Management ChallengeBy Dave Lindorff | Posted 11-11-2002
Case Study: General Electric and Real Time
Gary Reiner, CIO of General Electric Co., leads a visitor over to the far side of his spacious office at GE's Fairfield, Conn., headquarters and takes a seat at a large table, on which the only objects are an unusually large keyboard and what looks like a PlayStation game controller. Before him, a huge, elongated flat-screen display panel is mounted on the wall. Like a kid at a game console, Reiner, in shirt-sleeves and open collar, punches a few keys. Suddenly at his fingertips and on display on the screen is an array of green, yellow and red which, on closer inspection, resolves itself into diagrams that signal the status of software applications critical to GE's day-to-day operations.
Reiner calls up the main screen for GE's plastics operation, which flashes a series of green lines (green is good) and a few yellow lines (which mean a certain operation is not running as efficiently as it could). At the moment, there are no red bars on the screen. Otherwise, Reiner says, he'd be pounding away at his own keyboard, sending an e-mail to the appropriate division manager asking for an immediate explanation.
Reiner's goal: to monitor, once every 15 minutes, GE's mission-critical operationswhich, on his priority list, are sales, daily order rates, inventory levels and even savings from automation across the company's 13 different businesses around the globe. These "digital cockpits," graphical depictions of up-to-the-minute business performance across GE's landscape, are checked regularly by electronic robots that send test transactions through the systemtests that should take four seconds to complete, and which likewise trigger an automatic e-mail warning, or inquiry, when yellow or red becomes the color of the moment. "The idea is to respond faster to change, reduce cycle times and improve risk management," Reiner says. "We are not waiting for end-of-the-month or end-of-the-quarter or even end-of-the-week results anymore before we act. We now respond continuously."
Welcome to the frontlines of the real-time revolution, where response time means money. Since the dawn of machine automation, managers have sought to build processes that speed their ability to respond to change, but the real-time revolution promises to transform companies into complex sensing organizations that use everything from radio frequency sensors to global positioning satellites and worker-monitoring software to run everything from their in-house payroll departments to remote factories across the globeand at speeds and split-second reaction times that, in some operations, will far exceed humans' ability to gather, process, analyze and respond on their own.
Driven by increasing pressure to cut costs and become faster and more responsive to increasing volatility in the marketplace, GE is one of a handful of giant corporations, from computer chipmaker Intel Corp. to Iberian fashion dynamo Inditex Group, that is fast becoming a digitized enterprise where every process, down to the activities of every production worker and the details of each minute financial transaction, is at least theoretically accessible to successive layers of plant managers and ultimately to top corporate managers.
It's a brave new world, and cockpits are just part of the equation: When GE started to digitize its business two years ago, it also began to buy and sell online and, more important, started creating a digital nervous system that connects anything and everything involved in the company's businessIT systems, factories and employees as well as suppliers, customers and products. GE's aim, says Reiner, "is to monitor everything in real time," whether by using sensors to gauge performance of jet engine machinery operated by GE's customers or tracking which customers paid on time and what it would take to get them to make their payments faster.
Reiner, who is leading GE's digitization drive and was the first GE executive to use the cockpit, calls GE's digitization strategy "e-buy, e-make and e-sell." E-make, using digital cockpits, is all about GE's effort to interact faster within its own operations. E-sell, on the other hand, aims to hasten interaction with customers: GE's Polymerland Web site, which helps customers research GE's resin products and prices, has been cutting phone calls to service reps by up to 300,000 calls per year, boosting the speed at which GE responds to customers while at the same time shrinking the unit's costs by 35 percent over five years, with more savings under way. By digitizing sales, says analyst Nick Heymann, who tracks GE for Prudential Financial, GE has also speeded up serviceand has cut 60 percent from the costs out of selling GE's vast array of products, from dishwashers to polymers.
