Last summer, the US automotive market officially hit the skids, with car manufacturers on track to rack up the worst sales year in a decade.
As petrol rose to unprecedentedly high levels, commodity prices hit the roof and consumers rejected gas-guzzling SUVs and people carriers – or, crippled by the housing crisis and credit crunch, put off new vehicle purchases indefinitely – June’s US car sales numbers were a clear sign that things had gone from bad to worse in the industry. General Motors’ sales fell 18 per cent. Ford’s slid 28 per cent. Even Toyota hit a serious speed bump, with its sales dropping 21 per cent.
And there, at the bottom of the heap, was Chrysler. The Michigan car-maker’s June sales fell 36 per cent compared with 2007. In North America, where Chrysler does 91 per cent of its business, its market share shrank to less than 10 per cent for the first time in years. July provided little relief, with Chrysler announcing a 29 per cent decrease in sales compared to last year. And that was after Chrysler had announced plans to lay off nearly 30 per cent of its employees, reduce its product portfolio and shut down its plants for two weeks over the summer.
This can’t have been what Cerberus Capital Management, the New York-based private-equity firm which bought a majority stake in Chrysler last August, was hoping the headlines would be leading up to its one-year anniversary. This year was expected to be one of painful cuts, but one resulting in a return to profitability in 2009, a notion Cerberus and Chrysler executives have since abandoned.
A turnaround was always going to be difficult for Chrysler given today’s focus on global markets, fuel-efficient vehicles and onboard technological innovation. Unlike Ford and GM, which have large international operations, Chrysler does little business outside the US. It remains dependent on heavy vehicles, like large pickups, sport utilities and people-carriers.
Long-term success for the 83-year-old company means not just sandbagging until 2010, when experts predict the market will turn around, but a fundamental shift in business strategy. Being private could give Chrysler a head-start compared to public automakers that have to ensure quarterly improvements to satisfy investors. Chairman and CEO Robert Nardelli touts the company he steers as “newly independent, reinventing ourselves for success” and has taken to calling the company a “$60bn (£36bn) startup with an owner-operator mentality.” It’s a reference to Chrysler’s revenues of $62bn (£38bn) in 2006 – its last full year as part of a public company – that glosses over that year’s $1.5bn (£900m) loss. Still, “Chrysler has the opportunity to change and become an agile company,” says Thilo Koslowski, vice president of automotive and vehicle technology for analyst firm Gartner.
To do so, the firm must embrace unconventional partnerships with competitors to access emerging markets and introduce new vehicles and features. It must retool manufacturing and business processes to be more agile and efficient. And, to free up the capital to invest in these changes, it must become a drastically smaller company. At the heart of Chrysler’s transformation is its IT organisation, which itself must not only shrink in size and get fiscally focused, but support the more agile and global Chrysler of the future.
That means more partnering for cost cutting and access to new idea – specifically, through two IT services deals: one with CSC to manage IT infrastructure and another with Tata Consultancy Services (TCS) for applications development and maintenance. It also means restructuring to support the outsourced environment, aligning internal IT staff more closely with the business – and doing it with a staff that’s half its original size. “The goal is to move from order-taker to innovation partner. It requires a change in thinking, a shift in focus and, in some cases, skills,” says Jan Bertsch, senior vice president, treasurer and CIO at Chrysler. “We want to drive – not just react to – business growth.”
IT is critical to the turnaround, say onlookers. “IT ultimately needs to enable automotive companies to remain agile and better respond to market needs,” says Gartner’s Koslowski. “The move to make their own IT departments more efficient and rely more on partners is something we’re seeing more of in the automotive industry, though maybe not on the same scale as Chrysler. We’ll have to see how well it works for them.”
The last time Chrysler faced a situation this dire – at the tail end of the 1970s oil crisis – it was Lee Iacocca who made the tough decisions that got the company back on track. He resized the company, secured a significant loan guarantee from the government and introduced the K-Car line of inexpensive, fuel-efficient cars.
Chrysler’s new management brought the former CEO in to rally the troops in June. But this time, there will be no government guarantees, no product to save the day, no turnaround by downsizing alone. A fundamental strategy shift is necessary.
Always the underdog of Detroit’s Big Three, Chrysler has slipped to fifth in sales – behind GM, Ford, Toyota and Honda – in its home market. Its performance as part of Daimler (which purchased the company in 1998) has been mixed.
