like John Chambers is that Nardelli is using technology to force sweeping changes in business processes, rather than just bolting new technologies onto existing ways of doing things. "Investment in IT without process change does not get the results you want," says the Cisco CEO. "Bob Nardelli is on the leading edge of how this all is going to evolve."

Chambers is not exactly a disinterested party, but the research group Gartner agrees that there is major shift taking place in the relationship between CEOs and CIOs. In a study of 256 companies in conjunction with the Massachusetts Institute of Technology last year, 43 percent of CIOs said business process is driving their IT activities, rather than the other way around: "The CIOs we see are more connected with their CEOs and more connected with the strategy," says Mark McDonald, Chicago-based head of research for Gartner Executive Programs, a unit of Gartner that focuses on CIOs. "They talk more about changing the customer experience than about the technology."

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Gartner found three effective patterns. The first is where the business sets the infrastructure strategy and the architecture of a technology campaign and prioritizes spending. That's what Nardelli has created. A second pattern is where the IT organization sets the strategy and architecture, but the businesses decide on specific applications. And a third is in highly decentralized organizations where IT is a centralized function and each business unit taps it to pursue its priorities. McDonald calls this a "federal style of governance."

Skeptics: Depot Still Lags

However effective a structure Nardelli has created, it has not been completely foolproof. He and his team acknowledge that they went off a bit half-cocked with the technology to support the "special order" business.

Creating the systems to support that activity is the single largest IT expenditure this year. "What we said was, we wanted to do special order across every SKU (stock keeping unit), every category, every department," Nardelli says. "But this thing would have been bigger than the national electricity grid. We screwed up." Adds EVP Blake: "Our eyes were too big for our stomachs." The company is now concentrating on breaking the initiative into logical steps to keep it more manageable.

And, to be sure, there are skeptics of Nardelli's overall technology approach. Paula Rosenblum, Miami-based director of the retail research practice at the Aberdeen Group, acknowledges that Home Depot has made some improvements with its self-checkout and point-of-sale systems. But she wonders whether those technologies can recreate the customer intimacy that Home Depot once was known for. "It's clearly having a payoff," says Rosenblum. "The question is, As Lowe's continues to grow, is anything that Home Depot is doing going to give them an advantage over Lowe's and the local hardware stores and lumberyards?"

Lowe's does not appear to be relying as heavily on technology to compete, preferring instead folksy touches and different paint colors on the walls to make customers feel more comfortable. "If you ask me, How is Home Depot on the customer experience front versus Lowe's?" says Rosenblum, "I'd say they're working on it but they're lagging some."

Nardelli's view is that Home Depot is still going to spend another $1 billion on technology and that there will be huge payoffs for the customer and for Home Depot. One example is data mining, which is just getting under way and an area in which Wal-Mart has been an early adopter. The superstore is able to analyze a shopper's "basket," or what people actually buy, and combine it with demographic information about a particular geographic area.

That data-crunching helps Wal-Mart make merchandising decisions, such as which items should be placed on the shelves and which should be placed in proximity. The mix varies dramatically from store to store. If Home Depot can master data mining, that would have a huge impact on its ability to have the right products and the right quantities on its shelves. Another technology payoff would be continuous replenishment: As goods are sold, suppliers automatically resupply. At the moment, that data is coming back to Home Depot headquarters the old-fashioned way, in batches overnight. Making it real-time is the goal.

Home Depot's supply chain and logistics challenge looms large. The company is way behind. (See interview, page 33.) "The model that was built was 'full truckload to the store'," Nardelli says. "The more you brought, the more it would force you to sell, because you, get kind of jammed." If Home Depot can force discipline on its suppliers, as Wal-Mart has done, to deliver various sizes of shipments as demand warrants, that might change the look of many Home Depots. "The old adage was, 'Stack it high and watch it fly,'" he says, "But customers today are looking for a different shopping experience."

In some ways, Home Depot is leapfrogging other retailers. "Technology is, by its very nature, a leapfrog game," says DeRodes. "The last guy to the table always has an advantage."

But in other respects, it's playing catch-up. It is not yet a player in radio frequency identification technology, because it doesn't have the fundamentals in place to accommodate it. "I kind of kiddingly say that we're taking a major leap to the present," says Nardelli. "For Wal-Mart to have point-of-sale systems at the register and then to regenerate inventory replenishment is something we're moving to, but something they already have."

