Back on Track

Company | Union Pacific
Headquarters | Omaha, Neb.
Year founded | 1862
CIO | L. Merill Bryan Jr.
IT employees | 1,124
Revenues | $12 billion in 2001
Net income | $966 million in 2001
Return on equity | 10.6%
Return on assets | 3.1 %
Recent share price | $ 61.24
52-week high/low | $65.15/$43.39

It was a real train wreck. In 1996, Union Pacific Corp. had acquired Southern Pacific, making the 140-year-old railroad the nation's largest, with more than 33,000 miles of track stretching from Chicago to the Gulf Coast to the Pacific. But UP had badly underestimated how difficult it would be to mesh the two railroads' information and communications networks. Flying blind for more than a year, without a working computer system that could provide a clear idea of where its rail cars were, Union Pacific literally misplaced cargo as abandoned trains were backed up through the Southwest. Some deliveries were as many as 40 days late, and shippers suffered $2 billion in lost sales.

With customers deserting UP in droves, the railroad lost half of its market value as its stock plunged between mid-1997 and mid-1998, the year it posted a loss of more than $600 million. Its bond rating dipped, making loans more expensive and raising the specter that capital investment to upgrade and maintain the company's huge rail system and mend fences with customers would have to be put off.

But instead of publicly blaming the IT group for UP's problems and shying away from technology initiatives, CEO Dick Davidson took the opposite tack. He stressed that UP's identity should continue to be linked with technology, not separated from it; after all, the company's 20-year-old central tracking network, the Transportation Control System, has always been considered the best railroad management system in the industry. Still, it's an expensive and chancy course in an industry where companies need all the cash they can muster just to maintain their key assets like trains and tracks.

But UP management insists it had no choice. There were two options: change, or become just another second-tier, Rust Belt behemoth barely scraping out a return to shareholders that isn't worth the investment. "[CEO Davidson] said at the time that we have all this technology at the company and all this knowledge about technology, and that we just have to use it more," says a former employee who now works for a systems supplier that does business with UP. "He told us that he never wanted to be in the position again where we make one wrong move and suddenly the term 'Chapter 11' has entered our vocabulary."

This article was originally published on 07-19-2002
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