Case Study: Merging IT at DaimlerChrysler

By Paul A. Eisenstein  |  Posted 03-18-2002

Case Study: Merging IT at DaimlerChrysler


Corporate Headquarters | Stuttgart, Germany and Auburn Hills, Mich.
Year founded | 1998, through the merger of Chrysler Corp. and Daimler-Benz AG
CIO | Susan Unger
IT employees | 4,000 worldwide
Manufacturing plants | 180 in 37 countries
Brands | Mercedes-Benz, Chrysler, Jeep, Dodge, Freightliner, Sterling and others
Alliances | DC owns 34.1% of Mitsubishi Motors Corp. of Japan and 10% of Hyundai Motor Co. of South Korea
*Revenue | $136.1 billion in 2001, down from $144.5 billion in 2000
**Net income | A loss of $589 million in 2001, down from $7 billion in 2000

* Based on an exchange rate of 1 euro = $.89, as of Jan. 1
** Including negative one-time effects due to turnaround activities at Chrysler Group, Freightliner and Mitsubishi Motors Corp.

When Daimler-Benz Ag bought Chrysler Corp. In 1998, the German luxury carmaker was hoping the American mass marketer could show it how to cut spending, squeeze costs and boost profits. Back then, at least on paper, the $36 billion pairing, the biggest-ever among carmakers, seemed unbeatable. Chrysler had $7.5 billion in cash on hand, there was little overlap in the two companies' respective product lines—luxury cars versus mass-market compacts and minivans—and Chrysler was lean and mean, earning more per vehicle than any other major carmaker in the U.S. Best of all, in an industry seeking ever-larger economies of scale, the merger offered an opportunity for cost-cutting, by an estimated $1 billion over the first three years on the cost of parts, alone. At a press conference announcing what was then being proclaimed as a "marriage of equals," Chrysler Chairman Robert Eaton offered a rationale: "This is all about speed and flexibility. It's about converting ideas into profits and doing it faster than our competitors." Crowed Daimler Chairman Jürgen Schrempp: "The two companies are a perfect fit of two leaders in their respective markets."

So much for a perfect fit. Since Eaton and Schrempp, as new cochairmen, shared the balcony of the New York Stock Exchange in November 1998 to ring in the first day of trading for the new company's stock, DaimlerChrysler shares have lost more than the equivalent value of the entire Chrysler Corp. prior to the merger. Market and industry watchers now describe the deal as a sly German takeover that has not only come close to hollowing out the old Chrysler but has endangered the new company's profitability to boot: Last year, Chrysler lost nearly $2 billion—and by its own calculations probably won't make a dollar of profit until 2003. DaimlerChrysler, meanwhile, lost $589 million, and despite offering Chrysler car buyers discounts of as high as $2,000 per vehicle, Chrysler's American market share continues to shrink, from 16.2 percent at the time of the merger to around 13.5 percent today. Management has also taken a beating: Chrysler's Eaton is gone, along with dozens of top U.S. managers responsible for the marketing, product and design savvy Daimler had originally sought from Chrysler—the kind of smarts Schrempp said were needed to help the new DaimlerChrysler develop a vehicle for every kind of driver, from Buenos Aires to Beijing.

Company executives admit now that they greatly underestimated the cultural problems that would form the core of the company's present-day woes. For the past three years, mistrust between Auburn Hills and Stuttgart has made cooperation difficult on even the simplest of matters. Until recently, deciding which parts and, in some cases, which technologies the image-conscious Mercedes will share with Chrysler has been all but impossible. "We initially underestimated what it would take" to understand one another, concedes Vince Morrotti, DC's chief technology officer and previously the top IT executive at Mercedes-Benz of North America Inc. Morrotti and other top DC executives insist the company is getting on track after plenty of detours, but there remain numerous skeptics. Says veteran auto analyst Maryann Keller: "I can't imagine two more different cultures. Some 70 percent of mergers don't work, and this one isn't working, either."

Still, while much has gone wrong, the task of tying the two former companies' technologies together in a push to cut costs and boost efficiencies has marched forward. DaimlerChrysler CIO Susan Unger, a 29-year finance and technology veteran of the old Chrysler, is one of the few Chrysler execs to survive the merger. Her efforts have saved the new company close to $200 million so far, and many of her team-building techniques are being copied throughout the new corporation.

It has helped hugely, of course, that throughout, Unger has had strong support from the top. When Schrempp pulled Unger in during early merger talks and named her CIO, it was clear that whatever DC would become, the Germans saw IT—and Unger, with her track record of using IT to cut costs—as a cornerstone of the new company. "The position of the leaders," recalls Unger, was that "IT is absolutely an essential ingredient for making this merger successful. There was a lot of talk about how the Germans took over everything, but they recognized Chrysler's value on IT."

