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When Bob Romasco joined Direct Marketing Services, Inc. as its CEO in 1998, a superficial glance might suggest that the insurance company was healthy and thriving.
Based in Dallas, DMS sold life, disability, and other forms of insurance, plus other products such as travel and auto club memberships. The J.C. Penney unit marketed directly to over 100 million customers gleaned from the databases of its own business partners plus 50 million of its parent company's customers. Revenues had grown at a compounded annual rate of 17 percent for the previous seven years. Revenues in 2000 reached $1.1 billion and operating margins of 22 percent were the highest of any J.C. Penney division.
But a closer look at the business showed that trouble was brewing. In 1997, DMS's pre-tax operating income had grown by 21 percent; in 1998 by 10 percent; and projected growth for 1999 was zero. The company's business model was running out of gas.
Bringing in Romasco to diagnose and tackle the problem was a daring move for J.C. Penney, which had not hired an outsider for such a senior post in 40 years. Romasco, who had been a marketing executive at American Century Investments, soon discovered that turning around DMS would require more than strategic savvy. A turnaround also hinged on reinventing the basic organizational model.
An organization stuck in time
Romasco and his leadership team faced a series of tricky and tightly interlocked problems. The most apparent one was managing a largely outsourced marketing and customer service system assembled during the company's recent years of breakneck growth. DMS's outbound telemarketing machine included a dozen independent agencies making over 100 million calls a year out of 65 separate sites. The sheer volume was impressive, but the often-unwieldy external structure had become a set of artificial limbs that no one at DMS could fully control.
What is worse, DMS had unwittingly lost touch with its market. Most of its direct contact with corporate customers, for instance, was administrative in nature and at the middle-- manager level. By outsourcing virtually all other customer contact, DMS had become sheltered from the key client decision makers and was often viewed as a vendor forced to compete on price, rather than as a partner who could add...