When Fred Hilmer joined Fairfax Holdings Limited as chief executive officer in November 1998, the final strands of Project Hercules were being pulled together. Hercules was being coordinated by Hilmer's old alma mater, McKinsey & Co, with the ambition to strip away $40 million of costs from the publishing giant, making it nimbler and more effective for the new age that was dawning in the information business. Newspapers and print had survived the onslaught of radio and television, but Fairfax needed to respond urgently and intelligently to the dawn of the Internet and digital age. The Sydney Morning Herald, the Australian Financial Review, The Age, The Sun Herald and BRW remained solid products for the 20th century. But what of the 21st?
By June of this year the results of the cost cutting were filtering through. After-tax profits rose 61 per cent to $180 million, revenues were up 3.2 per cent to $1.15 billion. At the same time the online portion of the company was on the move, with site visits up to 150,000 a day, with more than one million page views a day, and a healthy employment of around 300 people. When he announced the year-end results, Hilmer said: "Going forward we intend to maintain a stringent balance between revenues and cost . . . Fairfax is moving forward on two fronts, strengthening and growing our core businesses and building new platforms for growth."
The need for even more Herculean efforts were telegraphed, only this time Hilmer was at the helm, with his hand firmly on the technology tiller that must underpin the company in the future. "Technology permeates our business, because it's an information business," he says. "It affects the three stages of any business: the create, the make and the sell side of the business. We want to gain whatever competitive advantage we can from the technology, recognising in some areas its parity, in other areas it's an advantage."
This means using digital photography, editorial computer systems, and communications which allow information to be swiftly relayed within the Fairfax network to get information into the newspaper as quickly as possible. In the Kuala Lumpur Commonwealth games, for example, it was possible to get a photographic image from poolside to photographic plate within six minutes. Fairfax is also using technology to ensure that staff have easy access to the Internet and to e-mail -- and as Hilmer puts it, the staff "are gold card users of mobile phones" -- as part of the intention to work faster, work smarter.
As far as the make side of the business is concerned, Hilmer dismisses much of the gee-whizzery of information systems, looking for applications which provide better control of the business, and which help the company deliver on its cost commitments. "You can't manage cost if you don't know how you incur it; and you have to understand what drives it and get frequent, timely and accurate reporting. We haven't really had that in the company and we're putting a lot of effort into that," he notes. Key to this has been a significant revamp of the management reporting systems. Not that this means throwing technology at a problem, Hilmer says, but defining better what information you want from the technology, and then developing the ability to access and analyse data. "To me technology is the means, not the end."
It should be, he says, the means to accessing and analysing the vast reservoirs of information Fairfax holds. "We have such a multiplicity of market data and it's extremely detailed -- on masthead, and area, on type of advertising. There is so much data that we might not be able to see what is going on. We need the ability to synthesise the data and see the trends. Quite often what we have to do is put better templates around the data."
In reforming the information systems which are available to management, Hilmer works closely with the chief financial officer and the chief technology officer, both of whom report to him. "In terms of the management information needed to run the business, the CFO, who is new, is spending a lot of time determining our information needs," Hilmer says. "The chief technology officer plays an important role in saying whether and how we can deliver. Technology is seen as really very important, because it's part of the lifeblood of getting the paper out, and it's clearly the lifeblood of the Web. So our chief technology officer [Ross Wood] is seen as a peer of the top management group, and an important part of the organisation."
When it comes to the sell side of Fairfax, Hilmer focuses on the issue of customer information. "You must appreciate we have two types of customers: we have advertisers and we have readers. I think this is an area which is potentially very exciting. If you take the readers' side, we want to work more closely with newsagents and signal that they are more like business partners. Get data about sale rates and customers, and make sure [newsagents] have what they need when they need it."
Fairfax also has huge subscriber databases for both its physical and electronic ventures. "This is a big part of our intellectual property, and so we have a project at the moment: a customer information platform to have a consistent way of getting and manipulating the data -- or, to use the jargon, mine the data," Hilmer says.
At present Fairfax uses a silo model for its customer information databases, with each silo containing information relevant to one masthead, and different silos for readers and advertisers. Ultimately Hilmer envisions a much more transparent access to company-wide information in a data warehouse, which can then be used to tune the corporation. For example, it might be possible to better profile customers and tailor products and services. For advertisers, a better grasp of the information would demonstrate more clearly how advertisements work, and where in the mastheads they work best. "We should know what works in the media better than any media buyer," Hilmer says.