One of Chrysler’s great traits, say industry watchers, has been its willingness to take a chance on a new vehicle. Most notable was its launch of the first people carrier in 1982, but in later years, particularly under Daimler rule, the results were less than stellar. The Chrysler Crossfire, a high-design sports car, wowed car show audiences but stalled in dealer lots when it was rolled out in 2003. The introduction of the full-size Jeep Commander SUV in 2006 was poorly timed. The new products were an expensive hit or miss for Daimler; Chrysler experienced years of yo-yo profit and loss, ending 2006 in the red. And Daimler, which had laid out $36bn (£22bn) in stock for a profitable Chrysler, decided all bets were off.
In February 2007, Daimler announced a three-year recovery and transformation plan that would cut 13,000 jobs at Chrysler (16 per cent of its workforce) and enable a return to profitability in 2008. Chrysler was to focus on cost cutting in the short term and pursue long-term global sales growth along with a portfolio that included more fuel-efficient, small vehicles.
At the time, there were some small IT outsourcing deals on the books, but most IT work was done in-house by employees and supplemental contractors. Seventy per cent of the IT budget was dedicated to keeping the lights on. Cerberus won the bidding war in May 2007, paying $7.4bn (£4.5bn) for an 80 per cent stake in the company, of which Daimler got just $1.4bn (£850m), the rest going to fund Chrysler’s industrial and finance operations. In August, the renamed Chrysler LLC became the first privately held major US car-maker in more than 50 years, and a plan to transform IT moved into high gear.
That would be a big shift for any car-maker, said the analysts. Chrysler may have introduced some innovative products over the years, but for most car manufacturers, it takes nearly four years to bring them to market. A few car-makers, notably Honda and Toyota, have invested in digital manufacturing systems that enable them to be more flexible, adjusting product production and volumes to changing market conditions and shaving up to a year off the automobile product lifecycle.
But as well as technological advancements, Chrysler’s management must also be focused on cash flow. For Bertsch and her team, that means IT must lower its fixed costs – and fast.
“The feeling of senior management was that IT was spending too large a portion of its budget on maintenance and not enough on strategic new initiatives,” explains Bertsch, noting that both applications and maintenance costs have been a drain. Chrysler’s IT department is not alone in that criticism.
Bertsch may be uniquely suited to the CIO role in this iteration of Chrysler. She spent her 29-year car industry career in finance at Ford and Daimler-Chrysler before being named VP of IT and CIO of Chrysler and Mercedes-Benz in 2006. Technology, she says, has always taken a back seat to cars. “Understanding the financial side of the business is critical and it’s the basis for all business decisions, including IT investments,” says Bertsch.
“We’re living in times of unprecedented change, and my personality is pretty well-suited to change. I’m always pressing for new things and challenging the status quo,” she says. “I knew we had to consider a lot of options as we decided how to react to this challenge and transform our company and the IT organisation.”
IT’s goals go beyond cost cutting to supporting and enabling the more global company Chrysler has to become. The company lost any real international connections it had when it cut ties with Daimler, and according to some critics, the company has not only relied too much on US sales, it’s been too reliant on American suppliers and partners to design and build its cars. To compete in the global car market, they say, Chrysler must partner abroad.
“No matter how big they are, automakers can’t be unique in every aspect of car design. So it makes sense to partner not just for cost arbitrage, but innovation arbitrage,” says CK Prahalad, co-author of The New Age of Innovation.
Indeed, the few positive pronouncements that have come out of the cloistered new Chrysler have been its deals with foreign suppliers and competitors. On the supplier side, Chrysler will be the first American automaker to source some of its seats from an Indian company, Delhi-based Krishna Maruti. In April, Chrysler signed a deal with Nissan whereby the Japanese manufacturer will supply Chrysler with a version of its subcompact saloon, and Chrysler will give Nissan a version of its full-size pickup. And in July, the American automaker inked a deal with China’s Chery to build small cars in Asia that Chrysler can market globally.
Those moves mean that IT must support a dispersed organisation that extends beyond Chrysler and beyond the US while still reducing IT costs by doing more partnering of its own.
Last winter, pre-Cerberus, the IT organisation was trying to figure out how to re-invent itself to support Chrysler’s turnaround plan. “We took a good hard look at ourselves – where we were most efficient and where we should partner with other suppliers,” says Bertsch. That benchmarking and analysis took five months and concluded that IT could benefit from outsourcing on both the applications and infrastructure sides of the house.
Industry watchers say that when Cerberus took over and Bertsch was named CIO, the pressure to outsource increased. Bertsch would not confirm that the new bosses pushed outsourcing harder but says Cerberus executives have been a great “thought partner” for her and her team.
