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Will GM Losses Thwart Its Tech Plans?

By Larry Dignan  |  Posted 2005-05-02 Print this article Print

Health-care costs are in overdrive at General Motors. Will the financial pressure force cutbacks in its technology plans?

General Motors loses $1.1 billion in the first quarter, citing ballooning health-care costs. It reorganizes top management, with Chairman and Chief Executive Rick Wagoner personally taking charge of its sagging home market, North America.

But for its information-technology operations, it is business as usual.

General Motors CIO Ralph Szygenda says the automaker's "strategic I.T. initiatives continue to be on track according to our original 2005 plan," and technology remains "key to improving business processes."

Yet GM's health-care costs, $5.2 billion in 2004, will reach $5.6 billion in 2005, according to UBS Securities analyst Robert Hinchcliffe. GM's auto operations are expected to lose money in 2005, a "kitchen sink" year where the company invests to reload for 2006,

Hinchcliffe says. However, he's not convinced that GM will rebound in 2006. So how long can GM's spending on technology—estimated at $3 billion a year—remain unaffected?

Not that long, says AMR Research analyst Kevin Mixer, who argues that GM's technology strategy will have to adapt to new priorities, budgets and financial realities. "The question is how the I.T. group will respond," Mixer says.

Szygenda may see new demands, say technology executives such as John Heveran, vice president of information technology at MCI, which has gone through financial turmoil—and bankruptcy—in the past three years. But the response may not be what you'd expect.

Conventional wisdom dictates cutting back budgets, killing projects and adopting a hold-the-fort mentality. The reality: Budgets can increase and more focused projects help stop the corporate bleeding. As MCI was recovering from a $3.8 billion accounting fraud that occurred when it was known as Worldcom, spending on technology increased, to solve billing problems and make the company more responsive to customers. The only projects cut by CEO Michael Capellas? Those that didn't connect with MCI customers. "In many ways, adversity provides focus on the critical issues," Heveran says.

In GM's case, that could mean projects to help cut health-care costs. While it may take a few quarters to see whether GM's financial problems change its information management priorities, it's clear the technology team—which cut $1 billion from its budget; standardized e-mail, desktop, design and engineering systems; pared 7,000 legacy systems to fewer than 3,000; and instituted virtual design techniques that can launch a new car in as little as 12 to 18 months ("Grand Test Auto," November 2002, p. 42)—has a lot on its plate. Here are technology issues to watch as GM attempts to revitalize its North American business.

Challenge: "Re-sourcing" EDS contract
Status: Evaluating potential vendors for 2006

The automaker's 10-year contract to purchase computer services from Electronic Data Systems expires in June 2006. GM is now evaluating proposals from a number of undisclosed companies that would like to replace EDS, once wholly owned by GM, as a supplier.

GM may ink deals with more than one services firm, with decisions coming at the end of the year. Or it could stick with EDS, which relied on GM for 9.5% of its $20.7 billion revenue in 2004.

Joe Barkai, an analyst at International Data Corp.'s Manufacturing Insights subsidiary, says GM should divvy up its outsourcing deals. "It's time to rethink the outsourcing strategy and perhaps keep some functions in-house," Barkai says.

For more on GM's ambitious plans for a digital makeover check out:GM Plans Digital Turnaround

The company says it's premature to determine what its strategy will be. Multiple vendors such as EDS, IBM and Hewlett-Packard support functions such as purchasing, manufacturing and scheduling. No single vendor accounts for more than 30% of GM's development investment, the company says.

For its part, EDS is angling for more business. EDS pitched GM on building a supply chain system that would be standard around the world. EDS would blend commercial and customized software, pull in data from facilities worldwide, and deliver production and retail sales information to executives through a Web portal.

No matter which vendors GM chooses, the transition will be closely watched since EDS is the lead manager of the automaker's health and benefits, engineering support, office automation and plant automation systems. "That transition will not be without pain," Mixer says. "I'd argue that GM's biggest issues are health-care costs, pensions, unions and the EDS contract."

Challenge: Multiple projects
Status: Full steam ahead

General Motors has more than 70 projects underway across the globe. These multiyear efforts involve everything from combining various flavors of SAP to updating manufacturing systems in older plants to supply chain projects led by different business unit heads.

GM won't detail those projects, but Mixer puts them in four broad categories: manufacturing systems; SAP standardization; managing data from engineers, designers and dealers to manage automobile life cycle and quality; and product development. Analysts say it makes sense to reconsider the categories. If health-care costs are crippling, shouldn't projects aim to cut that expense?

Barkai says a system connecting dealerships and their service bay diagnostic computers to engineering and manufacturing systems could help GM's bottom line by monitoring repair problems in real-time and correcting them before big recalls are needed. According to regulatory filings, GM spent $4.6 billion in 2004—nearly as much as its health-care outlay—on a category called "policy, product warranty and recall campaigns." "Policy" decisions involve discretionary fixes—say a car has been serviced three times but still has problems, so the dealer repairs it for free. Product warranty costs are liabilities on cars over a specific term. Recall costs involve all GM cars—including old ones—that may be recalled. On April 25, GM recalled 2 million vehicles.

Challenge: Rapid development
Status: To be determined

If an information system could cut health-care costs, could GM install it in six months? That hypothetical question worries Mixer. "When the wolves are at the door, you can't take 12 months just thinking about how you would build a system," he says. Of course, that's easier said than done for a company that reported $194 billion in sales, has 7,600 dealers in the U.S. and employs 324,000 people.

GM's technology organization has five CIOs representing North America, Asia Pacific, Latin America, Europe and GMAC, and five process information officers—the link between technology and business functions. The chief technology officer role, filled by business services CIO Fred Killeen on an interim basis, works with all executives.

According to Heveran, an organization chart doesn't reflect how agile a company can be. If a company focuses on just a few big projects, nimbleness follows.

To be sure, Szygenda's group has had its share of victories. It may need to notch a few more as GM revamps.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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