[Recommended]IT Governance at Oxford Industries: Information Architecture for Financial Data

IT Governance at Oxford Industries: Information Architecture for Financial Data © HEC Montréal 2008 All rights reserved for all countries. Any translation or alteration in…

IT Governance at Oxford Industries: Information Architecture for Financial Data
© HEC Montréal 2008 All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited. The International Journal of Case Studies in Management is published on-line (www.hec.ca/revuedecas/en), ISSN 1911-2599. This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the administrative situation presented. Deposited under the number 9 65 2008 001 with the HEC Montréal Centre for Case Studies, 3000, chemin de la Côte-Sainte-Catherine, Montréal (Québec) Canada H3T 2A7.
Volume 6
Issue 1 May 2008
IT Governance at Oxford Industries: Information Architecture for Financial Data Case prepared by Professors Michael WYBO1 and Carmen BERNIER2
At the end of 2005, Atlanta-based Oxford Industries was closing on its third major acquisition in as many years. Two–and-a-half years earlier, Oxford had acquired the Tommy Bahama brand in Seattle, and one year later it had purchased London-based Ben Sherman. As Oxford’s CIO, John Baumgartner has managed over the last three years to provide systems support to establish visibility into the day-to-day financial activities of the legacy company and the newly acquired operating companies, while minimizing any negative impacts on the profitability of the newly acquired companies through business process and system changes. As additional acquisitions are planned, however, balancing these two objectives is becoming more and more difficult. The degree to which the acquired organizations should function independently or be brought under one corporate information system is becoming an increasingly pressing issue.
Oxford Industries and the North American Apparel Industry
Founded in 1942, Oxford Industries, Inc. is a producer and marketer of branded and private label apparel for men, women and children. Oxford brands include Tommy Bahama, Ben Sherman and Oxford Golf. In addition, Oxford holds exclusive licenses to produce and sell certain product categories under brands such as Tommy Hilfiger, Nautica and Dockers. For example, Tommy Hilfiger is licensed to Oxford for men’s and women’s golf apparel and men’s dress shirts. A complete description of Oxford’s owned and licensed brands as of May 2004 is found in Exhibit 2. Oxford Industries has a long history in the US apparel industry (see Exhibit 3). In the 1950s and ’60s, US apparel companies manufactured locally for a domestic market and 90% of Oxford’s production was located in the US in factories owned by Oxford. In the 1970s, US manufacturers began to sew outside of North America to take advantage of the “807” clause of the US customs regulations, allowing for duty-free re-importation to the US of clothing assembled in a Caribbean Basin country. During this period, US retailers began to use overseas agents to import finished 1 Michael Wybo is an Associate Professor in the Department of Information Technologies at HEC Montréal. 2 Carmen Bernier is an Associate Professor and Director of the Department of Information Technologies at HEC Montréal.
HEC018
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products from Central and South America and Asia. The 1980s saw the growth of the “mega- retailers” – well-known brands such as Liz Claiborne, Tommy Hilfiger and Nautica that had never manufactured but always imported their entire product line as finished goods. In the1990s, these mega-brands became the dominant players in the apparel industry, and by 2000 domestic US apparel manufacturing had all but disappeared. Over the 60 years of its existence, Oxford has adapted to changes in the industry, moving from domestic manufacturing to overseas manufacturing and importing, and finally becoming a world- class sourcing organization. As a sourcing organization, its primary focus was on procuring and delivering finished product to major brands and retailers. In this business, it competed not only with manufacturers who sought to have direct relationships with these clients, but also with the sourcing organizations within the branded companies themselves. By the end of the 1990s, Oxford had determined that, to prosper as a North American apparel company, it needed to shift from producing and sourcing product for others and become itself an owner of high-value apparel brands. It therefore embarked on a strategy to acquire a group of internationally acclaimed and successful lifestyle brands. The significance of this shift in strategy is demonstrated by comparing the list of key management concerns identified by the company in 1998 and 2005 (see Exhibit 1). In 1998, Oxford was focused on being a world-class sourcing organization. In 2005, it sought to be a major brand owner, effectively moving into the same business as companies that had previously been its customers.
