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Sara Lee software recipe is heavy on SAP

Is the company, amid a massive restructuring, biting off more than it can chew with an applications overhaul?

Just two weeks after taking over as chief executive at Sara Lee, Brenda Barnes was trying to sell Wall Street on the company when her pitch was at least partly undone by a software glitch.

At a late-February presentation at the Consumer Analyst Group of New York annual conference, Barnes laid out the company's plan to essentially cut itself in half through a series of spinoffs and sales over the next year and a half. Although mature consumer-products companies routinely tinker with their portfolios, the overhaul unveiled by Chicago-based Sara Lee--which amounts to completely cleaning out its closet and significantly thinning its pantry--is nearly unprecedented.

So Barnes had a tough sell. Nonetheless, she was plugging away. She told the assembled investors, who oversaw tens of billions of dollars in funds, that the new "lean enterprise" would be more efficient and innovative than the dowdy old Sara Lee, whose stock has flattened over the past four years.

"ConAgra just gagged on SAP, and Sara Lee is loading its plate with it."
--a money manager at the CAGNY conference

Given the myopia on Wall Street, however, it was perhaps too much to ask for the assembled money managers and sell-side analysts to buy into a restructuring plan that is expected to take place over the next half-decade. But if the five-year reorganization strained credibility, Barnes' next announcement positively snapped it.

While undertaking this massive restructuring, Barnes said, Sara Lee also would roll out a systemwide implementation of SAP's enterprise resource planning software, costing tens of millions of dollars over the next few years. The awkward silence following the announcement gave way to a few snickers and snide comments from some of the more cynical Wall Streeters in the audience.

After all, just 24 hours earlier on the same stage, an executive from another company, ConAgra Foods, had told the audience that snafus with an SAP system were a main reason the company would miss earnings. In the words of one money manager at the CAGNY confab, "ConAgra just gagged on SAP, and Sara Lee is loading its plate with it."

A "patchwork quilt" of software
With a mix of five major software systems, it's certainly a rational business decision for Sara Lee to look to standardize on a single technology. Currently, software from Manugistics Group, J.D. Edwards (now owned by Oracle), Lawson Software, Movex and another tech provider lace throughout the company's operations in some 58 countries around the world.

All that one-off software means that Sara Lee typically spends "the majority of our IT budget on just maintaining our patchwork quilt," Barnes acknowledged during her CAGNY presentation.

Centralizing the technology, along with procurement and other operations, could save the company $210 million annually within five years, she projects. Already in its next fiscal year, which starts in July, costs should drop by $30 million.

Additionally, Sara Lee hopes that the single technology platform will lend consistency and visibility to the company's operations.

That is, of course, if all the software runs as seamlessly as planned. But could that be a case of pie-in-the-sky thinking at the cheesecake company?

"We're early on in the process ... so there really isn't much we can say about the SAP implementation at this point," says Sara Lee spokeswoman Julie Ketay. She declined to discuss the specifics beyond saying it will be "companywide, throughout a wide variety of functions."

"Because it's the global leader in (enterprise resource planning) systems, SAP gets a bad rap."
--Mike Dominy, Yankee Group

Sara Lee does point out that it already has some of its European operations running SAP, an installation spearheaded by its current chief financial officer, Theo de Kool, who will also take a role in the rollout.

Still, that goes only a little way to ease concerns about Sara Lee's plans.

"It's clearly a risk, as we've seen so many other companies stumble and come undone while doing it," says D.A. Davidson analyst Tim Ramey.

There certainly isn't a shortage of botched software installations that have bugged all sorts of consumer products companies.

ConAgra noted the messy software installation cost it about $25 million, about half its earnings shortfall in the most recent quarter. Hershey Foods lost business around Halloween in 1999, when some of its SAP order-management software conked out, meaning bags of its candy weren't on hand for trick-or-treaters. And just earlier this year, the software that publisher Penguin Group uses to ship and track its books left some orders AWOL, costing parent company Pearson some $17 million in charges.

"Because it's the global leader in (enterprise resource planning) systems, SAP gets a bad rap," says Mike Dominy, director of the enterprise services unit at tech consulting firm Yankee Group. The German software giant is a "convenient target" for blame by companies unprepared for the disruptions that can come with millions of new lines of code, Dominy adds.

To the contrary, SAP's software suite, which ranges from accounting and HR to financial and inventory-management applications, functions smoothly, Dominy says. Where hiccups abound is when the applications extend outside the company's four walls, particularly in the inherently complex field of supply-chain management, covering warehousing, distribution, order fulfillment, demand forecasting and so on.

"I suspect our portfolio actions are likely to get a disproportionate amount of attention externally."
--Brenda Barnes, CEO, Sara Lee

Even in those cases, Dominy says, some of the fault rests with the companies themselves. "Where we see the implementation go off track is where the company has done a poor job of defining the benefits and the business case [for the installation] or has changed the scope of it."

To be sure, food and beverage companies can get SAP systems to work as advertised.

Chewing gum giant Wrigley recently wrapped up its four-year SAP implementation. The system, which can process 30,000 transactions per day, has "fully met (our) original business plan," says Chief Operating Officer Ron Waters. Wrigley has even added operations in Spain and China that it picked up last year when it purchased the Joyco Group division from Spanish food producer Agrolimen Group.

Of shakeups and software
From a regional distributor of coffee, tea and sugar founded in 1939, Sara Lee has sprawled into a company selling everything from Hanes underwear and Wonderbras to Ball Park hot dogs to Chock Full o' Nuts coffee to its namesake cheesecake. (Until late 2000, it also owned luxury leather goods maker Coach.)

With its strategic shakeup, however, Sara Lee is acknowledging that its disjointed structure hasn't worked to drive the 3 percent to 4 percent sales growth and 5 percent to 8 percent profit hike it's targeting. In fact, Sara Lee stands to earn less in its current fiscal year, ending July 2, than it did in its previous fiscal year.

Obviously, the most significant move toward recasting its business is the plan to take the food and clothing out from under one roof. Among the steps outlined: Spin off the U.S. apparel business and sell the European clothing division, as well as divest the European meats unit, U.S. retail coffee business, the direct-selling network and other unspecified "tail brands."

By the time the dust settles from all the auctions and offerings, analysts expect Sara Lee to have raised roughly $3 billion. Collectively, the businesses generated $8.2 billion of the company's $20 billion in revenue last year.

Sara Lee hasn't specified a price tag for the SAP system, saying only that the software is budgeted as part of the $240 million it expects to spend, primarily over the next three years, on information technology and business process management initiatives. With the SAP software providing the technological cornerstone, Barnes says the operational transformation will determine whether the slimmed-down Sara Lee succeeds--never mind the multibillion-dollar brand dispositions and realignment.

"I suspect our portfolio actions are likely to get a disproportionate amount of attention externally," Barnes said in announcing the moves. "However, we are thoroughly convinced that the organizational changes we are making are the single most important pillar for the transformation."

Still, D.A. Davidson's Ramey rates the "inherently scary exercise" of installing and running the mammoth SAP system as more of a danger to the company than the half-dozen or so sales and spinoffs it also has at hand.

The risks around the pending installation are heightened at Sara Lee because its business has traditionally been Balkanized, adds Ramey, who worked at the company before stepping over to Wall Street's sell side in 2002. He recalls that it took "a major corporate initiative" for the Ball Park hot dog unit to work out a plan with the group that made the buns.

"There was no imperative for the business units to work together, so there was no imperative for the technology at those business units to work together," he says. "If you're General Mills or Kraft or Procter & Gamble, you'd scratch your head and wonder how Sara Lee ran its business before."

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