E-buy is also about interacting better and fasterbut with suppliers. In 2001, says Reiner, GE saved more than $680 million through Web-based auctions. And there were time savings as well: "Before," says Reiner, "sometimes a buyer didn't quite know what was expected of him or her in terms of what they should buy for a particular commodity, and they'd go out and cut their own deal." Now, he says, such deals are no longer acceptable. The result? "The new system forces people to buy off prenegotiated contracts," Reiner says. "This saves time, saves money and keeps us from wasting effort on transactions that will ultimately have no value."
Speed gains also show up in billing. Steven DeLarge, manager for global financial planning at GE Power Systems, says that simply by collecting more data on customers who were late in paying their bills, GE was able to be more effective in getting them to pay on time, for a savings of $6 million in interest. "With this system, you can get the payment information to the front end faster, and then have the salesperson do the collection call instead of having to use a collector," DeLarge says.
But GE isn't the only company keen on getting faster. In years to come, many experts say, many more companies will use information technology to become a "real-time enterprise"a company that can react within seconds to changes in its business. And as more and more firms wire themselves up and connect to their business partners, they make the entire economy faster. "What businesses like GE are creating is an explosive cocktail of time-based change that will rip out inefficiencies in our organizations based on our ability to gather, use and disseminate information," says Gartner research vice president Andy Kyte. "Wasting time will seem as stupid as wasting money itself."
To be sure, in the current lackluster economic climate, it's little wonder that vendor hype has sprung up around the concept of the real-time enterprise: Gartner's annual schmooze-fest in Orlando in early October was all about real time, as are nearly a dozen conferences in the coming year, from Chicago to Berlin. But while experts acknowledge that getting to real time will require, in many cases, significant new levels of technology investments, the push for real time isn't all hype, either. Indeed, in a cost-cutting climate, real time can mean real savings. For its part, GE estimates that its digitization efforts saved the company $1.6 billion last year. "We said we'd cut $10 billion in costs in five years, and we're already a third of the way there," Reiner says.
According to Gartner vice president and research fellow Roy Schulte, the elapsed time of individual processes at e-businesses around the globe is already beginning to accelerate. Responses to call-center inquiries, for example, have gone from eight hours as of a few years ago down to 10 seconds today; refreshing a data warehouse has accelerated from one month to one hour; and the time it takes to build a custom-made PC has gone from six weeks to 24 hours, to name a few examples. Schulte predicts this acceleration has just begun and that process times will speed up even more, triggering a huge impact on the inner workings of companies large and small. For the strategic CIO, he says, the movement to real time will mean "increasing the velocity of business processes, and to get this kind of speed the CIO is going to have to rethink how he or she designs computer systems."
Shots in the Dark
Shots in the Dark
Yet as GE's cockpit shows, the real-time movement is also about strategic advantage: being able to monitor business continuously and react when conditions change. "Today, businesses mostly shoot in the dark," says Michael Maoz, a research director at Gartner and one of the pioneers of this concept.
In addition, real time means the ability to use newly available information to offer new products and servicesor, simply, to have a window into operations that wasn't available previously. In 2000, GE's consumer appliance business installed online kiosks in selected branches of The Home Depot. Today, customers can order an appliance, select a delivery date and time, and be told instantly whether their request can be met.
Internally, says GE Power Systems' DeLarge, the use of cockpits has eliminated the need for weekly operations reports. "In the past, some operating numbers weren't available until the Saturday of each week," he says. Now, information is loaded continuously into GE's cockpits and, he says, "in the case of past-due invoices, for example, salespeople know how much leverage they have over price in the field and can act on operations figures right away."
To be sure, it takes money to make or save money: Gearing up to real time will require companies to make massive new investments in software, sensors and other technologies. According to Reiner, GE so far has spent about $1.5 billion in employee time, hardware and software and other expenses, which works out to a roughly 33 percent return on investment per year over the five years of the project.
Advocates and experts on the subject of real-time operations say a 50 percent to 100 percent return on revenues should be possible. "Basically, every 1 percent of revenue you spend on real time should give you a 1.5 percent to 2 percent revenue increase as payback," says Vinod Khosla, a partner at the venture capital firm of Kleiner Perkins Caufield & Byers, and one of several experts widely credited with coining the term "real time." Says Khosla, "If you're not getting that kind of return, either you've already spent so much on IT that you have wrung out a lot of costs already, or you have a poor IT strategy."
