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Feature: Change Management Cold Fusion

Feature: Change Management Cold Fusion

The phone call came out of nowhere and immediately sent a shudder up Herb Johnson's spine. It was from the manager of a run-down warehouse near Birmingham, Alabama, that had just been acquired by Johnson's company, CVS.

"There's a TV news crew here and they want to talk to Willie Johnson," said the nervous manager.

"Who's Willie Johnson?" asked Johnson (no relation), CVS's senior vice president of logistics.

"They say he has the Alabama record for time spent on Death Row."

"And he works there?" asked Johnson.

"That's what they told me. Everybody's looking for him in the warehouse right now. What should I do?"

Johnson didn't know much about the workings of the place-besides the fact that it was a horrible mess. He'd made one quick visit. But the phone call confirmed his worst fear: The warehouse operation, which served the former Birmingham, Alabama-based West Coast Big B drugstore chain, was out of control.

Luckily for Johnson, Willie Johnson was not in that day. Nor would he be asked to come back. Johnson ordered the star convict's dismissal. The warehouse manager told the TV crew that Willie no longer worked there and convinced them to go home. (Willie might have survived-as he had on Death Row-if he had revealed his dubious achievement on his employment application. But the application was mostly fiction.) "Aren't you screening people?" Johnson later demanded of the Big B warehouse HR manager.

"No, we stopped doing that about three or four months ago," he replied, winning points for honesty if nothing else. "People were coming in and out of here so fast we couldn't keep up with it."

Johnson learned that the only screening going on in the warehouse was being done by a local gang that forbade Big B employees from wearing the colours of a rival gang. A knife fight in the parking lot had sorted that out. On this day in 1997, Johnson set his own Alabama record-for reviewing employment applications.

"Big B was the worst mess I have ever seen in my 32 years in the logistics business," he says.

"IT GETS MESSY"

The reality of mergers and acquisitions is not as clean and easy as it sometimes seems in newspapers and magazines. "When you start drilling down into the details, it gets messy," says Howard Edels, CVS's senior vice president and CIO, who has had his own share of messes to deal with. After the headlines have drifted off the pages of The Wall Street Journal, and the company leaders and Wall Street analysts have offered their pronouncements of how the move will affect profits and shareholders, people like Johnson and Edels step in to make the paper dreams of CEOs, lawyers, accountants and investment bankers a reality, to stitch together wildly varying business processes, company cultures and computer systems into something resembling a unified whole. In the trenches of an M&A effort, only two things matter: preventing catastrophes-system failures, product shortages, etc.-during the switch-over that could leak into the media and drag down the company's stock price, and hiding the switch-over from customers, who won't put up with too much inconvenience before taking their business elsewhere.

To achieve both these goals, companies have to be fast. They have to make decisions quickly and follow through on them with alacrity. A bad decision may be better than a slow one. Bad decisions can usually be reversed, but slow ones sow doubt. Doubt lingers. Speed shows Wall Street, shareholders and customers that the costs incurred in the deal will have a legitimate payback. Soon.

EMPIRE BUILDING

About the only way to pull all of this off successfully is to make sure bad things happen to people like Johnson and Edels before they can happen to stockholders and customers. They are the human shields for the tremendous complexity and chaos behind the scenes of a major merger or acquisition. (At press time, Johnson announced he was leaving to take a new position at Premier , a San Diego-based health-care purchasing and services organisation.) CVS has been an aggressive acquirer ever since two brothers, Stanley and Sidney Goldstein, and their partner, Ralph Hoagland, opened the first Consumer Value Store in 1963, in Lowell, Mass. To fuel their growth strategy, the partners sold out to Melville in 1969, where Stanley would eventually become chairman and CEO in 1987 of a retailing empire.

All the while, CVS expanded throughout the Northeast, picking up three regional chains along the way, including People's Drug Stores, a 500-store Washington, D.C.-based chain in 1990. But despite being the company's most consistently profitable division, CVS was lost within the motley Melville empire. "CVS was known as a good operator, but people didn't pay much attention because of the way they were structured within Melville," says Jason Fox, a securities analyst with Olde Discount , a brokerage company based in Detroit. That relative anonymity prompted Stanley Goldstein to sell off everything else, kill Melville and form a new company around the CVS core in 1996. And that's when the company really began getting aggressive.