Exhibit 1 Management Concerns in 1998 and 2005
Management concerns in 1998  How much sewing capacity should we own and how much should we outsource?  How do we overcome the standard “sourcing” paradigm which forces us to compete
largely on cost?  How do we overcome risk aversion and investment aversion within our own company?  How do we return to a best-manufacturing mindset and a best-manufacturing skill set
after becoming so dependent on outsourced manufacturing capability?  To what extent do we need local partners or joint ventures?  How should we manage warehouse and distribution issues?
Management concerns in 2005  How to integrate acquisitions and at what level of integration?  How to fund acquisitions?  How to migrate away from unprofitable manufacturing?  How to get better at international sourcing?  How to leverage operations across brands?  How to keep our share price up and rising?
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On June 13, 2003, Oxford acquired all of the outstanding capital stock of Viewpoint International, Inc., which it operates as the Tommy Bahama Group. On July 30, 2004, Oxford acquired Ben Sherman in the UK. Both brands had significant customer followings, representing very different lifestyle segments. In the fall of 2005, Oxford acquired the Arnold Brant brand, one of Canada’s foremost menswear designers focusing on a “modern luxury” lifestyle.
Current Financial Management Processes
Visibility into financial information becomes increasingly important as the number of acquired companies increases. In addition to financing the purchase of new companies, Oxford must finance the day-to-day operations of the companies it has already acquired as well as the pre- acquisition Oxford operations (legacy Oxford). This makes it extremely important to have visibility into each operating company’s cash flows. In particular, from the moment a company is acquired, corporate needs to know its financing requirements and plans for inventory acquisition (raw materials and finished product) and capital expenditures (for example, store openings) as well as its performance against sales plans and the state of receivables collection. Oxford management has instituted a set of financial management processes in order to ensure adequate financial control over its diverse operations. Corporate currently manages Accounts Receivable (AR), Accounts Payable (AP), Credit, General Ledger (GL) and all legal and treasury functions (loans, banks, letters of credit) for North America. Hong Kong operations, for example, manage their own letters of credit. Investor relations for the United States are also handled by corporate. Ben Sherman UK has its own accounting team to close its own books. End-of-month accounting data is sent manually from Ben Sherman UK to Atlanta at each closing. The data is faxed or emailed as spreadsheet files or printed reports from the local accounting system. Tommy Bahama has a small accounting staff for internal reporting and budgeting. All GL transactions are posted in Atlanta. Tommy Bahama does not have its own GL system. The Oxford CFO, corporate accounting staff and the operating unit accounting staff all participate in each accounting close. It currently takes five to seven days for a month-end closing, three to four weeks for a quarter-end, and two months for the year-end. This represents the time required to receive the data from the operating units and perform the consolidation. All North American (NA) organizations (including Ben Sherman US) are on the central AP system. All non-inventory expense transactions (such as rental payments or utility bills) from North American units are entered directly into the central AP system. This system can be queried for these transactions in real time. They are therefore available to corporate management, but are not automatically visible to users until posted at the end of a fiscal period. Inventory expense transactions for all units are not visible until posting. For example, a purchase order (PO) issued by Tommy Bahama through its local ERP system stays in the local system until the goods are received. At the first closing period (end of month) after the receipt of goods, the
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corporate GL is updated and the transaction becomes visible to corporate. Thus AP transactions for inventory items are visible to corporate only after the fact. Tommy Bahama had purchased the Blue Cherry ERP application shortly before being acquired by Oxford. Tommy Bahama and Ben Sherman UK both have their own IT groups. Corporate IT staff run all central systems and support legacy wholesale, retail and licensing operations for North America as well as Ben Sherman NA operations. Legacy operating units each have a small local staff composed mainly of help desk and report programming personnel. Each year, each operating unit submits an annual capital expenses (capex) budget. This budget is reviewed and reworked for the second half of the year based on the experience of the first half of the year. Store openings are the largest component of the capex budget, which also includes new office leases, information technology and equipment. Each year, each operating unit submits an annual sales and inventory budget. This budget is reviewed and reworked for the second half of the year based on the experience of the first half of the year. Sales and inventory are re-forecast in the first quarter for the second and in the third quarter for the fourth. Financial requirements for the year are estimated based on the following components:
 The sales and inventory budget and its revisions;  The timing of receivables based on the sales budget;  The amount of receivables based on historical collections;  Borrowing history net of receivables.
