First Things First

By Paul A. Eisenstein  |  Posted 01-14-2003

Case Study: How Ford Motor Co. Got Back on Track

After decades snug in the role of the perennial No. 2 in the U.S. auto industry, Ford Motor Co. suddenly seemed intent on overtaking its longtime rival, General Motors Corp., when Australian Jacques Nasser was named Ford CEO in 1999. An unabashed admirer of General Electric's "Neutron Jack" Welch, the cocky and confident Nasser billed himself as an agent of change. It was clear he not only wanted to pass the struggling GM in terms of global car sales volume, but also ease Ford's vulnerability to the recurrent downturns that regularly cripple the auto industry.

Nasser spent billions to acquire brands such as Volvo and Land Rover, and even more on an array of businesses ranging from repairs to recycling. But Nasser, like many top corporate executives in the heady days of the late 1990s, seemed even more enamored with the then-emerging world of "e-"—and put into place a $1 billion Internet strategy that seemed, at times, to lay more emphasis on the Internet than it did on automobiles.

"We've entered a world where you measure speed in gigahertz and pipeline bursts, not horsepower," Nasser declared at the January 2000 North American International Auto Show. Framed by a giant video image of himself, Nasser stood at center stage in Detroit's cavernous Cobo convention center, surrounded by a quartet of boxy concept vehicles. Dubbed "24.7," they looked like they'd just rolled out of a Nintendo game. Their plain-vanilla exteriors enveloped high-tech instrument panels featuring an array of telematic technology, including voice-activated navigation, organic LCD video displays and mobile Internet access.

"Go back 100 years, Henry Ford put the world on wheels. Today," said Nasser, "Ford Motor Company will put the Internet on wheels."

But the bravado didn't stop there. A couple of days later, Nasser announced the launch of Ford's Wingcast telematics unit—which would allow consumers to use their cars as Net portals, ready to tap into the information superhighway from the road. Nasser also formed joint ventures with an array of high-tech partners ranging from Qualcomm Inc. to Yahoo!, and even announced plans—with Yahoo! founder Jerry Yang at his side—to give every Ford employee a computer and Internet access.

In addition, Ford, its stock price at an all-time high of nearly $64 a share, and its already fat profits looking to grow even larger with the spoils of the New Economy, took to the Web with a passion. It helped found the B2B auction site, Covisint, with crosstown rivals General Motors and DaimlerChrysler. It also moved aggressively to begin retailing its cars online, and boldly moved to sell factory-direct to consumers, bypassing dealers and their hefty markups.

Accelerate to the present. What once seemed so inevitable has taken on the ring of futility. Ford dissolved the Wingcast venture last June and has curtailed the computer giveaway. The Yahoo! partnership has quietly expired, while its standalone ConsumerConnect unit—the figurehead of its old aggressive, five-prong Internet sales strategy—has been downsized and absorbed into Ford's traditional marketing groups.

And after running afoul of state franchising laws and angry retailers, the automaker has handed its online retailing operation over to dealers—though Ford insists the Web is paying off handsomely with sales leads it wouldn't be getting otherwise.

Meanwhile, Ford's stock price is stuck in low gear, averaging around $9 in recent months. Its market share is sliding, from 23.2 percent to 21.5 in 2002. Earnings are also depressed, with worldwide automotive operations reporting a third-quarter loss of $243 million, compared with a loss of $877 million for the same period in 2001. True, the red ink is diminishing, but at press time, Ford's 2002 earnings were expected to fall way short of Wall Street expectations. Embarrassing vehicle recalls, meanwhile, have tarnished an image honed by years of advertising that "Quality is Job One," and the company is eliminating thousands of jobs and shuttering five factories to get costs back in line.

Indeed, things are not going quite as planned for the automaker as it approaches the celebration of its 100-year anniversary on June 16. With CEO Bill Ford, the first Ford family heir at the helm in more than two decades, the automaker has launched a "back to basics" campaign designed to help it regain its footing.