In 1997, CVS acquired Revco D.S., which had 2,600 stores-nearly twice as many as CVS. Revco had been staggering since the late '80s, when an ill-fated diversification attempt drove the company into Chapter 11 in 1988.

After finally emerging from bankruptcy in 1992, Revco was humbled again in 1996 when Pennsylvania-based Rite Aid 's offer to purchase the chain was rejected by the Federal Trade Commission. Employees at Revco's Twinsburg, Ohio, headquarters were devastated when the FTC decision came through. "When Rite Aid initially cut the deal with Revco, they moved 400 people into Twinsburg and they sucked the organisation dry of every piece of information it had," says CVS's Johnson. "Rite Aid started going out and buying real estate lots that Revco was going to buy; they knew every advertising strategy that Revco was going to use for the next year and countered them in their markets."

All of which did not put Revco employees in a sharing mood when CVS came calling later that year with a $3.9 billion acquisition offer. "When we came along, no one was talking," recalls Johnson. "It was the most frigid experience I've had in my entire career."

SOUNDS OF SILENCE

With a 25-page question-naire tucked under his arm, Edels came to Revco headquarters in late 1995 as part of an eight-man due diligence team. (According to Johnson, CVS deliberately kept the team small to avoid stirring any comparison to the 400-strong Rite Aid army.) The goal of the questionnaire was to determine the scope and complexity of the integration effort to come. The questionnaire asked about Revco's systems architecture, its business processes and its supply chain. To ease fears about revealing sensitive information, Edels made deals with the Revco people. For example, to get at the structure of Revco's database systems and the locations and sizes of its files, he agreed to let the Revco people black out the specific data in the files that contained competitive information. "We said, 'You don't have to give us the numbers, just tell us where the files are and how they are laid out,'" he recalls.

It was rough going right up until the deal was signed and approved by the Federal Trade Commission (FTC) in May 1997. Not only was Revco tight-lipped, but many of its top managers had fled during the Rite Aid disaster, and the company was struggling to hire replacements because everyone feared another acquisition attempt.

To shore up the organisation, Revco had promised employees big retention bonuses that would pay out if the company was ever acquired. Revco went back on that promise, but CVS decided to honour the contracts, and according to Vinny Minchillo, vice president of MIS retail systems, few Revco IS staffers left during the transition period.

Though money was undoubtedly the primary motivator, Edels and Minchillo say they built loyalty among Revco IS staff by taking them to baseball and basketball games and being honest and open about what CVS planned to do: Revco's headquarters would close and all the Revco stores would become CVS stores and be run from CVS headquarters in Rhode Island. The same held for IS. There would be no Revco IS team, no "bake-offs" between Revco's systems and CVS's to determine which had a better point-of-sale system at its stores, for example, or a better pharmacy system to dispense prescriptions, or a better warehouse system to pick merchandise to be delivered to stores. Revco systems would become CVS systems ASAP.

A DEBATE OVER TACTICS

Opening up a best practice exercise (espoused by many a guru and consultant these days) just didn't wash with Edels. The people at corporate headquarters knew CVS's processes and systems and in Edels' view, there was no reason to introduce exceptions into those processes-especially since Revco was being shut down. Speed was an issue too. Wall Street and shareholders were keeping an eye on the rate at which CVS could convert the old Revco stores and make them more profitable. In 1997, a typical Revco store pulled in only about $259 in sales per square foot versus CVS's industry-leading $434, according to Drug Store News, a New York City-based trade publication.

But going "all CVS, all the time" wasn't popular with all of CVS's business people. For Johnson, who could not afford to lose the Revco people he had in his seven new distribution centres in the Midwest and the deep South, the all-CVS strategy was an opportunity missed. "After we made the convergence, there were some things that went away on the Revco side of the house that caused some consternation among the Revco people," he says. For example, Revco's legacy warehouse systems were more robust and had more functionality than CVS's.

To speed the integration process, Edels created interfaces to all four of Revco's warehouse computer systems-each of which had its own custom application set-and tied them to CVS's corporate boxes. The Revco systems became conduits for CVS data and CVS system functionality.

Johnson remains sceptical of this interface strategy. "In hindsight," he says, "if we had had a few more months and more resources, we could have adopted some things out of their system. But we didn't. We just pushed theirs off and put ours in. If I was going to make a recommendation, I'd say get the egos out of the room. Send the IS guys on vacation for a week or two and let the businesses decide what is the right thing to do."