Sales and inventory budgeting (forecasting) is the responsibility of the operating units. In fulfilling this responsibility, all of the operating units use essentially the same method for developing these forecasts. However, there is no central IT system for recording and aggregating these across the entire corporation, other than the use of Excel.
Current IT Infrastructure at Oxford
Acquiring a company means acquiring its IT infrastructure – the hardware, software, applications, and staff skills and knowledge it uses to execute its business processes and store its data. The existence and value of any potential operational synergies are not always apparent before an acquisition occurs, and exploiting such synergies has not been, at least to this point, a reason for identifying a particular company as a desirable acquisition target. Oxford is therefore looking for the flexibility to move an acquisition to corporate systems if it makes sense to do so (significant operational synergies and minimal impact on operations) or to let it operate independently if this makes more sense (minimal operational synergies or significant potential to negatively impact operations.) Legacy IT infrastructure is a constraint on Oxford’s ability to implement its strategy- driven architectural decisions.
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Exhibit 5 depicts the three legacy operating groups plus Tommy Bahama, and Ben Sherman (UK) and their relationship to the Oxford corporate financial systems. North American operating units
Each group runs on a separate instance of the Apparel Business Systems (ABS) ERP system, which resides on its own IBM iSeries server. ABS captures all operational and financial sales and inventory transactions. All financial systems for these three groups reside at corporate.
 All customer orders are processed in ABS. The customer credit screen is a real-time interface to the corporate AR/credit system (Lawson);
 Invoice/sales information is automatically interfaced to AR/credit at the end of each day;  Purchase orders (POs) for product are entered in ABS;  Users directly interface to corporate AP (SSA Global) to process invoices for payment;  HR/payroll (SSA Global) and fixed assets (GBA) information is submitted to corporate
via e-mail/hard copy and keyed into the appropriate system;  Monthly sales and inventory are automatically interfaced from ABS to GL (CODA) as
part of the month-end process. Likewise, AP, AR, fixed assets (FA) and HR/payroll are automatically interfaced to GL at month-end.
Tommy Bahama
The Tommy Bahama group uses Blue Cherry as its wholesale ERP system, STS for retail and HSI for the restaurants. All systems run on Intel servers. Similar to ABS in legacy Oxford, these systems capture all operating and financial sales and inventory transactions for their respective businesses. Tommy Bahama is dependent on Oxford corporate for AP, AR, credit, FA and GL reporting. They have their own HR system and outsource payroll to ADP.
 All wholesale customer orders are processed in Blue Cherry. The customer credit screen is populated from the corporate AR/credit system as a batch process run several times per day;
 Wholesale invoice and sales information is automatically interfaced to corporate AR/credit at the end of each day;
 POs for product are entered into Blue Cherry;  Retail sales (and inventory) are captured in STS and kept until month-end;  AP is the same as for legacy, with users directly interfaced to the corporate AP System;  HR (Cyborg) is done in-house, with payroll being outsourced to ADP;  FA is the same as Oxford legacy;  Wholesale sales are part of the automated interface from corporate AR/credit to GL as
part of the month-end process. The same process is in place for AP and FA. ADP e-mails month-end payroll information that is uploaded to GL. Wholesale inventory and retail sales and inventory are reported to corporate on spreadsheets, which are then entered into CODA by corporate accounting.
