Gutting out costs at GM

By Leslie Knudson

Despite the fact that 2006 turned out to be a relatively good financial year for GM, the numbers only slightly nudged the needle in the right direction. Though GM reported positive 2006 financial results – with a $5.4 billion improvement in adjusted net income and an $8.4 billion improvement in reported net loss, along with a record revenue of $207 billion – it still has a long ways to go to reach its ambitious but necessary cost reduction goals.

Having reduced structural costs in North America by $6.8 billion in 2006, GM estimates that amount only represents 25 percent of its overall structural cost reduction goal. In 2007 CEO Richard Wagoner is looking to make another dent in GM’s overall cost burden. This will be achieved through labor concessions and its innovative automobile design process that designates each vehicle model to be manufactured in a specific region of the world.

Currently, the business strategy at GM is structured around four high-level business priorities. At the forefront of those is the North American turnaround, which includes a major structural overhaul to curb costs. “We have a lot of focus right now in North America on our turnaround strategy, which is an extraordinary challenge for us,” Barclay says. “We’re making tremendous progress there. The North American turnaround is all about revenue growth and structural cost reduction, and we’ve been working very briskly to reduce our structural cost.”

The second priority is to focus on emerging markets, as GM is aggressively involved in looking to seize opportunities in up-and-coming markets. “Our HR teams worldwide – particularly in Asia and Latin America – are very focused on making sure that we have the right people practices on the ground and building capabilities to capture those markets quickly and successfully,” Barclay says.

With an employee base spanning every time zone, strengthening GM’s integration across the world is the third major priority. “The third would be accelerating our integration across the world – we have fantastic resources, people, technologies, innovative strategies and practices in each business unit country to country that we’re trying to integrate to create maximum leverage for the company.”

Finally, GM is focusing advanced propulsion technologies, which relate to how GM powers vehicles. Advanced hybrid propulsion systems serve as the key technology behind hybrids, designed to offer greater fuel economy and significantly reduce emissions. GM’s commitment to improving the efficiency of the traditional internal combustion engine along with preserving the environment is evident through its long-term plans to build a total of 12 hybrid vehicle models.

The health care strain

Being the largest private purchaser of health care in the US is a label that doesn’t come without some pain. Having spent $4.8 billion in 2006 on health care in the US alone last year – and with the health care inflation rate estimated to increase by 6.5 percent in 2007 – fighting the spiraling costs of health care is a never-ending uphill battle for GM.

The massive burden continues to be the largest competitive disadvantage for GM. Fitch Ratings just recently issued a report citing that health care costs as a portion of each U.S-built vehicle are expected to rise an average of 11 percent this year. As health care costs continue to climb, GM has been forced to go back to the drawing board with union workers, and this summer’s scheduled labor talks with the United Auto Workers (UAW) are reckoned to be the most important in company history.

When GM executives sit down this summer with the UAW to iron out negotiations, there will be some tough talks at the bargaining table. One of the topics that will most likely be discussed will be GM seeking reprieve from its $68 billion post-retirement employee health care obligation. A backdrop of fairly recent concessions – in late 2005 the UAW agreed to concessions equivalent to $1 billion in annual cash savings at GM – may make for some hard-nosed negotiating. The contract talks slated for July will aim at reforming the current collective bargaining agreement with the UAW set to expire in September 2007.

Aside from the anticipated labor negotiations, GM is involved in a whole host of initiatives to keep its head above water when it comes to health care – including changing plans, coverage, co-pays and deductibles, as well as, working with suppliers to improve internal processes to help them become better providers. Despite its efforts, the health care drain will still leave GM playing catch-up to foreign manufacturers just to get on an even-level playing field in terms of cost.

“We basically cover about 1.1 million lives including our current employees, retirees and their dependents so it’s a staggering number,” Barclay says. “We work in the area of driving transparency, cost and quality of our providers so our employees or retirees can see more clearly what the price points are, what the cost really is and what the quality levels are so they can become better educated consumers.”

Wellness is a big focus at GM in helping to reduce health care costs. “We try to help employees and retirees focus on risk areas to become healthier in their lifestyle so that their health care costs are lower and they have a richer life,” Barclay says. “We offer health-risk appraisals, which conveniently show where they may have areas of high risk, whether it’s in the cholesterol level, high blood pressure, weight – all the different categories of health risk – so it helps to identify where they have issues.”