She had to move fast: Unger was given little more than two months before the merger was formalized in November 1998 to tie together 16 different European e-mail systems to Chrysler's one—"just to enable everyone to share information and best practices," she says—and then to patch together a way for all design teams to start using one global network, and all with no increase in spending, other than what she could squeeze from cost-cutting.

But the cultural challenges have been just as daunting, if not more so (see "Thinking Out Loud"). In the critical, time-crunched weeks before the merger, Unger recalls, even the simplest differences between American English and the British English used by DC's German engineers could lead to frequent misunderstandings.

Unger and Chrysler had faced tough obstacles before. It took a federal bailout to save Chrysler in 1979 and a complete product overhaul—accompanied by technology-led efforts to cut costs, boost quality and accelerate productivity—to recover from near-bankruptcy a decade later. Today, General Motors Corp. claims to be the biggest vendor of microprocessors in the world, thanks to the computing power of today's cars. Ford Motor Co. says its internal computing power is second only to the Pentagon's. But Chrysler has long had a leg up on both, thanks to its history of financial turmoil. "We didn't have the luxury of being anything but efficient," Unger says.

At Chrysler, for example, Unger was instrumental in pushing the early use of collaborative design software, IBM's CATIA CAD/CAM system, to overcome a severe labor shortage in the late 1980s and early 1990s. Using CATIA, engineers "build" a virtual vehicle, which is run through simulated crash testing—and even down a digital assembly line. The goal: to be certain that what's on the drawing board will, indeed, meet cost and design specs. With CATIA, Chrysler cut development costs, and shortened lead times from what had been close to five years down to as little as 20 months on some programs. According to market analysts, CATIA can help cut up to $1 million a day in process costs.

While at Chrysler, Unger also proved her cost-cutting mettle on the quality front. Chrysler was scrapping up to 50 vehicles per month at its Ohio Jeep plant because workers would inadvertently drill the wrong number of holes in them as they moved down the assembly line—they weren't sure which components were needed. Unger convinced IT to start automating the warranty claims process, and also ushered in a barcode system that electronically identified each vehicle as it rolled down the line. The barcodes included information about which accessories were to be installed on which Jeeps, essentially telling the assembly operator how many holes to drill at any given time. The changes cut the number of vehicles being scrapped per month down to three, for savings in the millions. But Unger didn't stop there. The next step was to automate the drilling rig itself so it could only drill the correct pattern. Scrap rates at the plant from drill errors are now down to zero.

Meanwhile, Daimler-Benz, though slower to evolve a corporatewide IT strategy, was on a rapid automation kick at the time of the merger. It, too, had just started to adopt a version of CATIA. But Daimler executives needed the support and expertise of Chrysler's more unified and sophisticated technology to pull the new company together.

Sluggish Acceleration

Sluggish Acceleration

Unger's new DC IT management team initially faced a global Tower of Babel. The IT network each company had put in place reflected its native corporate origins. While Chrysler was relatively centralized, Daimler-Benz was notoriously decentralized—reflecting a company that functioned like a bunch of semiautonomous fiefdoms. Each Daimler business unit had operated its own IT system; financial and human resources applications, especially on the Daimler side, had evolved regionally.

The network backbones weren't much better off. In theory, each company had one, but again, Daimler's was a patchwork, even in its core European market. "This was a big problem," Unger recalls. "You can imagine how much network bandwidth you needed to send CATIA data from one location to another. With the two companies' old hodge-podge of networks, it would never have worked."

Differences in business processes posed other headaches—not so much in engineering and design, but in manufacturing, where different cars and trucks are still being built in different places—and in different ways. Arguments continue over how— or whether—to use technology to "commonize" certain processes. Says Unger: "Parts come into a plant, they go out, we build the cars and the finished ones go out. Why does that process have to be so different from one plant to the next?"

Unger has had some influence. In the past, DC's warehouses had been unable to fulfill all of the 220,000 orders sent in each day by mechanics seeking replacement parts. That meant customers had to wait to get their cars repaired—or go elsewhere. To improve the balance of supply and demand, Unger brought in software that linked DC's Mopar parts division with many of its suppliers and logistics providers, which allowed Mopar's purchasing and inventory managers to see what was wrong and speed the flow of parts. In 2000, DC says, the system saved it $7.2 million in reduced stock and $10 million through improved order fulfillment.

