COMPANIES URGED TO SCRAP LEGACY SYSTEMS

JO FLEISCHER

PASADENA, Calif. -- It's time for supermarket retailers to begin scrapping the aging "clunky" computer systems that are holding back the industry's progress, said Robert J. Herbold, executive vice president, Microsoft, Redmond, Wash., who retired from his post as the company's chief operating officer in February.

Speaking to an audience of grocery industry executives at the SN/Executive Technology Summit here last week, Herbold offered Microsoft as an example of a company that had benefited from scrapping legacy systems in favor of less expensive Web-based applications deployed using packaged software.

An internal purchasing system used by 11,000 Microsoft employees per month cut the cost of sending purchase orders to vendors by $43 per transaction, a 72% reduction. The Web-based application, called MS Market, was created by a team of five people in less than five months, and it was able to handle $5 billion in employee purchases in 2000, including everything from paper clips to printer supplies, Herbold said.

He said the application also helped the company reduce staffing in its procurement office by 70% during a period when the company more than quadrupled in size. Herbold, who joined Microsoft in 1994 after serving as a senior vice president at Procter & Gamble, Cincinnati, said legacy systems hold grocery retailers back. "You'll never make dramatic progress unless you engineer around legacy systems and legacy people," he said. "If you try to piecemeal it together with a lot of old systems, it's going to be very difficult."

He cited Sainsbury's in the United Kingdom as an example of a company making dramatic strides with new Web-based applications. He said the chain recently implemented a Web-based promotions management system to share sales and inventory data with suppliers to help avoid out-of-stocks.

In a six-month test of the system -- which was built with packaged applications -- Sainsbury's and Nestle cut out-of-stocks on certain sale items by 20%. With the system, the supermarket retailer is able to jointly plan promotions forecasts with suppliers and alert a supplier when sales of the promoted item begin to exceed expectations (which would cause an out-of-stock situation) or trail behind sales forecasts.

Herbold cited an array of other examples, ranging from Charles Schwab Corp.'s online brokerage to Wells Fargo & Co.'s online bank. He said Schwab, San Francisco, transformed its business by replacing its entire order processing system with a Web-based approach so as to launch its successful Schwab.com online brokerage business. As other brokers struggle in a turbulent market, he said, Schwab has seen revenue increase by 95% from two years ago.

In a separate session later in the conference, several supermarket executives said the approach Herbold advocated sounded radical. During a question-and-answer session that touched on Herbold's earlier speech, Jeff Noddle, president and chief operating officer, Supervalu, Minneapolis, said, "The reality of changing legacy systems and scrapping them is there's a disruption factor."

Alfred Plamann, president and chief executive officer, Unified Western Grocers, Los Angeles, said few companies can afford to throw out functioning systems. "It sounds good, but it's just too darned expensive."