Another focus area is technology used in health care. “The last area is looking at the current lack of use of technology in health care overall – electronic records and the ability to transfer data, and how systems don’t talk to each other and there’s no consistent standard,” Barclay says. One prime technology initiative is e-prescribing, which is handling prescriptions over the computer versus handwriting them. Two groups of doctors at two of GM’s health plans – Henry Ford Medical Group and the Health Alliance Plan – have participated in e-prescribing for more than two years and have witnessed strong results.

“Looking at the data of the 1.7 million prescriptions written through this program, they’ve detected more than 150,000 problems such as drug-to-drug interaction issues where they’ve actually canceled or changed the prescription,” Barclay says. “It gets dramatically at this issue of quality, safety and efficiency; and it’s helping employees change their behavior and move to generic drugs, which saves a tremendous amount of money for themselves and the company.” Barclay estimates that GM has witnessed a move greater than 10 percent to generics.

GM’s global production model

Engineering activity within the larger product development group is another key area of innovation where GM is seeking to reduce costs through its revamped structural organization. Different regions of the world have been assigned a vehicle model to correspond with each of their areas of expertise. Once a particular country or region has been designated a center of expertise, that place is responsible for producing that specific model for the entire global market.

“There is a tremendous amount of change going on in the way that we design, develop and manufacture vehicles worldwide,” Barclay notes. “We have different parts of the world that are experts in certain parts of the vehicle business as it relates to product development. In essence, we’ve taken every part of the world, knowing what their expertise is and have expanded the boundary.” For example, Asia Pacific has taken on the small and mini-car class, Germany is leading on front-wheel drive capability, and the US has the full-size trucks and sport utility vehicles brief.

Partitioning off a specific country or region of the world to serve as the single manufacturer of a specific vehicle model is a radically different model for GM, and one that seems to be paying dividends. “Because of all this redesign, we have centers of expertise actually feeding product across the entire world out of one place, which is dramatically different and has completely changed our business model,” Barclay says.

As you can imagine, HR has been very closely involved in the process of assigning expertise per country, including the planning and decision-making around people resources, skill building and leadership talent at each center of expertise. “HR is fundamentally involved in that upfront and all the way through,” Barclay says. “HR is there from the decision of making a place a center of expertise to the measurement of what we have, what it’s going to take, how we’re going to do it, how to measure the outcomes and then building the capability.”

HR’s critical involvement in the engineering process at GM is a model example of the level of involvement that HR professionals can and should have in an organization. “That’s the kind of work that our HR professionals want to do and what the best companies in the world are asking of their HR professionals,” Barclay says. “Not administrative and transactional work but being there at the time of decision – building the capability, integrating with the operating teams and getting the desired business outcome.”

The shrinking global enterprise

For the global manufacturing giant that spans 50 countries, size always plays an imminent factor in its overall business strategy. Yet as its footprint is expanding, GM is also tightening its integration and alignment across the globe. “The size of the company and the geographic spread is definitely a challenge,” Barclay admits. “Although, with all of the global integration work we’ve been doing over the last number of years, I have seen a big change in a big company feeling much smaller.”

Global work experience has been an enriching part of employment at GM and enterprise-wide objectives instilled across the globe have served to create stronger alignment. “If you do the right things, you get the right alignment and objectives: people start to learn how to not subordinate the enterprise objectives but actually the opposite,” Barclay says. “You have people working across the geographic functional boundaries where they get over the issue of distance: they learn how to work across a global clock and how to overcome language and cultural barriers.”

The fundamentals of being a global enterprise and working around the clock on a virtual global assembly line is an experience that is both rewarding and rare. “We’ve seen a sort of transformation in our workforce,” Barclay says. “We have engineering teams that span multiple regions; as the global clock proceeds on a daily basis, they are handing off engineering projects from one part of the world to the other. As one area of the world goes to sleep, they shoot it over to Europe who passes it along to Asia who then passes it to Brazil the next day – and it is absolutely fascinating to see.”

While GM faces some tough and important days ahead, it’s obvious that it’s making the most of its most critical asset: people. “When you have 280,000 people spread across 50 countries, it’s hard to drive alignment so your processes have to be really good, and frankly, they have to be pretty simple,” Barclay says. ‘If you drive complexity into the process, it will fall under its own weight. We live, work and compete in an incredibly competitive global business environment like most industries, but ours is incredibly challenging. When you have a global automotive business, if you don’t strategically take advantage of all the power that you have in your people assets across all these countries by integrating and leveraging them in the most optimal way, you will not win.”