But while this new digitization process carries much promise, it also poses some significant management and operational challengesat GE and elsewhere. In the view of Eric Clemons, professor of information management at the University of Pennsylvania's Wharton School, what businesses need to do is follow the model of the U.S. Marines. "Current Marine war-fighting doctrine says you cannot have micromanagement. You have to permit local decision-making with distributed responsibilities and trust without monitoring"precisely, he says, the opposite of the command-and-control digitized model being developed at GE.
And real time will cause labor dislocations, experts caution. Real-time initiatives, as they spread through the economy, could lead to an increase in unemployment of 2 percent to 2.5 percent because of labor-saving improvements in technology, says John Parkinson, chief technologist at Cap Gemini Ernst & Young. Adds Ann Bartel, a professor of human resource management at Columbia University's Graduate School of Business: "Just the shift toward a more monitored workplace will affect the quality of workers' lives and change the way workers are used to working, creating significant management challenges."
Indeed, taking a glimpse at GE's experiences so far on the road to real time, such predictions don't sound entirely hollow. John Seral, vice president and CIO of GE's IT and e-business, says that as GE's plastics division moved from a traditional business model to real time, with digital cockpits in managers' offices, "the company was able to eliminate all the people who were producing data and spreadsheets on a regular basis"for a savings of $3 million in payroll costs last year alone. During Gartner's conference on the real-time enterprise, research vice president Carl Claunch told assembled executives that "in businesses being transformed by e-business and real-time strategies, there will be 10 percent fewer workers on the payrolls by 2005."
Larrie McNary, president of International Union of Electrical Workers Local 701 at GE's aircraft engine plant in Madisonville, Ky., says workers there have mixed feelings about the company's real-time initiative. "It's a way for the corporation to analyze whether or not a plant is getting the most work effort and productivity, and I've seen how the whole environmental, health and safety information is now on the digital system," McNary says. "Of course, GE has always tried to see which of its operations is going to be profitable, and this is now a means by which GE can continuously keep track of each division via real time. From a business point of view, it's good. But for us, it's quite the opposite. It gives management a minute-by-minute comparison of the cost factors for each of its sites and each part being produced."
McNary says digital cockpits let GE "slop back and forth as to whether Madisonville should be making 70 percent of a part or whether the Evendale, Ohio, or Lynn, Mass., plants should be making it instead." In this way, McNary says, GE managers can play one plant against the other. "It's really a work speedup, a way to get people to run more parts in less timeand at no extra pay. Those who can do it the fastest get to keep their jobs." McNary says workers and managers at the plant have already "had some skirmishes about it. All the monitoring has been quite an issue at our site, and it's going to be a growing problem in labor-management relations. It's something we'll be addressing at our next contract negotiations."
And there's another potential speed-bump on the road to real time: While geared to make firms better and faster at responding to change, real time also threatens to make firms far more vulnerable to changeand far more difficult to control and manage well.
The financial markets have already shown that putting even parts of the economy on autopilot can lead to accidents. A stock market crash in 1987 was caused in large part by automated program trading. Further, even the best technology can offer no protection against bad management decisions: Cisco Systems Inc., for its part, got hit a year ago by a classic "bullwhip effect" and had to write off $2.5 billion in inventories because its order books failed to reflect real demand. Cisco managers refused to believe the dramatic changes in the numbers that their automated systems were showing them, and got stuck with components already ordered from suppliers. "The idea of corporate cockpits at GE is good, but the key is how good is the information in that cockpitand how ready are we to believe the machines we set up to monitor this stuff?" says Fred Meyer, chief strategy officer with Tibco Software Inc., a business integration company that has constructed digital trading floors for Wall Street investment banks. "This is a great place for the concept of garbage in, garbage out," he says. "It's a great place for a powerful person to make decisions based on yesterday's news."