But Unger says her ROI push has been mostly painful, and getting tougher. "When you get down to the specifics of how a vehicle is made, that's where [cost-cutting] becomes more difficult," she says. In fact, it's still one of DC's biggest internal debates: Should everyone be operating exactly the same hardware and software systems at every level at every location within the DaimlerChrysler system? "We thought at first that there should be one of everything," says CTO Morrotti. But now, he says, it's clear that, amid some fierce local resistance, "one-size-fits-all wouldn't work in this organization." Case in point: The old Daimler and old Chrysler sides of the company still use separate databases to collect and analyze customer information for marketing strategy.

The Germans, though, have also given some ground. "One lesson we learned from our colleagues in Auburn Hills is that the IT backbone needs to be as homogenized as possible around the world," says Helmut Mahler, DC vice president of information technology management. Unger credits "face-to-face meetings" with senior-level executives like Mahler early on "to explain what infrastructure is." Unger also sought to leverage the relationships each former company had with different technology suppliers, using each side's clout to hammer out better prices and contracts.

Yet further progress will be tougher to negotiate. Though Unger estimates that scrapping each duplicate application saves another $2 million to $3 million, the fights over which ones stay and which ones go rage on. A recent battle over whether to drop Daimler's Oracle-based database in favor of Chrysler's IBM DB2, for example, continues. Ditto some CRM applications.

And the stakes just got higher. Chrysler's new German boss, Dieter Zetsche, has ordered another $8 billion in cuts at Chrysler over the next three years—just as additional cost-cutting targets are getting harder to find. To eke out more savings, analysts say, Daimler execs will have to start sharing engineering and design work with their Chrysler counterparts, which, up until now, they've guarded tightly. Is it possible? Nearly one-third of the components in the new Chrysler Crossfire sports car, for example, are being borrowed from Mercedes. "Without a shared IT system," says J Ferron, chief of automotive practice for PricewaterhouseCoopers consulting, "such collaboration would have been culturally difficult, if not altogether impossible, cost-wise."

But analyst Keller wonders how much more "commonizing" Unger can do. "How can you [share] dealer networks and purchasing and distribution systems that are very different across the company and very unique to individual markets, based on different ways people buy cars?" Keller asks. "Can many of these things ever be centralized? At some point you have to start finding ways to use technology to create profits, and that's a whole 'nother ball of wax."

Repair Work

Repair Work

For now, however, the wide culture gap between Stuttgart and Auburn Hills remains Unger's bête noire. Even before the merger was officially announced, Unger, aware that bickering would impede fast progress, began creating IT teams to size up the combined companies' IT strengths, weaknesses and priorities (see "CIO Roadmap"). But most significant, Unger says, was her decision to immediately confront most cultural issues head-on.

Under Unger's leadership, DC used a "Balanced Scorecard" to measure progress by the IT group toward a specific goal— in this case, cross-cultural cooperation. Unger's group was ranked with color- coded "grades." In DC's case, green meant progress, yellow meant problems and red meant failure. "At first," Unger recalls, "we were always being rated red, never green. I was always in trouble. But I knew that if everyone was comfortable right away culturally, we couldn't be doing the right thing." Creating a new culture out of two old ones was not going to be comfortable for anyone, she says, "so we hit the hard issues first and I did what I could to bring out the pain right at the beginning."

Unger moved quickly, for example, to establish who would be in charge, who would report to whom, how decisions would be made and what sorts of behaviors would be discouraged—and punished—come performance review time. Unger also sought to manage expectations, as in her belief that "red" was not something to worry too much about in the merged company's first weeks.

Six months into the merger? Unger's group started scoring green. "I think what helped is that we focused not on territory, but on ROI as a unifying theme," she says. Unger also sought input from the business side at every turn, and set time limits on deliberations. "Most frustrating has been the difference in the way people work," Unger says. "The Germans, at first, wanted to take weeks to make decisions that the Americans wanted to make in hours."

The new rules of the road according to Unger: First, American managers need to brief German counterparts on proposals in advance of a vote; German managers must be prepared to make faster decisions. Second, no IT project gets a green light unless it leads to a payoff for the bottom line—and meets the needs of the people who want the technology. Third, senior management must support all IT projects and put their key people on those projects, or the project gets left in the dust. Says John Parkinson, chief technologist for Cap Gemini Ernst & Young LLC: "CIOs in merger situations are almost always the diplomats on the front line, because through IT you really are brokering a deal between the most significant parts of the enterprise—not spreadsheets and assets but communications systems. Success lies more with managing the roles and expectations than the technology."

Even so, deciding which technologies get centralized and which stay local remains tough, and Unger acknowledges the difficulty. "I try to stress that I am neutral with technology and suppliers. I couldn't care less. But a lot of these decisions tend to be emotional nonetheless," she says. "You mitigate emotions by trying to keep everyone focused on ROI, of course, but the technology biases you have to deal with sometimes are immense. They're holy wars."