In 2001 and 2002, under Daimler, Chrysler had signed some small outsourcing deals with a handful of Indian providers and a North American firm.
“We were mainly in time and material mode, leveraging labour cost arbitrage rather than leveraging best practices,” recalls Alex Beylin, Chrysler’s IT management director who oversees the applications group and the IT transformation. But they weren’t sending out nearly as much IT work as rival GM, which had bought outsourcing giant EDS in the mid-80s, spun it off in 1996, then signed on a 10-year deal with the firm. GM CIO Ralph Szygenda has marketed himself as a pioneer of what he calls the “third wave” of outsourcing, in which competing service providers work together to support GM.
“My cross-town peers are dealing with the same things, although they’re in different phases,” says Bertsch. “GM has outsourced a lot sooner and maybe more portions of the business.”
Once Chrysler’s IT leaders decided what they wanted to outsource – and after taking several months to disentangle Chrysler from Daimler – they signed two outsourcing deals to limit uncertainty and defections within the IT workforce. “We didn’t want our subject-matter experts uncertain about where their career paths were headed,” says Bertsch. “So we came to a decision to transfer the business as quickly as we could.”
In April, Chrysler signed a deal with Mumbai-based TCS for application and maintenance support services for an undisclosed amount. A few days later, Chrysler confirmed a deal with CSC, also for an undisclosed amount, to provide mainframe, server and storage services worldwide, as well as applications support, maintenance and development services for a portion of Chrysler’s application portfolio.
Chrysler had worked with TCS on smaller development and maintenance projects in the past. The hope this time is that CSC will bring efficiencies and economies of scale to the infrastructure side of the house, while TCS helps IT reduce the size and scope of its complex suite of large applications.
“We don’t want to tell our global suppliers what the best practices are in supporting us anymore,” says Beylin. “We want to empower them to do that.”
The service providers also give Chrysler IT more global reach, says Bertsch. “We foresaw our future with a desire to grow internationally,” says Bertsch. “We needed to make sure IT was positioned to provide all the expertise and support we could.” Not only will CSC and TCS be able to leverage their scale and efficiency to Chrysler’s advantage, she says, the hope is that they can introduce new processes to Chrysler and bring innovative ideas to the IT organisation.
Beylin says he’s finalising a framework, in conjunction with CSC and TCS, to foster collaboration and, hopefully, innovation between Chrysler and its IT partners. The outsourcers will have to put together business cases for better ways to do things.
Though Chrysler won’t provide any specifics, Bertsch says that IT has already seen benefits from the deals, despite the training, travel and separation costs associated with the transfer of work to the IT service providers. “We’re seeing relatively quick payback here,” says Bertsch. “And it’s something we think is sustainable.”
But it has been a huge adjustment for Chrysler, where the average tenure of employees is 20 years. Most painful have been the layoffs. Some employees were eligible for retirement, the outsourcers hired others, some stayed on at Chrysler while others were simply let go. The bottom line is that Chrysler’s internal IT staff will be half its original size. Bertsch started a year ago with a team of 2000, including contract workers. By the end of the re-organisation, she’ll have just 1000.
“It’s the biggest transformation IT has gone through here,” says Bertsch. Communication with staff about outsourcing plans has been constant. “We were very open with why we felt the transformation was necessary, what we found during our months of study, why we chose certain suppliers, and the results of the quoting process,” says Bertsch. “Now that we are where we are, people may finally appreciate some of that.”
The transition of the majority of the infrastructure work to CSC happened quickly, but the transition of application work is ongoing.
Facing up to change
Accepting the reality of a much smaller IT group is only one hurdle Bertsch’s team faces. “We’re talking about preparing our folks for cultural, process, even in some ways behavioural changes about how someone manages his or her work,” Bertsch says. For example, previously, business partners felt they could bring in supplemental IT employees anytime they needed help. In an outsourced environment, they’ll have to prioritise projects and work within structured processes.
Chrysler IT staff also need the skills to manage a vendor, instead of managing the work of IT itself. Bertsch’s remaining employees will focus on managing suppliers, maintaining the relationship with business users and planning IT architecture. The upside, says Bertsch, is that her team will have more time to partner with product development, sales and marketing, or manufacturing and engineering.
But all these big plans for the future have to be made amid today’s punishing business climate. Bertsch knows she can’t do anything about the cost of commodities, the credit markets, the price of petrol. But those things, she says, just make her team’s goals more critical.
“There are always those things in the environment that you can control,” says Bertsch. “We’re going through the transformation here and changing the way our business model works so we can operate differently in the future.”