GM's IT Outsourcing Strategy: Rad Ride or Creaking Clunker?

The media loves big deals. Doesn't matter what they involve - mergers, outsourcing, star athlete contracts, movie box office - whatever. If the numbers are big enough they will write about the deal and undoubtedly find a way to assert that the mega numbers mean ground breaking strategies and tactics are somehow involved.

Often this is nonsense and one need only be patient for it to be exposed as such. Take the AOL-Time Warner merger for example. The media fell all over themselves to write about this at the time of announcement only to tear it apart a couple years later when the numbers-induced intoxication of the deal's size had worn off.

GM's Spotty IT History
The numbers game is alive and well in the IT outsourcing sector and few can resist it. The latest mega-deal to come down the pike is none other than GM. Lest we forget, back in the ancient eighties the company made a bold foray into the IT area by acquiring a computer services provider -Electronic Data Systems - and turning over its computer operations to the company.

It also brought a plain-spoken Texan by the name of Ross Perot, the founder and CEO of EDS, onto its Board of Directors. The results of this gambit were shall we say 'disappointing'. GM ended up paying ol' Ross a gazillon bucks to take a hike because they got tired of the fuss he kept making about how poorly run the company was. GM ultimately spun EDS off but awarded them a long-term contract for a huge chunk of IT services.

This contract is now about to expire and outsourcing providers and industry consultants can hardly contain their excitement over the prospect of GM awarding the $15 billion it has to spend on IT services.

Now Outsourcing's Latest Sugar Daddy
A recent article in Business Week - "GM's Way or the Highway" asserts how GM is taking a new and innovative approach to awarding and managing outsourcing IT outsourcing contracts. Ralph Szygenda, GM's CIO, is portrayed as the IT industry's biggest Sugar Daddy. After billions of dollars spent and years of frustration with EDS, Szygenda is portrayed as someone about to reinvent how companies contract and manage IT outsourcing. According to the article:

"Under Szygenda's scheme, the company retains more control, breaks big contracts into smaller pieces, and imposes standard ways of doing things that mean one supplier can quickly pick up where another leaves off. 'This is revolutionary,' says George F. Colony, president of market researcher Forrester Research Inc. "If it works for both sides, in a couple of years you'll see a lot of other companies doing it."

I'm no fan of George Colony (he onced predicted 'smart' tubes of toothpaste that would reorder themselves when they were nearly empty - just what the world needs). But in this case, he is right when he notes that if the approach works for both sides you'll see lots of companies emulating it. But revolutionary? I'm not so sure. GM's approach appears to build on the lessons learned from an earlier IT outsourcing pioneer - British Petroleum Exploration (BPX)

BPX Tried This Before
About 10 years ago, BPX attempted a similar multi-process, multi-vendor approach. John Cross, then CIO of BPX wrote an article describing their outsourcing strategy that published in Harvard Business Review! It was also ballyhooed as 'revolutionary'. Trouble was it didn't work. It was simply too complicated to coordinate across multiple vendors on a global scale. Despite professions of partnerships and 'market-based and performance-benchmarked' contracts, the providers were unable to act in the integrated and seamless manner envisioned when the deals were signed. Like GM, BPX thought it had the problem licked when it required the competing providers to attend a one-week brainstorming and negotiation marathon in which vendors were encouraged to collaborate to address BPX's requirements and to develop joint bids for an integrated and seamless service.

An in-depth description and analysis of BPX's outsourcing alliance management experience is contained in a scholarly work by Tom Kern and Leslie Willcocks entitled, "The Relationship Advantage", (Chapter 5, pp. 172-216) published in 2001 by Oxford University Press.
Despite it innovative aspects, BPX's multi-vendor alliance was ultimately scrapped. According to Kern and Willcocks:

".... the increased costs of coordination and the difficulties of making competitors work together as partners was found to be disadvantageous to the otherwise successful approach. Faced with recontracting as the Alliance neared its five-year contract completion point, BP decided against the approach as it had proven to be too management intensive and complex...."

The company decided to further break up the contracts by region and award them to multiple vendors. It also took more responsibility for overseeing and managing the outsourced services and the relationships with each of the vendors.

Can GM Learn From the Experience of Others?
GM's approach seems to have adopted the learnings from the BPX experience with outsourcing to multiple vendors. It claims that it will retain control over the outsourced processes by managing them with internal staff. But for this to work, GM needs to have smart managers who understand how to make IT processes hum and multiple vendors dance together like the Rockettes.

Like BPX it is seeking shorter-term contracts of five years. This is supposed to "keep service providers on their toes". This remains to be seen - BPX signed five-year contracts and still struggled with the performance of its vendors.

GM believes that by using several suppliers it can "play them off against each other", meaning the encumbent vendors will be pressured to perform by the fear of replacement. BPX tried the same thing and even included a contract clause that allowed it to benchmark vendors and replace them if a competitor could beat their performance. But it never invoked this clause. It's belief that a replacement vendor could somehow be easily 'plugged in' to the arrangement with the other suppliers was also questionable.

Regarding this last challenge, GM believes its ability to easily switch vendors will be further enabled by imposing a single set of operating rules for all providers which any new vendors would be required to adopt. Perhaps, but this means the rules were sensible and effective and that there is a process in place for bringing the new provider quickly up to speed. This is plausible in theory but remains to be proven in practice.

Let Us Pray
So there we have it, GM, the beleaguered giant, is taking some big risks to fix what it rightly sees as some of the fundamental weaknesses of outsourcing. GM is right to use its clout in negotiating deals but if it pushes too hard on its outsourcing providers it could find itself faced with a revolving door of poor performing outsourcing relationships. It needs to create positive incentives for vendors to go the extra mile - to take risks, innovate and share knowledge with GM and each other. Compliance-heavy contracts however are not known for stimulating such behavior on the part of outsourcing providers.

