Cost-Cutting and Globalization
Driving IT Innovation at General Motors
Amid ongoing corporate difficulties, General Motors has been leaning heavily on CIO Ralph Szygenda to cut waste and speed innovation through a fully outsourced approach to IT. In 2006, GM awarded $7.5 billion in outsourcing contracts, and before 2011 the company will award another $7.5 billion.
That "big bang" moment in 2006 followed a stormy relationship with Electronic Data Systems, which was acquired by GM in 1984 and spun out as an independent company once more in 1996. EDS still retains approximately 60 percent of GM's IT work. GM's other major outsourcing partners are AT&T, Hewlett-Packard, IBM, Capgemini, Compuware subsidiary Covisint and Wipro.
Two years after he sat down with eWEEK to discuss his outsourcing strategy at a critical turning point, Szygenda spoke with Editorial Director Eric Lundquist and Contributing Editor Stan Gibson, providing an update on how far GM has come and how much further it must go.
It has been nearly two years since GM handed out its IT outsourcing contracts. Are all the partners meeting their agreements with GM?
It's going very well-better than I had thought. The suppliers work well with each other. I have 1,500 people that manage them, but there hasn't been one case where I've had a major incident between suppliers. Every now and then you catch one trying to make the other not look so good. But, overall, it has worked well.
It's amazingly complicated, but GM is complicated to start with. The issue for the suppliers is globalization. We have forced them to put in a globalized model. In most cases, they don't run a global model, but a national or regional one. So using the same processes has worked amazingly well. It has made the processes of managing IT simple.
The other aspect is multisourcing, or multiple companies working together. We allow collaboration-we don't tell them exactly how to do everything. That's worked well.
So, have we gotten done what we wanted to do? Yes, we have. Most people thought this would never work. Instead, many companies have come to GM to learn how to do this. Fortune 20 companies are interested in how the suppliers are supporting us globally. They would like to have something like that, but they don't.
Overall, it's working well. Every day is hard-but every day is hard in the auto business.
If partners were not meeting their goals, how would you handle them?
If you don't do it well, you get penalties. And we can walk away from contracts for lack of performance. Remember, winning new business is based on the performance of existing business. Each year, we're still bidding out hundreds of millions of dollars of business that they want to win. Also, we have report cards that rank the companies every six months. They know exactly where they stand, and we make decisions for future business based on that.
We know how well they're performing against other suppliers. If we had outsourced to only one company, we wouldn't know that. However, there are not a lot of IT companies, so you can't throw out a new company every day. It's a win-win model. We don't want them to lose.
Do I get mad at a suppler daily? Yeah. I won't tell you which one I just got off the phone with 2 hours ago.
Have you assessed penalties?
Sure. We do it constantly, based on performance, reliability-anything. And remember, all development of new systems is done at a firm, fixed price. So they lose if they don't deliver it on time.
You haven't terminated any of the agreements?
That's right. Some companies have been disadvantaged with regard to winning new business, based upon performance, but they haven't lost anything they already had.
Cost-Cutting and Globalization
When the contracts were awarded in 2006, there was another $7.5 billion in hardware, software and application development work over five years that you were going to award. What's the status of that $7.5 billion worth of spending?
Over $1 billion per year is being awarded. It's like traditional business that people can win, that's competitive. Or it's building new systems, like logistics. That happens all the time.
Are you still spending less and less every year on IT, as was your goal a few years ago?
We're spending less on support and maintenance, but we are putting the same amount of money into the development of new systems. Overall, we may be going down or staying flat, but we are going up in the development of new applications. That has always been our goal, to save money on operations and spend it on next-generation innovation.
But the cost of operating the GM environment has gone down every year for 12 years. I guarantee you, for the next three years, it won't be any different. That means we are running all of GM, including the increase of new capabilities-telecommunication capacity, adding BlackBerrys, new-generation hardware and supercomputing-we're doing all that at a lower cost than the prior year. That's pretty good after 12 years.
Are you satisfied with the amount of work that's being done offshore, or would you like to see more work done offshore?
It doesn't matter. The suppliers are competitively bidding, and because of the economics of the world, to be competitive, they have to do certain things. They could offshore or not. If they go offshore and performance goes down, they lose money.
Now, I do know what they do, and I don't want that to adversely affect operations. If they can convince me they can do things in Ukraine and not affect GM, or do it in Silicon Valley, it doesn't bother me, because I know what cost I'm willing to pay. If things aren't done well, then they pay penalties. We let the market drive it. That way I don't have to worry about it; I can worry about building cars and trucks. I know where the work is being done, and I have people throughout the world managing it.
How would you compare your relationship with EDS 10 or 12 years ago to your relationship with EDS today?
Interestingly, I think it has always been pretty good, in that I have not had issues getting done what I wanted to do, in a lot of cases because I created the right contractual agreements with them. I think they struggled for years with GM not being organized enough to tell them what to do.
Have there been arguments? Yes, but has there been an impasse where people walk out of the room and hate each other? Never. We've created enough win-wins, so it's been good. It might work well because we have to make it work. I'm not going to bring tens of thousands of IT people back into GM.
A goal of the outsourcing model was not just cost-cutting but innovation. Can you give us some examples of innovation in IT or of business innovation enabled by IT?
The motive has never been ... cost-cutting-but the results were cost-cutting. We have taken GM from a decentralized company with autonomous business units to a global company with a common business organization in 10 years. That's pretty quick. We had to do it to survive, but it doesn't solve all the problems at GM.
