Information worth billions
General Electric's CIO, one of the world's most influential, tells how he makes infotech pay in a big way.
(Fortune Magazine) -- Gary Reiner isn't like other CIOs. The average chief information officer's tenure is just over three years, but he has held the job at General Electric for the past dozen years - the period when the foundation of GE's business shifted from manufacturing to services to information. Most CIOs complain about their budgets' getting squeezed, but Reiner's is growing and, at $4 billion, is almost the size of a Fortune 500 company. Many CIOs report to the chief financial officer, but Reiner reports to the big boss, GE's CEO, Jeff Immelt. Most strikingly, other CIOs are rarely in charge of critically important non-infotech responsibilities, but Reiner has been running GE's massive Six Sigma initiative since 1996 and also oversees the company's $55 billion of annual sourcing.
One more important difference: He isn't a lifelong geek, having started his career as a management consultant at Boston Consulting Group after graduating from Harvard Business School. Reiner, 54, talked recently with Fortune's Geoff Colvin about beating the high cost of commodities, why GE (GE, Fortune 500) is selling software, how to be on the right side of reverse auctions, and much else. Edited excerpts:
What does Jeff Immelt want from you?
Three things. My responsibilities are information technology, Lean Six Sigma, and sourcing.
I don't know of any other company where the CIO is in charge of sourcing. What do you do?
Our job is to leverage the scale of a $180 billion company rather than several individual businesses by aggregating our demand and then negotiating in as many cases as possible as one company rather than several individual companies.
And presumably that couldn't happen without information technology.
Good sourcing is in information. On indirect sourcing it's knowing what we buy, which is a challenge in itself; aggregating that; and then making sure that our businesses are leveraging the negotiations we've done because they tend to be better deals than those done individually. On the indirect side, that's a very big deal. On the direct side, we were one of the first to do e-auctioning. Our job would be to commoditize the item as much as possible and then leverage IT to have our suppliers bid for the business.
What's an example of aggregating something from all over the company?
We buy about $150 million of personal computers a year, laptops and desktops, and we've selected one supplier companywide. As you might imagine, we have a great relationship with our supplier, but also a very low price.
And that supplier would be?
I've heard criticism of e-auctions - that they poison the relationship between the supplier and the customer and that sometimes the savings aren't as great as they appear to be. What has your experience been?
We auction about 30% of our total buy. We spend a lot of time upfront communicating with our potential suppliers, so we've agreed on delivery requirements, on the specs that we want, on the quality that we need, and then the only thing remaining is price, and that's what the auction is all about. And to maintain the integrity of the auction, we commit that if you agree to everything we've communicated, and you win the auction, you get the business.
I would presume that as much as you like to buy things through reverse auctions, you absolutely hate to sell things that way.
That is correct.
How do you avoid it?
When we started doing e-auctions, I went around to all our businesses to find out whether any of our customers had e-auctioned us. The last one I went to was our plastics business, and they were the only ones that had been auctioned by their customer. I said, "Which customer?" And they said, "Our appliance business." We had auctioned ourselves, which we were quite good at, I might add.
The more commodity-like the part or service is, the easier it is to auction; and the more differentiated, the less easy it is to auction. By design, every year we try to make more of our business portfolio be products and services that are noncommodity - that are differentiated. So we have been fortunate not to be as auctioned on the sell side as we are on the buy side.
But how can you beat the high costs of commodities like oil and metals?
We're doing four things, none of which is perfect, but together they help. The first is hedging. The problem is that sooner or later you pay the piper, but you can delay the pain for a while, and we have done that.
Second, we're accelerating our low-cost-country sourcing. We source about $4 billion of direct materials out of China. Overall, about 20% of our direct material is sourced from low-cost countries, and we have goals to accelerate that quite a bit, particularly given high commodity prices. Third, we are increasing the number of engineers and reallocating our engineers to focus on designing out the particularly expensive raw materials. And fourth, we're getting price; if we and our competitors are all paying more for raw materials, we're going to have to get that in price. And we have a very big effort to try to do that as well.
You've been in charge of GE's Six Sigma initiative since it started, in 1996. Are you still getting value out of it?