The Road Ahead

The Road Ahead

What's next? More cost-cutting. A 13-hour parts auction in mid-January, using Covisint, the industry's online parts exchange, helped DC save up to 40 percent of the opening price on some items, and DC will continue to experiment with the auction model for some purchases.

DC also plans to turn to software programmers in India and other parts of the developing world to reduce costs even further on next-generation projects. Unger will also push ahead to consolidate IT into an even more streamlined and "commonized" operation. Morrotti, for one, foresees "huge opportunities" to cut costs by reducing the number of regional computing centers. It's unlikely DC will settle on a single, global data center. More likely, he says, DC will set up four regional facilities, one serving North America, another for Latin America, a third for Europe, the Middle East and Africa, and the fourth serving the Asia/Pacific region, which would more closely tie DC to partners Mitsubishi Motors Corp. of Japan and Hyundai Motor Co. of South Korea.

Even farther down the road? Schrempp foresees new ways to wring cost-savings from DC's expanding global ties. In January, he reported that DC is working with Mitsubishi and Hyundai to develop a "world engine" for as many as 1 million vehicles that could, potentially, cut development costs by one-third and carve out bigger profits from the small cars most of these engines would power. In addition, Mahler says, DC may save $100 million in engineering costs by cloning a Mercedes transmission for Chrysler sedans coming out in 2004.

Information technology will be critical to both efforts: such collaboration, say analysts, would not be possible without some common—and virtual—design and engineering systems and combined purchasing of some key parts. Still, analysts like Keller question how far DC can go in this direction before "customers start wondering why they're paying $100,000 for a Mercedes when they can spend $20,000 on a Mercedes-built Chrysler compact."

Mahler is optimistic, saying that Unger, his boss, has built a unified IT team which will enable continued progress. "Today, the process of integration [in the IT department] is complete, and whether you're in Stuttgart, São Paulo, Singapore or Auburn Hills, we act like a team," Mahler says. But Unger also knows that long-term success will take a lot more than getting disparate IT cultures to make nice. Sure, technology has already helped Unger to start taming culture and costs. The really hard part—figuring out a way to help IT plump up the profits—has only just begun.

Can she do it? Keller is dubious. "The auto industry is not magic." she says. "Success is not a by-product of efficient software. It's what the software produces, ultimately. It's what the distribution system ultimately delivers. Success and failure, in this business, is still determined one customer at a time in a showroom."


PAUL A. EISENSTEIN is publisher of TheCarConnection.com, an automotive news Web site. His work has appeared in some 60 media outlets, including The Economist and National Public Radio. Comments on this story can be sent to editors@cioinsight.com.

Focus

: Merger Management">

Focus: Merger Management

What is it? A step-by-step process that helps companies and IT departments manage organizational and cultural change— before and after a merger, acquisition or alliance is announced. The goal: tech-led integration of companies.

The upside: By demonstrating the ability to address management and cultural issues—as well as align IT infrastructures with business goals—CIOs can use the merger- integration process to deliver value and help drive future strategy.

The risks: Cost-cutting targets set by the CEO are often based on simplistic assumptions; many CIOs also face unrealistic deadlines for integrating complex technology—and all without a break in service or performance.

Business payoff: Gartner Inc. says CIOs who fail to do premerger planning add 20 percent to 50 percent more time to the period given for achieving business goals. They also hike the cost of a merger by at least 25 percent of the combined IT budgets.

CIO Roadmap

CIO Roadmap

  1. Size up management issues, systems, budget and application needs

  2. Collect data, identify key personnel, and cite best practices

  3. Design ideal architecture; assess costs, choose which systems to integrate

  4. Create IT transition teams, prioritize key IT projects and set up joint IT-business task forces

  5. Design new IT department; determine dominant IT organization and develop migration plan

  6. Work on communications systems first and plan next steps, including long-term integration roadmap

  7. Combine key systems, pilot new processes, monitor progress and seek new synergies

Source: Daimlerchrysler Corp.

Resources

Resources

Books and Papers

    From Promise to Performance: A Journey of Transformation at SmithKline Beecham
    By Robert P. Bauman. Harvard Business School Publishing, 1996

    Managing Cultural Differences: Effective Strategy and Execution Across Cultures in Global Corporate Alliances
    By Piero Morosini. Elsevier Science, 1998

    Taken for a Ride: How Daimler-Benz Drove Off with Chrysler
    By Bill Vlasic and Bradley A. Stertz. William Morrow & Co., 2000

Web Sites

    www.ismbc.org
    Information Systems Management Benchmarking Consortium, a nonprofit association of technology and merger management executives