Auto Maker Plays IT Safe

GM locks in its outsourcing partners, but the lack of major changes raises questions.

General Motors CIO Ralph Szygenda last week rolled out what he has called the third wave of outsourcing—$7.5 billion of IT work over the next five years—but few big changes were apparent, raising questions about how the beleaguered company will benefit from its technology model, which Szygenda has spent years painstakingly constructing.

Indeed, once the headlines passed, GMs outsourcing deals left key questions hanging. Why did the company choose to stay with all its current vendors? Was it too hard to extract Electronic Data Systems, which managed most of GMs technology systems for the last 10 years? What were the transition risks with a major shake-up? How will work be transferred to other parties when the new contracts begin in June?

Overall, GM decided it was best to stay put with vendors it knew well. In the contracts, EDS, Hewlett-Packard and Capgemini emerged as the biggest winners, garnering $3.8 billion, $700 million and $500 million of the work, respectively.

Also getting significant pieces of the pie were IBM, which was awarded $500 million of work; Compuware subsidiary Covisint; and Wipro, which was awarded approximately $275 million of work. Still to be awarded is up to $7.5 billion more for hardware, software and application development needs that will unfold over the next five years, Szygenda said.

That work could go to the current winning vendors or to others, he said. In addition, telecommunications contracts that expire at the end of this year will be rebid and awarded by the end of the year, Szygenda said.

The deals come as GM is hemorrhaging money. For 2005, the Detroit automaker reported a net loss of $8.6 billion, compared with a profit of $2.8 billion in 2004. Revenue was $192.6 billion in 2005, compared with $193.5 billion in 2004. GM CEO Rick Wagoner said 2005 "was one of the most difficult years in GMs history."

Amid GMs turmoil, Szygenda set about standardizing business processes such as change requests, purchasing, and sales and marketing across all its technology suppliers. Yet to be determined is how much money, if any, GM will save from its new outsourcing deals. Szygenda said that the deals were more about spurring innovation at GM than cutting costs. GMs current annual IT budget is about $3 billion, and Szygenda said he expects the company will spend less than that each year for the next five years. He didnt detail specific savings.

"There are savings that are meaningful to the business. Rick Wagoner is always looking for savings," Szygenda said on a media conference call, adding that some savings will come from standardizing processes and mandating that service providers conform to the standards. "We didnt let payment terms and low cost drive us."

EDS, which had the most to lose in the rebidding process, emerged from the battle with most of its business intact. Although EDS was once GMs exclusive IT provider, over the past 10 years, GM has given about one-third of that business to other providers. (EDS was acquired by GM in 1984 and spun out in 1996.)

Like EDS, HP will be getting a significant chunk of its business done offshore. "To meet GMs cost-cutting goals, we will have to leverage offshore. We will be delivering globally," said Jim Angers, vice president and general manager of the Palo Alto, Calif., companys GM account.

HP claimed eight contracts, which represent a significant gain in business, Angers said. "Its an expansion of stuff weve already done for GM. We havent lost anything," he said, explaining that HP made gains in server management at the 19 data centers that were part of the bidding. Angers added that HP will be hosting all of GMs ERP (enterprise resource planning) implementations and all of its Asia-Pacific servers.

Joe Kovach, vice president and GM account executive for Capgemini, said the Paris-based companys work is a bit out of the ordinary for most outsourcing deals. GM has handed Capgemini responsibility for application development architecture and processes.

/zimages/2/28571.gifClick here to read more about GMs latest round of outsourcing contracts.

"This is the think work that a company does not normally outsource," Kovach said. The role makes Capgemini, in effect, the development czar for GM, and Capgemini will have to enforce a standard architecture on many other contractors, including HP and IBM, he said.

Kovach said the $500 million in GM work is a bump up from the $300 million in business Capgemini is currently doing with GM. Most of the increase comes from work that EDS had been doing, he said. Kovach added that he expects Capgemini to take on another $500 million in work as GM fills out its application development needs in the next five years.

Jim Kelly, vice president of the GM account at EDS, said that, this round, the Plano, Texas, company bid on 90 percent of the work and won 70 percent. EDS had lost its contract to handle purchasing systems to IBM but won it back in this round. EDS had also lost half of its human resources and financial systems work with GM to IBM and Affiliated Computer Services—business it also won back with the latest contracts. Kelly also said EDS lost global sales and marketing to Capgemini.

One change for EDS: More of its work will go overseas. Kelly said EDS will meet GMs cost-cutting goals by having more work done in low-cost countries. He said EDS is doing 40 percent of GMs work offshore now, but the company will increase that percentage to 60 percent over the next five years.

The big question remaining is, Whats next? GM and its newly named suppliers have until June to execute a transition plan. Szygenda said the transition would begin immediately but acknowledged the risks ahead. Further benefits could vanish if the transition to the new contracts and providers does not go smoothly.

Meanwhile, industry watchers such as Kevin Reale, an AMR Research analyst in Detroit, were skeptical that GM could get the benefits it desires, notably innovation and the ability to "digitize" GM. "Who are the game-changing IT providers? I dont see those among the winners," Reale said. "I dont buy that it was to drive innovation. It was just pure cost reduction."

Reale also noted that GMs contracts are fixed-price, which means the savings incorporated in them could disappear as change requests are made. "If the pieces of the business shift as much as they say, there will be impact. I dont know if they have the processes in place to handle the transition," Reale said.

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