Jennifer Reingold (Fortune) interviews Bob McDonald, CEO of Procter & Gamble, and Filippo Passerini, CIO of Procter & Gamble
July 19, 2011
JENNIFER REINGOLD: Hi. Well, let’s get started right away. We have a lot to talk about, and we have the distinct pleasure of having Bob McDonald, and Filippo Passerini here. P&G (PG) is a $79 billion company. I think you have all heard of it. It makes Crest. It makes Tide. The question is, why are you, Bob McDonald, telling everyone that you’re going to be the most digitally-enabled company in the world?
BOB MCDONALD: Jennifer, as you know, our purpose as a company is to touch and improve the lives of the world’s consumers. Today, as we sit here, we’re reaching 4.2 billion people in the world. We’ve turned that into a growth strategy called our Purpose Inspired Growth Strategy. We want to touch and improve the lives of more consumers in more parts of the world more completely. And we believe that the way to do that, one of the tactics to do that, is to digitize the work of the company from the creation of molecules all the way to running our factories off of the point of sale data of our retail partners. And, as you know, digital is nothing but ones and zeros, so we believe that if we can do that, we can digitize the work of the entire company.
JENNIFER REINGOLD: So, from a practical level, what does that mean? As I understand it, the two of you have been working together since 2008, even before you became CEO, to completely transform this company, and to make it be effectively the competitive advantage of the company, right? I mean, it’s not about ‑‑
BOB MCDONALD: That’s right.
JENNIFER REINGOLD: It’s not about the detergent, the powder itself, per se, it’s about how you get the competitive advantage, and so forth. So, Filippo, can you tell us about the process?
FILIPPO PASSERINI: (Off mike.)
JENNIFER REINGOLD: Hang on one second. Is the mike off?
FILIPPO PASSERINI: (Off mike.)
JENNIFER REINGOLD: Bob, can I go to you?
BOB MCDONALD: I’m just helping with the technology.
JENNIFER REINGOLD: Here we go. We’re digitizing as we move here.
FILIPPO PASSERINI: This mike doesn’t work. Okay. This one is better.
The simple answer is to run the business in real-time, so the ability to predict what is going to happen. For that it is very important for us to create simulations, models, predictive models of the business, and to accelerate decision-making and to be able to respond on the fly in a very agile way. What is critical is to eliminate all the unnecessary human touch points.
JENNIFER REINGOLD: So, getting rid of all the humans, right, is that it?
FILIPPO PASSERINI: Well, what is unnecessary?
JENNIFER REINGOLD: Right. Now, but in doing this I think that you have actually reduced the processes that the company needs to make decisions. They’ve gotten it down to ‑‑ do I have this right, 88 things it takes to run P&G?
FILIPPO PASSERINI: We have identified that there are 88 things, business processes, that fundamentally run this $80 billion company. Now, if you double click you’ll go down into the thousands, but fundamentally there are 88 distinct ones. And for each one of them we have analyzed the cycle time, the number of people involved, what is the decision making time from the moment the information is available to the moment we can actually use it for business, and digitization is all of that combined. It is the ability to constantly compress time and constantly evolve the way we collaborate internally. And going more and more from a physical world to what is really a digital world is inevitably part of our business.
JENNIFER REINGOLD: So, what does that mean on a practical basis? How do you take those 88 processes? Maybe we can use a particular example of a decision, or something that’s being made throughout the company. How do you ‑‑ it sounds to me as if 88 is a very large and complex number, but I think what you’re saying is it’s actually a small number. How do you get there?
FILIPPO PASSERINI: Well, we have analyzed all the activity systems within the company, what is required for us to understand consumers, produce, manufacture, distribute, merchant, commercialize, and looking at all the activity systems, these are really the building blocks all together complete what we have to do. And you’re right, Jennifer, 88 for a company of our size, I would consider it a very small number. And these are the known processes. So, for each one of them it takes a lot of bottom up work, and the beauty is that, different to that, there has been a lot of top down directions, vision, strategies, and a cultural change.