Besides spending on the information systems and technologies which underpin the creation of the newspaper, and the management of the business, Hilmer also has to face the requirement to constantly improve the technology at the company's printing plants, the mail rooms and distribution systems, in order to remain competitive. It can all get smarter, he confirms.
So deep is Fairfax's dependency on technology that Hilmer likens it to a bank. Just as a bank could not operate effectively without technology, nor could a modern newspaper business. But Fairfax's pockets are not infinitely deep, and the constant demand for additional technology needs to be tempered by the cost containment argument that never strays far from Hilmer's conversation. At present the company is revisiting its approach to allotting capital budgets.
As befits a former management consultant and academic, Hilmer breaks the issue into three parts. First is the "stay in business" requirement for technology expenditure. "We just need to have these things on people's desks to stay in business. All that you want to be satisfied of is that you are cost-effective," he says. "The second category is where the expenditure has to generate a return. Now I would prefer everything to be like that. But this is where a machine will let us get something out quicker, or get a page somewhere faster. Then we would like to see a normal return comfortably in excess of the cost of capital.
"Then the third type of expenditure is really option creation. This is difficult to assess in a discounted cashflow sense, where if I spend this much I will save this much'. What you are saying is if I spend this I might get a business opportunity that I wouldn't otherwise have, and might have success in the market, and for my shareholders."
Each of the three types of technology investment is valid, but the management thinking which must take place before IT budgets are signed off is different. No less rigorous, notes Hilmer, just different. "We are increasingly rigorous. More of what Nigel [Dews, chief executive of Fairfax's online venture F2] does is more in the option creation category of spending; it's a different kind of thinking, but it's no less rigorous. It's more based on understanding what might evolve. It's often harder to take a call on the option creating expenditures."
In an interview with Business Sunday in September Hilmer expanded on this, saying: "We're spending money because we believe it's an important potential area for us. There's no guarantee; but the amount of money that we are spending is quite small. The Internet loss on an economic basis last year -- not on a consolidated accounts basis -- was in the order of about $20 million, and you have to see that against a cash flow of over $300 million.
"Now you can have good bets that lose, and you can have bad bets that win; but I think it's a reasonable bet. It's an important bet for us; it gives us a chance to get into a new medium that I believe over time will go. What we're trying to do in the Internet is build a number of different platforms that hang off our content and that make sense, and that give us a shot at making some money as this medium matures."
Acknowledging the different nature of this online business to the mature print business, Hilmer took the decision in September to float off the interactive side of the business into a wholly-owned subsidiary, F2, with a commitment to provide funds over the coming three years of more than $100 million. At the time Hilmer issued a statement claiming that "F2 is now a very valuable business, as significant as any Internet company in Australia, and we have structured it to realise its full value within Fairfax". He argued that by retaining the interactive business within the parent company, Fairfax had become "the quality Internet stock in Australia".
Although the publishing company's shares remain solid, they have yet to experience any of the meteoric rises enjoyed by many Internet-only businesses. This indicates the share market at least needs more than Hilmer's rhetoric to be convinced a public listing of F2 would not have generated more share market wealth. At present F2 comprises the online sites of Fairfax's print titles; financial sites, such as tradingroom.com.au and moneymanager.com.au; car site drive.com.au, classified advertising online as a response to the Trading Post; and employment sites. It has also launched an auction Web site, sports sites and city guides.
Fairfax's interactive future, though, is not solely a patchwork quilt of Web sites. Hilmer is excited at the prospect of datacasting and has been advocating a regime of open policy and regulation which would foster the development of a robust datacasting market in Australia.
Hilmer is no stranger to industry competition -- at least as an umpire. He has been architect of much of the nation's current competitive regime, having chaired the National Competition Policy Review Committee in 1992-93. But he is no longer competition umpire. He's now a front row forward in a game where the competition can be real big and real ugly. As chief executive of one of the country's largest publishing houses, and custodian of shareholder value, Hilmer has a fiduciary responsibility to act as a corporate advocate for policy relating to new technology where that might affect the company's future prospects.
In a letter to the prime minister, John Howard, in August this year Hilmer gently chided the government for giving the free-to-air networks an "immense amount of spectrum, for free, for digital television and a guaranteed opportunity to provide datacasting". He believes datacasting will be the "next frontier in the information and commerce revolution", combining print, Internet, video and interactive commerce.