Reiner acknowledges the need to manage things differently under real time, saying the company's management structure and approach have changed enormously over the past four years to accommodate some of the new challenges being brought on by the real-time movement. Yet he says that "real time" is also a bit of a misnomer. "Right time" might be a better way of looking at it, he says: Few operations at GE outside of finance need to be monitored on a minute-by-minute, much less a real-time, second-by-second basis. "Most of our monitoring is daily or weekly," he says, "or at eight-hour intervals." While it might be technically possible to monitor much more rapidly, there is little or no advantage to be gained from such an increase in data, experts agree.
Still, according to Lynn Boyd, manager of information development at GE, there are cultural speed bumps that must be negotiated. Even within IT at GE, she says, the digitization drive has led to a "significant restructuring" of the company's information management training program, "especially the two-year, entry-level program for IT people." Specifically, it has become much faster paced, and a lot less site specific. "The business problems they're dealing with now, which used to involve business planning, now increasingly revolve around digitization," explains Boyd. "You could find yourself working on a project with maybe two people here in our Fairfield office, and another 30 working on coding in Bangalore, India." Clearly, holding a meeting under such circumstances will continue to involve, among many things, whole new levels of uncertainty and collaboration.
Analysts credit GE with having the management discipline built into the culture so that the movement toward more automation might be easier than at other companies. For his part, Reiner says he sees the real-time movement as an extension of GE's already relentless Six Sigma quality drive, which he helped spread through the company when he was promoted to CIO in 1996. Like vigilant quality controllers, he says, GE will continuously monitor time savings as passionately as it does quality improvements. "The technology is going to keep getting better and will keep wringing out costs," he asserts. So when will GE be fully operating on real time? "It's going to take forever," he says. "Like quality, it's something you are always looking to push further."
But can GE and other organizations change fast enough without risking greater, hidden costs down the road? The experiment so far at GE is unquestionably benefiting the company's push to cut costs, even as the initiative is still being put in place. But it's also flashing some early red and yellow warning lines of its own about the risks of moving toward real-time enterprises. Says CGE&Y's John Parkinson: "Technically what they've done is very impressive, but it may well be a house of cards." Adds Gus Stuart, a professor of game theory and business strategy at Columbia University's Graduate School of Business: "GE and other companies should be very excited about the potential of real time, but there will need to be a whole new cultural adjustment to make it happen. My guess is that there will be a huge growth in the IT consulting business, because some managers are going to botch this, big time."
Dave Lindorff has written for such publications as The Atlantic Monthly and BusinessWeek.
What Is a Real
What Is a Real-Time Company?
A company that competes by using up-to-date information to progressively remove delays to the management and execution of its critical business processes.
The business goal: To save time and money by responding faster to events and by reacting more flexibly to rapid shifts in the marketplace.
The technology risk: Business activity monitoring can reap more information than managers know how to manage or harness into meaningful responses.
The management risk: A tendency to micromanage at the expense of stifling innovation and creativityand a danger of focusing less on longer-term strategic goals.
Results so far at GE: Some cost cutting achieved; no influence yet on revenues but some change in purchasing and sales strategies.
The Real-Time Enterprise: Powering Profits with Process Automation , By Joe Bellini and Peter Fingar, Meghan-Kiffer Press, January 2003
The Power of Now: How Winning Companies Sense and Respond to Change Using Real-Time Technology , By Vivek Ranadive, McGraw-Hill Professional, 1999
Sense and Respond: Capturing Value in the Network Era , Edited by Stephen P. Bradley and Richard L. Nolan, Harvard Business School Press, 1998
The Power of Now
The Power of Now at GE
$1.6 billion saved last year from digitization, roughly 16% of the $10 billion GE expects to save annually by 2006
$3 million saved by GE's plastics division on payroll costs so far from switching to digital cockpits
$100 million freed up by digitizing inventory, accounts payable and receivables
$6 million saved in interest payments last year by knowing which customers paid bills late
5% improvement in GE Power Systems' inventory turns, and 10% hike in receivables turnover
$680 million cut from total purchasing costs last year by using online auctions
2 Times as many customers per salesperson can be handled, thanks to cockpits that guide price and sales