BOB MCDONALD: Maybe I can give you a real example. We have 5,000 people in the company who used to do demand planning. So, each one would have their own spreadsheet. And they would try to plan demand based upon the inputs that they saw. Of course, they all had their own technique. Well, if you’re getting the point of sale data of a retailer, that’s a lot of samples. If you think of a CD, or in music, the more samples you have of that digital sound, the better the quality of the sound. So, as you’re getting those samples from the retailers, you can then create a Monte Carlo simulation that forecasts the future better than a human being can do it using an Excel spreadsheet.
JENNIFER REINGOLD: Wow. And is there a particular decision that’s been made that we can use as an example?
BOB MCDONALD: Yes. Well, the decision is that we’ve now ‑‑ in fact, Friday I’m inaugurating a new facility in Cincinnati, where we’re aggregating the demand planning, and we’re going to have the opportunity to redeploy those people to something else, because we’re using computer based simulation to plan demand. And this is the kind of thing that’s possible.
We talked about in our branding area, when I was a brand manager, I used to ‑‑ back in 1983, I would ride home at night listening to cassette tapes of how consumers would be responding to our products. They would call our 1-800 line. We were the first company to have toll-free numbers on the backs of our packages. We don’t do that anymore. Today what we do is, we have something called consumer pulse, which is on the cockpit of every individual’s computer. Everybody has a cockpit. And on that cockpit, we take all the inputs, whether it’s tweets, whether it’s blogs, whether it’s letters, whether it’s phone calls. They all get aggregated, they all get ‑‑ we use a Bayesian numerical technique to categorize them, and then we provide that input to the brand manager or the brand group in real time, so they can literally watch the comments come in on their brand from their respective geography. And, of course, I have the same thing for the P&G brand.
JENNIFER REINGOLD: And how does that change the decision-making? It would accelerate it, I assume, but I could also imagine it might create a cacophony, in a sense, right, of so many voices?
BOB MCDONALD: It takes some training to know what to react to, and what not to. Every Monday morning, we meet with the top 50 or so leaders in the company. Some are connected virtually. Some are physically in Cincinnati. We use videoconferencing to connect them. We review the business from the previous week. We review the profit forecast, the volume forecast in real time, and we make decisions to change at that point in time. If we had not had that capability, we probably would not have hit the quarters the way we hit them in the first half of the year, as the economy was heading south. So, it’s important ‑‑
JENNIFER REINGOLD: So, you’re all sitting in the room together, you’re all looking at the same data, the same data points that are collected, together, globally.
BOB MCDONALD: That’s correct.
JENNIFER REINGOLD: And you are able to make that decision in real time as opposed to going ‑‑
BOB MCDONALD: And you can click down into the data. What you find is, as you digitize your work, the biggest issue doesn’t become the ability to digitize, the biggest issue becomes the source of data. In other words, if I’m only getting data from a provider once every three months, that data is worthless to me in terms of operating a company in real time. So, what Filippo has done is, he’s started to attack the data sources in order to get that data in real time. And many suppliers can’t supply in real time. So, we have discussions with many of those suppliers.
JENNIFER REINGOLD: Well, I was just going to ask about your suppliers. Do you bring them into this process? Is this something ‑‑ are you able to share this technology more broadly, and does this therefore help your relationships with the suppliers?
BOB MCDONALD: Yes. I’ll talk about the suppliers broadly, and then Filippo can talk about the suppliers of digital technology.
But, yes, we would connect a chemical company supplier to our forecast so that they have visibility of what we’re forecasting, and they can plan their demand as well. We just started this a few years ago. So, we’re not there yet. Filippo and I started it about 2005-2006. We’re not there yet, but we’re making progress, and eventually I would like to have everybody connected.
JENNIFER REINGOLD: So, everyone can rely on the same chain of information, the same source?
BOB MCDONALD: Well, that’s what’s important. It creates ‑‑ what it does is, it allows you to flatten the organization. We’ve reduced 50 percent of our vice chairmen, we’ve reduced 15 percent of our vice presidents, we’ve reduced 15 percent of our directors. We’ve taken a number of positions from the lowest level of the organization to the CEO from seven to five. You collapse the organization. Everybody gets the same data at the same time. I had to give a speech on Monday to some of our people because we have a process where every semester, every general manager in the company writes a letter to the CEO about their business. Well, I don’t want the letter to regurgitate the business to me. I have that on my cockpit. I want to understand what the strategic issues are. But you create a transparency, and that transparency, and transparency with suppliers, enables you to move more quickly.