"We would like to see the winners in the new space win on the basis of merit as judged by consumers, not on the basis of some decisions made in Canberra -- or, to a lesser extent, the state capitals," Hilmer says. "In fast moving markets it is important that the government should not pick a technology or pick a winner, but allow the providers of the technology through the market to shape the outcome.
"That's a little bit foreign for us as a country; we've tended to think very much in terms of protection and regulation. There are a series of rules starting in the way we allocate spectrum; the way we think about broadcasting local content, Telstra, the way we are prepared or unprepared to have access regimes to the cables, the pipes.
"I think it's quite important to put our view on the table, and I think we're taking a view that is a happy coincidence of self-interest and good policy, which is very much a pro-consumer approach. We're concerned that the way spectrum is used gives as many people from the bush as from Double Bay or Toorak access to a digital signal," Hilmer says. "We're concerned that people who have got pipes through what is often government-granted monopolies or protection see that those pipes are used to allow providers access into consumers. In that environment the winner will be the person with the best offering.
"That's a very comfortable position for me. In the long run, if you win in the market then you have a defensible and sustainable position. If you've got a position because of regulation, then the day you're out of favour with the government, or the day the mood turns against you legislatively, your business starts to crumble. And to me, too many businesses for too long seem to think the name of the game is do the deal with Canberra."
Hilmer says that to date there has perhaps been more government policy related to the new industries than there has been in [the US], which has relied to a large degree on market forces to determine the way in which technology advances. "Look at the fantastic wealth creation that has come from technology. It has been most pronounced in the least regulated areas," Hilmer warns. "If we care about being a first-tier type of economy then it's really critical for us to have a policy framework that is consistent with being a tier-one technology economy. And someone's got to tell me a better system than a market-led economy."
Hot Off the Wires
Step out through the elevator doors on level 19 of the Darling Park headquarters of Fairfax and you swim into a sea of soft terracotta coloured carpeting. Marble busts of publishing legends gaze from plinths, canvasses painted by some of the nation's greatest artists dot the walls, elegant china clinks, and an air of measured calm pervades. It beggars belief that a couple of floors up are hundreds of journalists, editors, artists and photographers bellowing at one another, yelling into telephones and hammering keyboards as daily deadlines loom.
When Fred Hilmer was appointed chief executive officer of Fairfax last year he was greeted with scepticism by this mob of newspaper men and women. Hilmer was a thinker, Fairfax needed a doer. Could he make the transition? A year on and he is making some solid progress, in part thanks to a legacy of cost-cutting plans inherited from earlier executives. But the future for publishing, and information providers of all shapes and sizes, is unclear as the Internet and datacasting reshape the boundaries.
Hilmer is clearly engaged intellectually by the conundrum. Before accepting the Fairfax offer Hilmer was professor of management at the Australian Graduate School of Management. For 20 years before that he had been a partner at management consultancy McKinsey & Partners, leading the Australian practice for the final nine years of his term.
During the early 1990s he chaired the National Competition Policy Review Committee, creating guidelines for the nation's current competition landscape. With the appointment to Fairfax, Hilmer has a once-in-a-lifetime opportunity to put the theory into practice. It's an opportunity he appears to relish.
-- B Head
It's Not Personal; It's Business
Why does the McKinsey Mafia seem to control much of the direction of Internet business in Australia? There's Fred Hilmer himself, of course; and Nigel Dews, installed as chief executive of Fairfax's online business, F2. Paul Twomey, head of the National Office of the Information Economy; Evan Thornley, founder of Looksmart; and Jeremy Phillips, chairman of ecorp, to name some of the most high profile (and highly paid) McKinsey & Co alumni now making a quid out of the explosion that is electronic business.
"I think the McKinsey experience is useful with the Web," confirms Hilmer. "It is a very fast moving business, and you need people who can get a project done in two-to-six months. The McKinsey training is superb at that.
"You get good tools for project planning and management. You learn to think, you learn to deliver, in hot-house time. These are bright people, who are well trained and are actually getting things done, and that's why a lot of them are coming to the Web."
Hilmer himself spent 20 years as a partner with McKinsey, managing the Australian practice for the last nine of those years. But he left the firm more than a decade ago. He seems less convinced that the networking which develops among McKinsey consultants, and persists long after they leave the firm, provides them with any particular advantage. More, it is the pragmatic skills which a McKinsey stint delivers, which allows them to succeed perhaps more easily than others in the new environment.
"It's very disciplined, it's a very rigorous way of going about things; but I think it's the project management side that has been underplayed."
-- B Head
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