Edels disagrees, saying that maintaining the integrity of all the different Revco systems would have slowed down the conversion process and cost too much money. "It was cheaper and easier to rewrite some of their functionality into our systems later so that we weren't dealing with the integration headaches," says Edels. Furthermore, according to Edels, CVS already had a warehouse software package from Dallas-based EXE Technologies that was better than any of the Revco or CVS legacy systems. "We were starting to put EXE in one of our [CVS distribution] centres when the Revco merger hit," he says. "So we put it on hold until after the conversion was over." Edels says the new warehouse system is now installed at CVS's Lumberton, N.J., distribution centre and will eventually be rolled out to all 10 of them.

SUPPLY CHAIN MADNESS

Before the Revco acquisition came along, CVS thought it knew everything there was to know about its customers' buying habits. The company knew when to put snow shovels into stores and when to take them back. And Johnson knew what food to stock to warm the tummies of Northeasterners on cold March nights. Then his staff started sending the tummy-warmers to Tennessee and Georgia.

"Unbeknownst to me, we had people shipping minestrone soup to one of the Southern distribution centres," Johnson recalls. "The warehouse director in Knoxville, Tenn., finally called and asked, 'Why are you sending me this "mine stone" soup? What is it?'" Besides worrying about regional preferences, Johnson also had to make sure the product mixes in stores were as efficient as possible. There were approximately 5,000 items in a typical CVS store that were not in a Revco store, and vice versa. Over a five-month period in 1997, Johnson's team moved 5,000 items into Revco stores and took 5,000 out-things like redundant private-label merchandise or slightly different-sized containers of staples like mouthwash and detergent. After all, the goal of the acquisition was not to make CVS more eclectic; it was to increase CVS's pricing muscle over its suppliers by buying fewer types of products in dramatically increased volumes. The supply chain benefits of merging CVS and Revco stores' product lines were almost as significant. Johnson would be able to serve any store from any distribution centre (DC) in the newly expanded network. Until then, Johnson's truckers had to drive past CVS DCs that were often closer to newly acquired Revco stores than the Revco centres were, logging up to 300 redundant, expensive miles a day.

CULTURE CLASH

Before he could merge the Revco and CVS supply chains, Johnson had to merge the radically different corporate cultures that existed at the different DCs around the country. This job made the painful chore of reorganising 10,000 different products seem easy by comparison. "I don't care how good your reengineering is, if you haven't done something to bring the culture in around behind it, culture is going to kill it," Johnson warns.

One of the companies that remained fiercely independent after its acquisition by Revco, and later by CVS, was the Hook-SupeRx chain, based in Indianapolis. When Johnson first visited Hook's DC, one of the warehouse employees corrected him when he referred to it by its former owner's name, Rev "This isn't Revco," he snapped at Johnson. "This is Hook's." The Hook's corporate logo was still on the walls in the DC offices. "I let it stay there for three months and then just painted it over [with the CVS logo] one day," Johnson says.

It was harder painting over Hook's old habits. One such tradition was sending young girls in bikinis to pop out of cakes when men had birthdays or anniversaries. Another was to send strippers to an annual employee-sponsored family golf outing. Female employees and children were asked to leave the warehouse while the strippers performed.

"This is the way they did business...," Johnson says, his voice still choking with emotion. "It was accepted."

Not by everyone, however. A female employee at the DC filed a complaint with CVS the Monday after the outing. Details of the event sent a shock wave through CVS headquarters. Johnson flew out to Indianapolis soon after. The warehouse management staff didn't last long. "One was terminated outright and the other three were allowed to resign," says Johnson. "There was 107 years' experience among the four of them. It was the coldest day of my life," he says, adding, "Even to this day, I think half the people there think we made the right decision and the other half thinks it was too harsh. But it sent a clear message to the organisation that we were not going to tolerate that kind of behaviour."

The processes for receiving and shipping goods in the Hook's DC and the other centres within the Revco organisation were also more than Johnson could stand. "There was no consistency around policy," says Johnson. "Process seemed to be defined by the director of each facility. In many cases they didn't have a super or someone responsible for the cleanliness of the building. The doors to the warehouse opened in the morning and stayed open until midnight, which meant there were a lot of opportunities for pilfering. We needed to reengineer a lot of their facilities."