FILIPPO PASSERINI: Jennifer, one way to think about it is that we’ve been on a cycle of weekly, monthly, quarterly, and it doesn’t have to be that way. Some of the processes will need to change every few hours, others every several months.
JENNIFER REINGOLD: So, a quarterly planning meeting loses its value, effectively.
FILIPPO PASSERINI: This is really the conceptual important point. And then, to Bob’s comment, we are looking at it from a supply chain at some point, from an employee digitization at some point, so enabling collaboration always in real time. We are looking at it from aligning business. So, I think what is different here is how pervasive the whole program is, first of all, in this alignment between CEO and the technology organization, but then importantly in the desire we have to transform the way business is done, which I consider my mission, is not to develop new systems, it’s not to bring in new technologies, although we do do that, it is transforming the way business is done starting with the business benefits, which we always quantify in advance.
JENNIFER REINGOLD: And I think when we were speaking in the green room just now, what came up was the notion here that P&G is not thinking about technology as a separate part of the business, you know, the IT Department is no longer the IT Department. The IT people are deployed within the businesses, specifically, right, in the field and so forth.
BOB MCDONALD: Yes. Filippo’s job is to transform the way we do business. So, identifying those 88 processes, which we’ve agreed on, we go through and we digitize each one of those, bringing the business partners in. One of the things Filippo has done very well is to make sure he is focused on his customer, the customer being the business leader, and allowing them to use whatever technology they want to use. He has not dictated to them, well, we’re going to buy so many of this kind of technology. We want to use the technology that people are comfortable with.
JENNIFER REINGOLD: But the other side of this is that people within the company who are not in the technology part of the business, I think you are making it a requirement that they become up to speed, that they understand the technology as a part of their responsibility. You don’t call the IT Department ‑‑
BOB MCDONALD: If you want to transform the way you do business, your human resources department has to be involved as well, right, because you want to make sure you’re hiring the right people, you want to make sure you’re training people properly. So, I asked the human resource department, and Filippo to get together, and come up with demonstrated ability to use technology for each level in the company. And we’re going to train people, but if they can’t be trained, then they’re not going to make it to the next level.
JENNIFER REINGOLD: So, just to be clear, this would be part of your performance review?
BOB MCDONALD: This is part of your performance appraisal.
JENNIFER REINGOLD: And this applies to everybody?
BOB MCDONALD: Everybody, including me.
JENNIFER REINGOLD: And if you can’t cut it, what happens?
FILIPPO PASSERINI: And then on the other side of the coin, if you wish, what we try to do is to make our solutions so compelling, and so attractive that there is really not push back, because people see the value in doing that, and the value is either cost reduction, which could be significant ‑‑ we’ve been able to reduce $900 million in cost over the last ‑‑
JENNIFER REINGOLD: How much? Sorry.
FILIPPO PASSERINI: Nine hundred million dollars over the last eight years.
BOB MCDONALD: His goal is a billion.
FILIPPO PASSERINI: So, there is a lot of that which is showing value to the business units. But, if we are to be business people rather than technologists, we need to speak the business language, and do it in a way that is relevant. Relevance for us is our fixation day-in and day-out, and we want to make sure that we really deliver concrete value. This is lowering some of the resistance you may have because people find that attractive, and they see value in it.
JENNIFER REINGOLD: Can we move it a little bit to the external face of P&G? I know also that you’ve used technology very effectively to communicate both with the consumer, and with your suppliers. Do you want to give a few examples of that?
BOB MCDONALD: Let me talk about marketing and then Fillipo may want to talk about some other aspect. Our vision of marketing of the future, if you’re trying to touch and improve lives, think about the most indispensable relationships you have in life, they tend to be family members, they tend to be people that you’re very close to. So, what we want to do is we want to create a one-on-one relationship between every one of our brands and our company, and every consumer in the world. We reach 4.2 billion people today, not all one-on-one, but that’s the end point.