To win the game, however, Nardelli doesn't have to out-Wal-Mart Wal-Mart. What he has to do is demonstrate that the technology spending alters the customer experience and that he has firmly locked the technology into achieving business goals. If he can do that, he could go down in the books as that rare CEO who got the technology equation just right.

RELATED ARTICLE: Nardelli's Well-Oiled Machine

The era in which chief information officers controlled a company's entire technology budget are long gone. At Home Depot, Nardelli has created a system of checks and balances.

Step 1.

Business units and top management, including Nardelli, identify what technology the businesses need. This process is coordinated by Frank Blake, executive vice president for business development.

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Step 2.

Projects chosen to proceed get a financial screening to determine their return on investment. This is done by CFO Carol Tome. Projects are assigned green, yellow or red light status.

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Step 3.

The executive team prioritizes projects based on their strategic fit, operational need and return on investment. It is only then that CIO Bob DeRodes takes over and designs and manages a project.

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Step 4.

DeRodes meets regularly with Blake and the business units in program reviews. He also chairs an IT executive steering committee, whose meetings Nardelli attends. These sessions serve as feedback mechanisms: If the IT plan isn't working as expected or if the business' needs have changed, the business unit can shift spending priorities.

Source: Chief Executive

RELATED ARTICLE: Q & A

Nardelli: There Is More To Come

Major changes in logistics and supply chains are part of his plan.

In an interview, Bob Nardelli spoke about the next stage of his campaign to transform The Home Depot. Here are highlights:

Tell me about your efforts on inventory and supply-chain management. Right now, it's very--

Very manual. The model that was built was "full truckload to the store." The more you brought, the more it would force you to sell, because you kind of got jammed. The old adage was, "Stack it high and watch it fly." But customers are looking for a different shopping experience. They're looking for less intimidation, more orderliness.

Are you going to try to use technology to change this old model?

Two things. We recently realigned our logistics operation and took it from a function into the operations. So now our vice president of operations runs the logistics centers we have today. They were totally decentralized--with different policies, different practices. Now, we're bringing visibility to fulfillment rates. We're bringing visibility to accuracy. We're bringing some order and accountability to our inventory. That's Part 1.

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Part 2 is we said, "Look, let's start with the answer: We want to be a $100 billion company," but not a $100 billion company of the past, where you basically had a single channel to market: the orange box [Home Depot stores]. Now, we've created Home Depot Supply. We've got at-home services. We've got B-to-B. We've got government. We've got online. So what we're seeing is a multidimensional logistics system that has to be in place to support, minimally, a $100 billion-plus business.

If you get the logistics right, how will that help the business?

I wake up every morning thinking about what that means to me. The answer is, The most precious thing in the world: additional square footage in the store. Today, I may have four faces. That means I may have four of the same items, because there is a minimum on reorder quantities. If I get efficiencies in the logistics system; I go to two faces. If you think about that collectively across the store, it's like getting 10 percent more square footage, or either more mix within the category or new categories. That is a home run, to be able to bring new categories, in the store, to be responsive to emerging megatrends.

What's the technology piece of the logistics challenge?

It's sales times square footage times margin. What you want to have is the ability to use a system almost as a rheostat [similar to a humistat] and dial in market preferences, square footage, times sales, times margin. You bring a level of sophistication that we try to introduce now manually. We're doing a good job, but I think we could do better because we'll be able to do it faster, more accurately. We'll take some emotion out of it, not all. Retail is emotion. But we'll be able to get at it faster, a lot faster.

But you'll never leapfrog Wal-Mart and Target in terms of your overall technological sophistication?

I wouldn't say "never." I would say my goal is to be more on par in terms of technology evolution with some of these other guys like Target and Wal-Mart. But I've got some catching up to do.

For more, go to www.chiefexecutive.net

RELATED ARTICLE: Home Depot's Key Technology Partners

* Cisco Networking equipment, including routers and switches

* EMC Data storage devices

* Deloitte Touche Helped install an SAP financial suite that has "gone live" and is working on launching Siebel customer relationship management software

* Hewlett-Packard Servers and desktop computers

* IBM Major provider of equipment. Also provided data warehousing and data-mining software. Helped install PeopleSoft human resources software

* Symbol Cordless scan guns for checkout

Source: Home Depot