What Went Wrong at

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What Went Wrong at Ford

What happened? "Ford allowed costs to balloon out of control," says Wall Street auto-industry analyst David Bradley of J.P. Morgan Securities. "It spent too much time and money becoming enamored with the Internet instead of making good cars and trucks. It wanted to own the entire customer experience via online Web sites, but customers simply weren't ready, and Ford took its eye off the ball." Adds analyst Joseph Phillippi, president of AutoTrends, a New Jersey-based auto industry research firm: "Vehicle prices were way out of line with what the marketplace was willing to pay. They cost too much to build, and when the economy nosedived, fewer people were willing to pay premium prices."

According to the latest Harbour Report, an often-quoted measure of North American automotive manufacturing productivity, Ford's legacy production systems and high marketing and incentive costs contributed to low profits-per-car across the Big Three. Even with manufacturing improvements, GM posted only a modest pre-tax profit of $337 per vehicle in 2002, while Ford lost $1,913 per vehicle.

Information is, once again, central to Ford's strategy. But this time, says CIO Marv Adams, who was recruited away from Bank One Corp. two years ago by Ford to "rationalize" IT, there's a new discipline now about what is hot and what's not. There is no way to solve the auto industry's "very complex problems," Adams says, referring to Nasser's grand plan, "by devising some Internet veneer that you can throw in front of it all."

To truly get Ford back on track now, Adams says, the automaker needs to "focus on using the great capabilities of the Internet and other technologies" that are far less flashy and obvious. "All IT work now is targeted toward improving quality and reducing the resources required to deliver new products" by up to $700 per vehicle, says Nick Smither, director of global IT business operations.

"Someone on my staff recently asked me what the headlines about Ford would be in The Wall Street Journal five years from now," Adams says, "and I said the headlines would be all about how Ford has transformed itself." The story, Adams hastens to add, would say nothing about IT, "yet every single area that would make Ford competitive again, from marketing to manufacturing," would be IT-driven. Or so Adams hopes.

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."

Quality in the Slow

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Quality in the Slow Lane

To meet the quality challenge, Adams has rolled out Project Execution. At Ford's truck plant in Louisville, Ky., one of several producing the F-Series pickup, for example, he's using a quality verification system, a wireless monitoring system that tracks—via barcoding, software and sensors—a vehicle as it makes its way through assembly. The idea is to make sure that no assembly steps are left undone, and that each vehicle passes a series of performance and quality tests along the way. Should something be missed, an electronically controlled gate won't let it out of the plant.

Adams is also creating a business analytics system to gather and analyze data coming from a variety of sources, including Ford's warranty processing offices, emergency call centers and 6,000 dealers. By "mining that data," Adams says, problems that might have long gone unnoticed "we can now often flag" before they get far into the assembly process.

Ford is also pushing ahead to use IT more to boost collaboration, especially on the product development side, where more of the process is going digital. There's no way to make the process entirely electronic, cautions designer Pat Schiavone, whose new version of the best-selling F-Series pickup truck will hit the road in 2003. "You can't really choose a design off a computer screen. It's something you still have to get to really see." But the number of clay, wood and fiberglass models can be sharply reduced, and far fewer running prototypes are necessary, since it's becoming easier to simulate real-world testing on the computer.

Not only does that mean cost savings, but it also speeds time to market. Example: The new Ford GT sports car. Modeled after the legendary GT40 that Ford successfully campaigned on the European racing circuit 30 years ago, its 500-plus horsepower V-8 will push the new two-seater to speeds approaching 200 miles an hour. But this GT was designed with speed in mind—the first virtually designed vehicle on the Ford product lot.

Not long ago, an automaker like Ford would need four to five years to transform a concept vehicle into a production car, but the GT project, thanks to IT collaboration technology, is on course to break the production speed barrier: Unveiled in concept form at the North American International Auto Show in January 2002, it didn't get the formal go-ahead until nearly three months later. Yet a running prototype was ready in November, and the first customers will start taking delivery in June 2003. The GT "has been virtually designed and virtually engineered," says Chris Theodore, Ford vice president of product development.

The use of computer-aided design, engineering and manufacturing systems "has been extremely successful in improving the productivity of product development," says Theodore, not just with the GT, but for a variety of new vehicles that will come to market over the next few years.

Another plus of going digital? Dozens of prototypes might be crash-tested before finding an acceptable design that meets federal safety and fuel efficiency regulations. With the GT, Ford will crash just one prototype—and then only to validate its computer-rendered results for skeptical government regulators.