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Ben Sherman UK
The Ben Sherman UK group uses another set of applications to support its business processes.  The Ben Sherman wholesale business, located in Lurgen, Ireland, uses the Styleman ERP
system which runs on an IBM server. AR and Credit are also part of Styleman, and these functions are managed by UK employees;
 POs for product are entered into Styleman;  Retail stores use Winpos for in-store processing and EPOS for back-office processing.
EPOS captures all sales and inventory transactions, with data posted to the GL at month- end;
 AP, FA, and GL (except for US business) use Open Accounts;  Ben Sherman UK closes its own books each month and sends results to corporate to be
merged in CODA for Oxford’s consolidated results.
The Information Architecture Challenge at Oxford
Traditionally, control over data and business processes at Oxford has been decentralized, except for data and processes affecting financial management and reporting. Acquiring new companies, however, automatically decentralizes financial data and processes, as the acquired companies have their own financial systems and procedures. This presents an immediate problem for the CIO, who must meet the requirements for centralized financial reporting and control, but who, for some of the following reasons, may not want to or be able to move existing financial data and processes to centralized systems as has been the strategy with pre-acquisition operations:
 Oxford IT has evolved over time to support the sourcing business, both in terms of functionality and in terms of data management and reporting capabilities. It would be difficult to meet the information requirements of the acquired marketing-driven, brands- based organizations with the current set of applications. Thus, from a systems design perspective, current applications may not be well suited to support the requirements of the newly acquired businesses and it could be disruptive to move these businesses to existing systems.
 Management is keenly aware that moving from one system to another implies changing
business processes and the ways in which employees do their jobs. From a purely operations-oriented perspective, Oxford corporate management does not want to risk negatively impacting the profitability of a newly acquired company by imposing new systems and business processes.
 One of the acquired companies had replaced its legacy ERP system just before the
acquisition. The implementation had been a difficult one and the company had no desire to subject itself or its employees to that level of disruption and stress again anytime soon. In addition to the potential to negatively impact performance, management perceived a potential staff morale and retention problem in imposing new systems on the acquired companies.
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 Even in the absence of these design, operations, and HR risks, moving each new acquisition onto existing Oxford systems would take, in the estimation of the VP of Information Systems, “at least one year simply to migrate data, understand and work out business process differences, train personnel, and ensure support” for any newly acquired company. The delays associated with fundamental implementation activities would require that some other solution be in place for that transition period.
For John Baumgartner, Oxford’s CIO, the question of how to provide information systems support for a growing list of diverse companies is indicative of a larger question facing Oxford. “There is this underlying question of just what kind of company is Oxford going to become. We can operate as a holding company where each business unit is managed independently, or we can operate as an integrated company, creating and exploiting operating efficiencies across our various brands and legacy operations, or we can do something in between. Every IT decision takes us further down one or the other of these paths, which may be where we want to go or may be something that we will have to back out of and do differently once we make the big corporate decision. One thing is for certain, and that is that these alternative paths require different IT to support them, and IT cannot continue to support going down multiple paths at the same time.” Mr. Baumgartner notes that “the issue here is not one of control, as Oxford is comfortable the numbers are derived from sound methodologies and each operating unit participates in a formal review of its complete budget (including detailed operating expenses) and must obtain senior management approval twice per year. Rather, the issue is one of efficiency and timely visibility.” Although there are daily reports on cash position and AR posted sales for the North American (NA) operations, there is no corporate-wide, real-time IT system available to the corporate financial and executive team. In addition, though the treasury department has daily visibility and control of the cash needs of the company, specific, transaction-level activity against plan is not known until the month is closed. This means there is no central mechanism for real-time alerts about discrete events. For example, an operating unit purchasing manager may increase the amount of goods purchased by 10%, and though the treasury department will see the increase in cash needs as the payment is authorized (assuming all other disbursements are occurring according to plan), the actual inventory transaction will not appear at corporate until the receiving (of the goods) transaction has been posted to the GL at month-end. There is no automated mechanism for alerting corporate if operating unit sales, inventory acquisition, receipts, payables, deliveries or lead times are greater or less than planned or earlier or later than planned. Currently, Oxford has sufficient credit facilities and loan agreements in place to cover deviation from plan with little or no operational impact on the company, all of which greatly reduces any risk when production needs exceed plan. “Even if there is no defined process to follow if the receivables that are intended to finance the acquisition of next season’s inventory are late in being collected or if a product’s sales exceed expectations and the brand manager needs funds to acquire inventory to stock additional units, these cases are all adequately covered by existing credit facilities and loan agreements. The issue from the systems perspective is at what point in the future will we find ourselves in need of a more closely managed cash position and will Oxford’s IT systems be prepared to meet this need?” Given its acquisitions-based growth plan, this need may arise in the near future, leading to Oxford eventually requiring improved IT systems to manage a more leveraged situation.