I hope GM succeeds in its approach but I fear it could be headed for trouble. Indeed, Ralph Szygenda, a brilliant career CIO and IT management innovator - seems to realize just how risky this outsourcing gambit could ultimately be. He is quoted at the end of the Business Week article saying, "Pray for me". I will Ralph - something tells me you are going to need it.

Here's an update as of Feb. 2, 2006 - GM has reported broken up it's IT operations into 40 pieces and has begun awarding several contracts. EDS claims to have been awarded a big chunk of the business (4 out of 15 billion - okay big but only about 25% of the total awarded).

Who Pays for Wal-Mart’s Low Prices?

Low prices. Always low prices. When it comes to consumer goods, America is addicted to them. And with its one-stop-shop product selection and fanatical commitment to low prices, Wal-Mart is the biggest pusher around. We like our “stuff” cheap, and Wal-Mart is the place to get it.

The company that many Americans hate to love is getting loads of unfavorable attention lately. Union and activist groups have successfully derailed its growth plans in certain parts of the country. And a new documentary film casts the company in a decidedly unflattering light. The title of Robert Greenwald’s, “Wal-Mart: The High Cost of Low Prices” suggests, there is more to the cost picture than what one sees on the checkout receipt.

Driving Down the Cost of Employees
Wal-Mart’s single-minded focus on driving out costs applies to everything it does including, as we are now learning, how it treats employees. Recently, a confidential internal memo prepared by a team led by its head of employee benefits and sent to Wal-Mart’s Board of Directors got leaked to the media. The memo presents a rare inside look at the company, and in particular, how it views the tradeoff between costs, employee satisfaction and public reputation.

Not surprisingly, Wal-Mart sees labor as a growing cost to be rigorously controlled. And its juiciest target is health care – the company’s insurance costs are rising at a substantially higher annual rate than its sales (15% versus 11.9%). Refuting its skinflint image, Wal-Mart claims it provides coverage to a greater percentage of its employees than other retailers - 81% of Wal-Mart employees are eligible for health insurance while the retail industry average is 56%. But because it’s expensive – only forty-eight percent of its employees are actually enrolled in its health insurance program. The retail industry is worse though – an average of only 36% of workers are enrolled.

Wal-Mart would like to get more credit for the benefits it already offers workers but admits its health care offering is “vulnerable to at least some of their (critics) criticisms, especially with regard to the affordability of coverage and Associates’ reliance on Medicaid.” The memo acknowledges that 24% of employees and 46% of children of employees have no insurance or are covered by government Medicaid programs.

Is Working At Wal-Mart Hazardous to Your Health?
There’s more sobering news about Wal-Mart’s workforce: “Our workers are getting sicker than the national population, particularly with obesity-related diseases. For example, the prevalence of coronary artery disease in Wal-Mart’s population grew by 6 percent compared to a national average of 1 percent, and the prevalence of diabetes in our population grew by 10 percent compared to a national average of 3 percent.” These statistics are sadly ironic given that the company is the country’s largest seller of the kinds of cheap unhealthy food whose consumption is directly linked to these medical problems.

The memo goes on to note the negative impact of its workers' poor health on Wal-Mart's bottom line. "The cost of an Associate with 7 years tenure is almost 55 percent more than the cost of an Associate with 1 year tenure yet there is no difference in his or her productivity"; it continues, "Most troubling, the least healthy, least productive Associates are more satisfied with their benefits than other segments and are interested in longer careers with Wal-Mart.”

Cheap Disposable Employees
Instead of proposing initiatives to help these workers become healthier and more productive, the team calls for redesigning Wal-Mart’s benefits package to better appeal to younger, healthier workers who are paid less and have shorter tenures. It hopes to weed out expensive, unhealthy workers by requiring more rigorous physical activity for jobs like cashier. Should anyone be surprised that a company that has built its business around selling cheap disposable products wants a cheap disposable workforce?

It's Past Time to Reform the Healthcare System
Wal-Mart deserves to be criticized for these types of initiatives but the situation they and other businesses face illustrates how urgently our system of health care funding and delivery needs reform. The premiere quality of our healthcare system is often touted but what good is this if fewer and fewer people can afford it? This is not a new problem and it’s getting worse - when are we going to finally do something about it? Who in business and government is courageous enough to tackle the challenge of making healthcare widely available and affordable? What kind of country – let alone business and workplace environment – are we going to have if large and growing numbers of people cannot afford health care?

I’m not letting Wal-Mart off the hook – it certainly can and should do more. For example, you would think it would use its buying clout to negotiate the best health care deal for workers of any company in the U.S. But there is no denying that our biggest company and many other large corporations are struggling to keep pace with rising health care costs for their workers. Healthcare is the hot potato that no one wants to hold – not businesses, not government, not individuals. We should be collectively trying to solve this problem, instead of seeking to shift the burden to the other guy. Several state governments are now attempting to come to grips with this problem because they, and ultimately the tax payers/voters (us) must foot the bill for the growing number of people who can’t afford health care.

Just as Wal-Mart is evaluating the tradeoffs that best suit its interests, Americans need to start thinking about the bigger societal tradeoffs between price, individual quality of life and collective welfare. What good are businesses with “always low prices” on toothpaste if it means that neither they nor their workers can afford the cost of dental insurance? Are we really in favor of low prices at all costs? What kind of communities, workplaces and environments do we want? It is time for everyone – politicians, business leaders, workers, citizens – to get our heads out of the sand and rethink our priorities. Our health – physical and economic – depends on it.