In Tough Economy Chrysler Looks to IT to Trim Expenses, Improve Business

At the struggling automaker, private-equity ownership drives IT to slash costs through outsourcing and retool to compete globally.

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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 inside and outside Chrysler, the company has not only relied too much on U.S. 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 C.K. Prahalad, coauthor of The New Age of Innovation and professor of corporate strategy at the University of Michigan Ross School of Business.

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 product development and sales, it appears no partnerships are off-limits. In April, Chrysler signed a deal with Nissan whereby the Japanese manufacturer will supply Chrysler with a version of its subcompact sedan, 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 organization that extends beyond Chrysler and beyond the United States while still reducing IT costs. To make the transformation, IT must do more partnering of its own.

Last winter—pre-Cerebus—the IT organization was trying to figure out how to reinvent itself to support Chrysler's three-year 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, who worked at Ford for 20 years before heading over to Chrysler in 2001. That benchmarking and analysis took five months and concluded that IT could benefit from outsourcing more on both the applications and infrastructure sides of the house. Doing so may enable the IT group to focus on partnering with the business on agile manufacturing processes or international partnerships. "They're outsourcing [the maintenance] so they can focus on more strategic projects that will enable the company to be more agile and responsive," says Koslowski.

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. (Chrysler added treasurer to Bertsch's role last month.)

Private-equity investors are keen to outsource in many functional areas of business to cut costs quickly. "They can't afford to get bogged down in things that don't work," explains Stephen Kotler, CFO of private-equity firm Watermill Group. Watermill brings in Indian outsourcer Patni Computer Systems to assess the IT infrastructure, strategy and sufficiency of IT assets of its potential acquisitions, and often take over portions of the target's IT portfolio once a deal is concluded. A private-equity firm will look at the time and money it would take to manage mission-critical IT projects and coordinate the necessary changes with internal IT staff versus an external partner. In most cases, says Kotler, outsourcing is more expedient and cost effective.

In 2001 and 2002 under Daimler, Chrysler had signed some smaller outsourcing deals with a handful of Indian providers and a North American provider. "We were mainly in time and material mode, leveraging labor cost arbitrage rather than leveraging best practices," recalls Alex Beylin, Chrysler's information technology 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 EDS in the mid-'80s, spun it off in 1996, then signed on a 10-year deal with the IT services provider. More recently, GM CIO Ralph Szygenda has marketed himself as a pioneer of what he calls the "third wave" of outsourcing, in which competing IT 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 early April, Chrysler signed a deal with Mumbai-based TCS for application and maintenance support services for an undisclosed amount (TCS, like Tata Motors, is a part of the Tata Group, although it operates as an independent company). A few days later, Chrysler confirmed a deal with CSC, also for an undisclosed amount, to provide mainframe, server and storage services worldwide, and 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, says Bertsch, 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 organization. Beylin says he's finalizing a framework, in conjunction with CSC and TCS, to foster collaboration and, hopefully, innovation between Chrysler and its IT partners. The outsourcers will be required 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 improvements to IT operations aren't guaranteed when a company outsources large components of it, says Gartner's Koslowski. "It has a lot to do with how well the company can adjust internally," he adds, to support the dramatic increase in outsourcing.

The Pain of Change

And it has been a huge adjustment for Chrysler, where the average tenure of employees is 20 years. Most painful, perhaps, have been the layoffs. Bertsch says she's hesitant to talk about headcount numbers in detail because "it has not been a one-event kind of situation." Some employees were eligible to retire. The outsourcers hired some. Some stayed on at Chrysler. 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 2,000, including contract workers. By the end of the reorganization, she'll have just 1,000.

"It's the biggest transformation IT has gone through here," says Bertsch. And the most difficult one. "It's personal, and it's important to all of us," she says. 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, the results of the quoting process," says Bertsch. "Now that we are where we are, people may finally appreciate some of that."

Still, she acknowledges that morale took a hit. The transition of the majority of the infrastructure work to CSC happened quickly, but the transition of application work is ongoing.

Nevertheless, Bertsch says, she has been surprised by how well the remaining team has pulled together. "I was completely overwhelmed by the way the team has tried to execute such a difficult transition," she says. The massive reorganization is "very, very uncomfortable for employees, but it's also brought some level of stability and a somewhat longer-term focus," notes CAR's Cole. "Often, when there's that sense of urgency, people tend to all pull together."

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 behavioral changes about how someone manages his or her work," Bertsch says. For example, as with any company that outsources its IT, those who remain have to learn a different way of managing demand from the business units. "If that's not managed well, that demand will go direct to the outsourcers, who can have a field day with it, depending on how the contract is written," warns Forrester's Cullen. Previously, business partners felt they could bring in supplemental IT employees anytime they needed help. In an outsourced environment, they'll have to prioritize 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. Take the new Nissan deal. "Before, we were spending so much time and budget on just maintaining," says Bertsch. "Now as we're building these new partnerships on the international front, we can be involved from a technology standpoint in how we integrate with them."

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 a gallon of gas. 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."

Copyright © 2008 IDG Communications, Inc.

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