Yet on all of these projects, Adams is just getting started. Keenly aware that rivals are also getting hip to the in-house power of the Net—Chrysler, for example, already uses Net-powered scanners to track warranty claims and fix defective parts—Adams wants to apply the quality and cost-cutting drive to IT projects and to suppliers as well.

The automaker's new product design portal looks just like any internal Ford home page, but it is intended to work like a doorway to most of the data and services an engineer needs to design vehicles, "and it's accessible anywhere in the world," says Smither, who until recently ran Ford's IT operations for product development.

Another critical goal of Adams' work is to share quality and cost goals with purchasing managers. There's been plenty of talk in the auto industry about the build-to-order concept—Nasser had envisioned a day when a buyer could hit a button to order a custom-configured Ford Mustang online, then transmit a slew of information directly to the dealer who would deliver it, the finance and insurance units that would underwrite it, the factory that would build it, the suppliers that would provide its components and the Ford designers brainstorming future models.

Adams doesn't buy any of that, at least for now, saying he doesn't foresee any immediate plans to produce cars directly to customer orders. That's realistic, industry analysts contend, since nearly 19 out of 20 U.S. buyers will gladly settle for what's on the dealer's lot. But there's still a critical need to smooth out the order process and to drive in discipline that ensures Ford builds and delivers a vehicle on time and at budget. CEO Bill Ford sees it as part of Adam's job to help take $700 out of the cost of producing a car—a companywide goal, but one that Adams thinks IT will have the most influence on achieving.

And while Adams is backing off some of the flashiest bits of Ford's failed Net strategy of yore, some of the lessons of the Nasser-era are being applied: Wingcast is gone, but the automaker is putting telematic systems on fleet vehicles that will provide operators the ability to track performance and, if necessary, schedule servicing.

The online ConsumerConnect unit has effectively disappeared, but now that the FordDirect.com retail site is being run by dealers, it is having a measurable impact on sales. "It is very efficient and has reached the goals we sought far earlier than we thought," notes Scheele. It is now generating 10,000 sales a month from Net leads, and Ford says it sold 100,000 vehicles this way last year—60 percent of those from leads it wouldn't have gotten otherwise.

And last but not least, Ford, like many companies, is investing heavily in Web-based communications systems—but for inside the company, this time—to improve the efficiency of Ford's workers, all the way up to the top tiers of management.

Ford is a major client of Northwest Airlines, which dominates the Detroit air hub, and Ford operates a fleet of its own aircraft at Detroit Metropolitan Airport. It takes a toll, especially when senior executives are consistently out of reach. But these days, Scheele can reach more people in less time, thanks to a worldwide leadership team videoconference scheduled every Monday morning. The automaker now operates more than 500 video conferencing sites worldwide, and over the next two to three years, its goal is to reach into virtually every office and conference room in the company.

"We will start moving our traditional videoconferencing into the IP space," says George Surdu, Ford's director of technical services, "and go to Voice over IP in telephony. The age of connecting two PCs over the Internet will allow us to get very sophisticated at a very cost-effective price."

Can Adams pull it all off? No question that the bulk of Adams' IT strategy, he says, is "correction mode"—for now. But Adams also believes that Ford can and must get IT strategy in better sync with business goals before Ford can start moving to more sophisticated real-time marketing and production systems—the key to more cost savings and sales gains. That sounds about right to Ford critics. "The message is that Ford has now recommitted itself to making and selling better cars, and that's a good thing," says analyst Phillippi.

Adams is more analytical. "We've recognized that the higher ROI comes from technology that's deeply integrated into the core operating systems, practices and processes of the company—not a strategy that puts an Internet veneer in front of things that still need to be fixed," Adams says. "For us and most corporations, the real Internet revolution—new, information-enabled ways to make, buy, market and sell products—has really just begun."

Paul A. Eisenstein is publisher of TheCarConnecton.com, an automotive news Web site. His work has appeared in some 60 media outlets, including CIO Insight and The Economist. Debra D'Agostino contributed to this report. Comments on this story can be sent to editors@cioinsight-ziffdavis.com.