Mostly, he needed to reengineer people's attitudes. "I visited every DC and spoke to every employee in the warehouse," he says. "I sent letters to their homes saying that there weren't going to be any layoffs." When Johnson visited the DCs, he'd climb up on a stack of shipping pallets and give a speech. "I told them about how we wanted to try to unify the organisation, and I asked them to be patient," he recalls. "I said that there were going to be some changes and they would be concerned and that it would take awhile to work through things, but that we would be a stronger, more unified company because of it."

Creating a single standard means that people will lose benefits or ways of doing business that they are comfortable with. To this dilemma, Johnson has no magic answers. He acknowledges that creating a single standard often meant enforcing that standard. "Sometimes we'd walk through the warehouse and we'd hear people laughing about a CVS employee or the way that CVS does business," he recalls. "We'd take them aside and say, 'This isn't Revco or Big B or Hook's anymore. This is a new company. And the next time I hear you talking like that it's going to be on your head.'" Still, many employees and managers resisted. Though CVS had a program for explaining why policies and procedures were changing, and gave most employees three to six months to adjust, according to Johnson, "there were some who simply told us that our way wasn't the way they did things. After a certain point you have to ask yourself, 'How much pain can I invest before someone gets the picture here?'" At the Big B distribution centre in Alabama, for example, Johnson estimates that he replaced 60 per cent of the staff in less than 18 months. To find new people, he had two national recruiting firms on call and he called in chits with every friend he'd ever had in the logistics search-firm business. He also received the go-ahead from CVS headquarters to review salary packages for Revco employees who were being paid less than their CVS counterparts. "My philosophy has always been to spend more to get the best person for the job," he says. Johnson estimates that CVS's headquarters logistics staff is now approximately one-third former Revco people. "It was a really difficult year," says Johnson, "but I now have the best logistics team I've ever had."

PICK THE BEST,DISCARD THE REST

CIO Edels hasn't been so lucky. "We probably brought a dozen people to Rhode Island for a week to show them around, but not one accepted a job," he says. "It's hard to get people to leave Cleveland. The job market is good and you just can't get a house in Rhode Island for the same price you'd pay in Cleveland." (When CVS bought the 250-store Arbor Drugs chain in 1998, Edels could not get any of Arbor's IS employees to move either.) Edels had to rely on contract help to get his integration job done. Indeed, when it came time to begin switching old Revco stores over to the CVS format and CVS computer systems, Edels was completely dependent upon contractors run by a select team of his staff who manned a "war room" in CVS headquarters around the clock for five months.

While quick integration was the overriding theme in the Revco acquisition, that isn't always the case when CVS buys a competitor. Within the industry, Revco was widely viewed as a mediocre player-the stores didn't have carpeting and were often dirty and poorly lighted. There wasn't much CVS could learn from the company. But when CVS bought Arbor Drugs in 1998, it acquired what industry insiders viewed as a class act with nice, clean stores and innovative computer systems and merchandising programs. In fact, CVS has only just decided to pull the Arbor signs down.

Despite the size of the 2,600-store Revco acquisition, working a mere 200 Arbor stores into the CVS empire is actually proving to be more difficult from a systems perspective. "With Revco, all I had to do was go get the data," says MIS Vice President Minchillo. "We didn't look at their applications. At Arbor we went and learned every system they had and chose the pick of the litter, either because we thought it was better than CVS's or because we needed their systems to run their stores." For example, Arbor had developed a photo-finishing system where customers could swipe a magnetic-stripe card each time they dropped off a roll of film. The card contained all the customer information the store needed to process the film, as well as the potential for discounts and "frequent flyer" programs. CVS wanted that. Now its Michigan stores have it.

Today, most of the old Revco stores are indistinguishable from CVS. Those that aren't, soon will be. CVS's long experience with mergers and acquisitions proves that there is no single recipe for transforming two companies into one, but Edels and his staff know that each merger will be hard and each one will be slightly different.

"Every week we're buying one to 20 stores, whether it's small chains or mom and pops," Edels says, matter-of-factly. Easy or difficult, large or small, about the only thing Edels can count on is that the acquisitions will keep coming. Acquisition has become the foundation of CVS's corporate strategy, and it's his job to be ready.

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