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At this point, Oxford’s CIO is dealing with the immediate problem of how to improve the company’s ability to meet its central financial reporting requirements and position the company for further expansion, without necessarily moving existing financial data and processes to a centralized IT system. However, it would be advantageous if the corporate financial team had real-time access even earlier in the purchasing process – for example, an IT system providing real-time visibility and alerts when projected cash needs differ from plan, but at the time a commitment is made (e.g., initiation of PO for product purchases or store construction) versus at the time when payment is due (product received or construction payment due).
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Exhibit 2 Extracts from Oxford’s Form 10-K for the fiscal year ended May 28, 2004
BUSINESS AND PRODUCTS Introduction and Background
Oxford Industries, Inc. was founded in 1942. We are a producer and marketer of branded and private label apparel for men, women and children. We provide retailers and consumers with a wide variety of apparel products and services to suit their individual needs. Our brands include the following:
Tommy Bahama® Oxford Golf Indigo Palms® Cattleman® Island Soft® Cumberland Outfitters® Ben Sherman®
Ely®
We also hold exclusive licenses to produce and sell certain product categories under the following brands:
Tommy Hilfiger® Dockers® Nautica® Cubavera® Oscar de la Renta® Havanera® Geoffrey Beene® Evisu® Slates®
Tommy Hilfiger is licensed to us for men’s and women’s golf apparel, as well as men’s dress shirts. Nautica, Geoffrey Beene, Slates, Dockers, Cubavera, Havanera and Oscar de la Renta are all licensed for men’s tailored clothing. Evisu is licensed for men’s and women’s apparel and footwear. Our customers are found in every major channel of distribution including:
National chains Department stores Specialty catalogs Specialty stores Mass merchants
Internet retailers
Where we sell product under the same brand name to two or more customers, whether the brand is owned by us or a third party, we consider such sales to be “branded” sales. For example, we sell Tommy Bahama brand apparel to Nordstrom’s, Saks Fifth Avenue and many other customers. Where we sell product under a brand name exclusively to one customer, whether the brand is owned by us, the customer or a third party, we consider such sales to be “private label” sales. For example, we sell Mossimo® product only to Target Stores and consider such sales to be private label.
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Our business is operated through the following segments: Segment
Description of the Business
Menswear Group (Menswear Group includes Lanier Clothes, Oxford Apparel, and Ben Sherman)
Produces branded and private label dress shirts, sport shirts, dress slacks, casual slacks, suits, sportscoats, suit separates, walkshorts, golf apparel, jeans, swimwear, footwear and headwear.
Womenswear Group
Produces private label women’s sportswear separates, coordinated sportswear, outerwear, dresses and swimwear.
Tommy Bahama Group
Produces lifestyle branded casual attire, operates retail stores and restaurants, and licenses its brands for accessories, footwear, furniture, and other products.
See Note “N” of “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details on each of our segments.