Digital technology enables that kind of connection. What we want to do is we want to, as you have done with us, in China and in Russia, we want to go in people’s homes, we want to understand the tension in their lives, we want to take that tension and turn that into an insight, come up with an insight, come up with a big idea, turn that big idea into something consumers can participate in and then turn that participation into a movement.
So, a good example here in the United States would be our Old Spice advertising smell like a man man. The idea is that young men are a little nervous about how they present themselves to the opposite sex, and we identified Isaiah Mustafa, who is in our ads. He’s an ex-NFL football player. Through that we created a campaign, which got a lot of notoriety. We had a lot of people parody the campaign from Sesame Street to individuals and put it up on YouTube, or blogs. And then they participated in it. We’d actually have Isaiah participate with them on a blog.
For example, before the State of the Union Address one of the questions asked to him was what his advice would be for President Obama. Do you know what he said?
JENNIFER REINGOLD: What?
BOB MCDONALD: You were laughing. He said I would start my State of the Union speech by saying, hello, ladies. Unfortunately the president didn’t use it. But, through that we’ve gotten 1.8 billion free impressions. So, advertising is very different today. You don’t talk to somebody. You engage them in a discussion and you give them the freedom to participate in that discussion, and actually to advertise for you.
JENNIFER REINGOLD: And I assume there has been a business result to that, as well?
BOB MCDONALD: Well, I’m glad you asked. Old Spice became the number one body wash and number one deodorant in the United States, because of this campaign. It also won a Grand Prix and nine other Gold Lions in Cannes at the advertising festival.
JENNIFER REINGOLD: Great. I want to have a chance to open the floor up to questions. Anybody?
BOB MCDONALD: There’s one in the back.
JENNIFER REINGOLD: In the back?
QUESTION: One of the things one observes when organizations, particularly large organizations, increase transparency dramatically is that it becomes a paradise for micromanagers. If you can see what the country manager is doing in China, or the country manager in China can see what’s going on in the cities, there’s an irresistible tendency to interfere and help. P&G is not exactly known as a hands-off management company.
BOB MCDONALD: Really?
QUESTION: How do you strike a balance between improving transparency dramatically and preventing the sort of empowerment that you say you want?
BOB MCDONALD: I think that’s a great question. I think that’s why it’s so important that you have to dismantle the hierarchy. You dismantle the hierarchy so people don’t have time to micromanage, right, and they’re focused on the most important thing. If you have four vice chairmen they can do a lot more micromanaging than two. If you have 15 percent fewer vice presidents and so forth, so that’s number one.
Number two you train them. You have to train them. I mean, you have to train them in the technology, but you also have to train them in the transformation of their behavior. We talked about transformation earlier. That’s critically important. Number three, if they start micromanaging, then you have to talk to them about it and correct the situation. Our situation is a bit different. We only promote from within. So, most of us have known each other, in my case 31 years. So, we don’t mind telling each other that we’re being micromanaged if that’s what’s happening.
FILIPPO PASSERINI: I have a quick point here. I believe after you have the wrong vision and the right strategy, I think much of it is pushing water through the pipes. There is so much we can talk theoretically about it. We need to get going, make it happen, and I’ve been surprised by the passive reaction of several people, because they say they have information, full democracy, the way we call it. It is something that has a lot of value.
JENNIFER REINGOLD: In a way, there’s nothing to argue, or in a weird way to micromanage, because the facts are the facts, right. I mean, once you have the data source, then ‑‑
BOB MCDONALD: Well, Proctor & Gamble has been known for many years, and these aren’t my words, as a democracy of ideas. And so I think this enables that democracy to occur.
FILIPPO PASSERINI: To build on this point, the beauty is that you spend a lot of time on discussing what is happening in the business, what are the results, and I think with that we’ve been able to move from the what, which is now the same for everyone, so there is now discussion, there is not debate to the why it is happening, what is happening, and how to improve on it. So, the shift is much more on the action, is much more on the ability to take a decision first and this is to your question, Jennifer, what we think is different in the way perhaps we are doing it.
JENNIFER REINGOLD: Other questions?
Okay. I will ask one. Sorry.
FILIPPO PASSERINI: There is one.
JENNIFER REINGOLD: I can’t see, sorry.
