Case Study: How Ford Motor Co. Got Back on Track - ' First Things First '

First Things First

Cutting out-of-control costs has been the critical first step back to health, says Ford Chief Operating Officer Nick Scheele—Adams' boss and CEO Ford's top deputy. Adams has begun to deliver: Over the last 18 months, Adams has cut about $250 million and plans to cut another $200 million from the IT budget by the end of 2004.

A critical piece of that strategy has been dubbed Project Edison—after the legendary inventor and longtime friend of company founder Henry Ford—and aims to standardize the company's IT backbone. The goal? To centralize and simplify, in such ways as moving more work "onto larger, more standard servers" and maximizing the productivity of existing systems.

Project Renaissance, another Ford program, will have Ford running counter to industry trends by shrinking what Ford outsources dramatically, taking back from outside contractors most of its IT operations. The goal: Keep more tech smarts inside the company, where you can develop, control and pay less for highly skilled workers who, in better times, could charge much more for their services.

"When Marv came here two years ago, he judged correctly that IT is a core competency that everybody has to have, and we've outsourced too many of those competencies," says COO Scheele. "So we're stopping shadow IT, and making [Adams] the IT czar in charge of all IT development, software, spending and hardware. It's a significant change from what we had before."

In mid-2001, Adams says, most of Ford's IT work was, "sprinkled across approximately 200 different suppliers." Adams is hiring skilled IT workers away from some of these vendors and is using them on programming and Web-hosting projects and to create new collaboration and knowledge sharing systems to streamline and speed up the business.

This insourcing strategy is controversial inside the industry. Sue Unger, Adams' counterpart at DaimlerChrysler AG, says she questions the need to increase the corporate headcount. But Adams' strategy has plenty of defenders, including Greg Moran, Ford's director of applications development, who says "it's difficult" with the high turnover at vendors to get skilled contract employees "who are aligned with your strategic challenges. With a stable base of Ford employees, we can build that knowledge base over time."

Adams' timing couldn't be better. Says veteran industry analyst Maryann Keller: "It's a perfect time to hire people with IT skills now, when they're more available." According to Moran, the premium paid to outside vendors and freelance tech workers in the auto industry is high compared with other industries. "It costs less to provide those services yourself rather than pay someone else a premium to do it for us," Moran says. Ford has already saved $12 million in manpower costs in the past year as a result of Project Edison, he says, and will save more as Ford moves closer to its 70 percent insourcing goal.

Ford quality is also high on the critical list: Embarrassing glitches and defects have plagued products like the subcompact Focus, which faced six recalls before it was rolled out nationally in 1999. Ford rivals GM and DaimlerChrysler are outpacing Ford on quality improvements, and industry analysts believe this is contributing to Ford's slowing sales and sliding market share. "Quality is a cost in Ford's case, and shareholders and employees are suffering from it," says analyst Keller. Though Ford improved product quality by 13 percent in 2002, according to product ratings firm J.D. Power and Associates, GM improved by 30 percent and DaimlerChrysler by 27 percent during the same period. Says Brian Walters, director of product research at J.D. Power: "Most of that 13 percent improvement came in 2002, which suggests things are turning around, but this is an industry built on continuous improvement, so Ford has got to work twice as hard now to keep improving."