On June 13, 2003, we acquired all of the outstanding capital stock of Viewpoint International, Inc., which we operate as the Tommy Bahama Group. The purchase price for the Tommy Bahama Group consists of $240 million in cash, $10 million in our Common Stock and up to $75 million in contingent payments that are subject to the Tommy Bahama Group achieving certain performance targets. The $75 million in contingent payments may include, at the option of the selling stockholders during the first two years, up to $12.5 million in our Common Stock valued at $12.88 per share (see Note “O” of “Notes to Consolidated Financial Statements”). The transaction was financed by a $200 million private placement of senior notes completed on May 16, 2003 and a $275 million senior secured revolving credit facility closed on June 13, 2003. On July 30, 2004, we acquired Ben Sherman Limited (“Ben Sherman”), which we operate as part of our Menswear Group. Ben Sherman is a London-based designer, distributor and marketer of branded sportswear, accessories, and footwear. The purchase price for Ben Sherman was £80 million, or approximately $145 million, plus associated expenses. The acquisition was financed with cash on hand and borrowings under our revolving credit facility. Founded in 1963, Ben Sherman has a long heritage as a modern, young men’s shirt brand that has evolved into an irreverent lifestyle brand for youthful thinking men and women. In conjunction with the acquisition of Ben Sherman, our senior revolver was amended and restated on July 28, 2004 and increased to $280 million with a syndicate of eight financial institutions. The maturity date was extended to July 28, 2009. We effected a two-for-one stock split in the form of a 100% stock dividend, payable December 1, 2003, to shareholders of record on November 17, 2003. Shareholders received one additional share of our common stock for each share of common stock held on the record date. We are a Georgia corporation and our principal executive offices are located at 222 Piedmont Avenue, NE, Atlanta, Georgia 30308. Our telephone number is (404) 659-2424. Our website address is www.oxfordinc.com. Information on our website does not constitute part of this report.
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Exhibit 3 History of Oxford Industries and the US Apparel Industry
DECADE INDUSTRY OXFORD
1950S, ‘60S AND INTO THE ‘70S
A DOMESTIC INDUSTRY
 US retailers bought and sold in US  US manufacturers sewed in US
 Oxford Manufacturing Co.  Oxford prospered and grew to
40+ plants in US
 90% of production was located in the US in plants owned by Oxford
1970S ENTER “807” clause of the US customs regulations (i)
 US retailers bought and sold in US from US manufacturers
 US manufacturers bought fabric from US producers, cut in US, sewed or contracted to sew outside US, and imported finished goods duty free for sale in US
ENTER IMPORTS
 US retailers didn’t know how to import  Foreign manufacturers didn’t know how to serve US
retailers
 Therefore, US retailers bought from US manufacturers and from importers who began to surface
ENTER DIRECT IMPORTS (VIA AGENTS)
 US manufacturers and importers taught foreign manufacturers how to satisfy US market needs
 US retailers begin to use agents to import at 6% commission vs. manufacturers’ 20% + markups
 Brands become sourcers
 Oxford started 807 late  Oxford contracted sewing
operations under 807
 Began closing US plants  Acquires first 807 plants
 Oxford became an importer
 Oxford teaches Big 3 producers (Hong Kong, Republic of Korea, Taiwan) how to satisfy Big 3 retailers (JCPenney, Sears, Ward)
 Oxford adds 807 plants  Closes more US plants
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DECADE INDUSTRY OXFORD
1980S ENTER RETAILERS’ FOREIGN BUYING OFFICES
 Retailers set up overseas buying offices, but continue to use agents and manufacturers
 Key trends: o Demise of small retailers o Growth of mega-retailers o Growth of mega-brands that were never
manufacturers:  Tommy Hilfiger, Liz Claiborne, Polo, Nautica,
Jones of NY o Private labels become private brands o Store names become brands, (e.g. GAP) o Import country base expands
 Oxford closes more US plants  Adds more 807 plants  Expands sourcing of imports
1990S THE AGE OF SOURCING
 Retailers take on agent and ma

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