QUESTION: Bob, you mentioned that everybody has certain tech requirements, every level, and you need to accomplish certain things, or know certain things to get promoted. I’m curious for you, or for someone who wants to succeed you some day, what are the tech requirements to be CEO of P&G?
BOB MCDONALD: That’s a good question. My ideal is always on, always connected. So, for me I don’t believe in the cloud, because sometimes I can’t connect to a cloud in Kenya, or Ethiopia, or somewhere else. For me I can’t use a Blackberry, because I type about 60 words a minute. And so I’m pretty fast, and a Blackberry slows me down. And when it comes to deciding whether or not to build $120 million plant, or a $1 billion plant, I don’t want to be deciding that based on what I can get on a Blackberry. So, what I have Fillipo helping me with, and I have, is a relatively small computer, with a full keyboard that is virtually always on and allows me to connect with whatever cell phone towers exist in whatever country, and pay what exorbitant rates are there.
So, my background is engineering, operations research, computer science with an MBA. I think having the combination of those skills is very helpful to getting this kind of job done.
JENNIFER REINGOLD: One more question? I really can’t see.
BOB MCDONALD: Yes, they’re over here.
QUESTION: Hi, Brian Dumaine from Fortune. Bob, could you address what you’re seeing in the marketplace in terms of the use of mobile apps and shoppers? I mean are they using mobile apps to do price comparison-shopping, to pay for their groceries? What’s working and what’s not?
BOB MCDONALD: Yes, there’s been a big increase in the use of mobile apps. There’s been a big increase in the use, particularly, of sites that promise coupons. I attended a focus group with some consumers the other day who spend virtually all of their day online trying to find multiple coupons for the same brand, and then they spend all their day in the retail store trying to find a cash register operator who will stack up coupons on the same brand, which is typically not allowed by most retailers. But, they find somebody who will do it. They know their name and they know the hours that they work. And then they get these coupons and they go in there and they do that. And to them it’s a game, and it’s a little bit of a religion. And they tend to, not surprisingly, they tend to connect with each other and oftentimes that connection causes one of them then to turn their capability into a website, or a blog, or an application. So, we see that going on everywhere.
JENNIFER REINGOLD: How does that affect the business itself? How are you responding to that?
BOB MCDONALD: It’s not a big part of the business today, but certainly in any digital application, we want to be part of it. So, usually, we get connected, and we try to help the firm figure out how to commercialize it, how to make money. We work with people like Facebook, and Google, and everyone to help them, as the world’s largest advertiser, to help them understand how to commercialize it, and how to make money off of what they’ve created. And so, as Filippo was mentioning earlier, we try to work with them to develop the technology to help us, and then as we co-invent, we help them then after we’re the first mover, we help them commercialize that technology more broadly.
JENNIFER REINGOLD: Is there a particular group of people that are specifically devoted to that?
BOB MCDONALD: In our company?
JENNIFER REINGOLD: Yes.
BOB MCDONALD: Yes.
JENNIFER REINGOLD: What is that unit?
BOB MCDONALD: Well, we have a group that is called New Business Development, where that’s their job. They’re always on the Internet. They’re always connected. Anybody with any idea can come to us. We use a website called, I think it’s called 9Sigma, where we put out a chemistry problem at night. We come back in the morning, and we take in all the chemistry ideas we get. We had one particular case, when I was running the laundry business, we had a chemistry problem. We went home at night. The next day a Chinese scientist had solved it. We paid him $25,000. He was the richest man in China. And I don’t know yet what the value of that idea has been. The richest man in his village.
Filippo has people working with suppliers all the time on this kind of thing.
FILIPPO PASSERINI: Yes. We have concluded that it is not any longer the big fish, the small one, or the fast, but we believe it’s the fish that will know how to network with other fishes that will be the winner. We have been, to Bob’s point, we made a big philosophy, a big strategy out of collaborating and developing strategic alliances in a number of ways.
JENNIFER REINGOLD: Okay. I think we’re going to have to leave it there. Thank you all very, very much.
BOB MCDONALD: Thank you very much.
JENNIFER REINGOLD: Bob, Filippo, thank you. And we’ll turn it over to Stephanie.