We took out 5,000 systems. You can't innovate if you're carrying 5,000 systems you don't need. In 2006, we started to run GM's businesses globally with standard processes, but the IT companies were still fragmented and not standardized across the world. If a company is globalized so we can work with them one way throughout the world, then we can innovate.
I have always pushed three things: standardization, simplification and collaboration. You need all three things to innovate.
So what's your end result? In product development, 30,000 engineers and support people are using the same technology in the same way throughout General Motors. They all can work in teams like they're in one room, but on three continents. We can design cars for the United States from Brazil. It means you can leverage improved labor costs throughout the world. It cuts your cycle time drastically and saves you immense amounts of money. Globalization works.
IT Takes Production to a Worldwide Market
In supply chain innovation, you're talking about 9 million vehicles that can be distributed to any part of the world. We can build in Korea and distribute in the Middle East by handling the complexity of global logistics. To build vehicles, you're taking $90 billion in materials and services, and you're bringing them in just in time throughout the world. You can do it from the most efficient location. So the shipping cost is not more than the cost of the vehicle-that would be dumb. We have systems that figure that out. We didn't have that three or four years ago.
If you run out of production in one part of the world, you can shift it to another country with capacity. It's very important in emerging markets such as India, China and Russia. In Latin America last year, every vehicle we could get in, we could sell. Outside of the United States, we're doing unbelievably well. We're up to 250,000 vehicles sold in Russia. It will probably go up, just like China.
If you're running common financial systems where the only differences are local regulations, the efficiencies of cost are quite amazing. We're putting money we are saving into innovation projects such as hybrid and alternative fuel vehicles. It takes tons of money to put into those areas.
We're not worried any more about the globalization of information technology. We're not worried about IBM's systems in China and we're not worried about AT&T, which is managing telecommunications throughout the world using the same architectures.
If you do that, you have a total digital real-time enterprise, and, after that, it's only innovation. Does it hurt every day when they screw something up? Yeah, but that's a minor issue. Every year [for 12 years], operational metrics have gone up. So right now, innovation is all we do.
Most of our suppliers have had to change their work force to focus on innovation. For example, AT&T has 30 basic R&D people working at GM. Capgemini has 400 architects to integrate all these areas globally. IBM, Capgemini, Hewlett-Packard and Microsoft are all working together building the most futuristic IT environment.
The real question is, will it pay off? Will GM be a better automotive company?
Does Bob Lutz, [GM's] head of all product development, have an IT problem? No-none throughout the world. Zero. He can build vehicles as fast as anybody else. It's a fashion business-all he has to worry about is building the right vehicles. He has the opportunity to do it.
Go look at emerging markets: Where there's a clean sheet of paper, in almost every case, GM's the leader. It's still iffy. You're still talking about a battle to win. In every area, we're putting in futuristic technology, from all our suppliers. And they've got their futuristic people linked in here because it's an unbelievable testbed. You've got to be careful you don't get carried away because you don't want to blow up the place [laughter].
GM's Finances and Future
GM's stock was down last month [March], and estimates were not good for the rest of this year, even for 2009. Is there something you can do in IT to help?
We already are. This business is running much more efficiently. Every year, this business is reducing cost. Billions of dollars have come out of the cost structure because of the process changes.
One issue is, is the United States going into a severe recession, and will it affect the rest of the world? Or does that not happen anymore? The other question is oil prices and how high they will go.
Right now, we don't see the rest of the world affected by the U.S. problem. Most companies are looking for an improvement in the second half of the year. If that doesn't happen, then people will be really concerned. Some people are saying it's starting to look like it might not happen. That's the issue.
What are we doing? Every part of our company has the ability to cut costs, thanks to globalization. So GM will continue to cut costs this year. We have the flexibility throughout the world to do that.
Let's say you do have a recession in the United States and it doesn't affect the rest of the world. Maybe you then worry about getting vehicles to the other parts of the world. GM has the opportunity to do that. That's the benefit that IT has given the company.
How do you sponsor new technologies such as social networks and blogging within GM?
I have a chief systems and technology officer whose job it is to drive the next generation of technology development within the company. He has about 400 architects throughout the world. On Thursdays, they all link together.
I have all the world's IT leaders bringing in new technology every day. If they have new technology, I know about it before anybody. I know all about AT&T's technology because I have their R&D people sitting here.
I don't have to beg anybody to come there. They're already here. The trouble is I might get too much of that crap. We use wikis and blogs up the kazoo here. It's our 100th anniversary, and it's all being done electronically on blogs and whatever.
I had a thing last year, where every company had to come in and give their vision for 2012.
We have a portfolio of investment for information technology. The chief systems and technology officer has money to invest in small companies to bring in new technology. He is involved with venture capital companies like Kleiner Perkins [Caufield & Byers].
I have to be honest with you. It's been disappointing for those smaller companies until about a year ago. Because everyone was working on infrastructure integration, there weren't very many new transformational things coming out. Also, venture capitalists were moving away from IT innovation to other areas like alternative energy. Now, I'm starting to see it come back.
Where would you place GM with regard to its competitors in terms of IT performance?
Our IT costs as a percentage of revenue are one of the lowest by far. Ten years ago, we were the highest.
In this model, I have 1,500 people that are top-notch business and IT experts. None of them code; they are IT brokers. They don't worry about having more computing centers-they have a different mentality just because of the model. If they had 1,000 programmers they would want to build new systems whether they changed the business or not. I've been around 40 years. I did the same thing.
We're very, very low, and we need to be. At the same time, are we spending enough for innovation to change the business? Yes.