We've been aggressively trying to migrate away from talking about tools and instead to talking about outcomes. Six Sigma is a tool. It is a wonderful tool, but it is a tool. What we're talking more about as a company is outcomes, and the two outcomes we really want are product reliability and customer responsiveness.
So we start with that and work our way back to what tools are needed to make that happen. For product reliability, the Six Sigma tools are sensational. On the responsiveness side, it's often less about using Six Sigma and more about getting the right people in the room to map out how long it takes for us to do something in front of customers and, using mostly common sense, take out those things that get in the way of meeting our customer needs responsibly.
In our GE Money business we offer private-label finance to retailers. We are the financing behind jewelry stores and pharmacies and the like. Sad to say, it was taking 63 days from when a retailer contacted us saying it wanted to consider using us as a private-label financier until it could conduct the first transaction with our financing. No one had calculated this before we went on this journey.
We did a number of what we call lean workouts, where we get everybody in the room to map out the process, and they got it down from 63 days to one day. The leader of that business was able to go out and have as his marketing campaign, "Enroll today. Transact tomorrow." When we did that, sales doubled. And there are 30 examples of that throughout the company.
All the GE businesses have become more information-based. How has that happened, and what has been your role?
There are two ways to think about that. The first way is that each of our big infrastructure businesses has a major service component. In every one of our infrastructure businesses we do something called remote monitoring and diagnostics, where we attach sensors to our equipment. So there are sensors in every locomotive, every gas turbine, every aircraft engine, every turbo compressor.
We've got software that resides with our customers or in our own shops, depending on how the customer wants to play it, that analyzes that data and is able in many cases to predict problems before they occur. We can prevent outages from occurring. That's one very big piece, and IT obviously plays a very big role.
The second way to think about it is that more of our businesses are actually selling software as a product. We are selling electronic medical records in our health-care business, which we're very excited about. We are selling software to our utility customers that allows us to optimize the grid and optimize the actual spinning of the turbine and the portfolio of different types of generators in their generating capacity.
In terms of my role, one of the things we do is every six weeks all the leaders of our software businesses get together by phone and we pick a particular topic. For example, what are the best practices for selling software? What are the best practices for migrating from customizing everything in software to being able to sell configurations? How do you test software in building it and in trying it in a customer site before they use it? We'll spend an hour or hour and a half, everybody sharing best practices and challenges and learning from each other.
Does social networking have a role within General Electric?
We've gone out of our way to call it professional networking rather than social networking. We've been building a professional-networking capability that allows everybody to put in the organization directory the skills that they bring to bear. It's very searchable, so if someone is looking for a particular skill, they can go to that site. That gets about 25 million hits a day, so it really is becoming sort of a heartbeat of the company.
What coming technology changes are going to be most important? Over the next five years there will be a distinct change in the man-machine interface. We've all grown up with keyboards and mice, but I'd be surprised if five years from now we didn't all interact with our computers via multitouch gestures. A number of companies are coming out with the ability to use your hands directly on screens. If you want a keyboard, you just click something, and right on the screen is the keyboard, as well as the equivalent of managing all the images on there instead of using a mouse. That's going to be a big change.
Another big change is going to be OLED, organic light-emitting diodes, which are extremely thin screens that will start out as TVs but will quickly become available as computers. They have better resolution than either LCD or plasma, and they're so thin that you'll be able to roll them up or fold them up and carry them. This will happen within the next five or six years: You'll be carrying around this screen, you roll it out, and it's got multitouch capability, and that's all you'll need.
Something that has already grown dramatically but will continue to grow even more and ultimately become core to enterprises, as well as consumers, is what's known as cloud computing - having all the applications centrally located. If you ask what percent of the documents you create are just for you, it's almost zero. Almost every document you create is for collaboration in one way, shape, or form. So why not start by building it on the web and providing permissions to people that you expect to view it and edit it and leverage it? So I think that's going to be a big change over the next few years as well.
Apple obviously has a wonderful user interface with the iPhone, and it integrates very nicely with iTunes and the iPod. Google in probably the fourth quarter of this year or the first quarter of next year will come out with something called Android, which is quite a beautiful interface. They've got 36 hardware or software service partners that have already signed up to leverage that operating system. They will probably be carrier agnostic. You'll choose a device, you'll have an Android operating system on there, and you'll have software writers writing applications to it. Over the next three or four years we'll probably have a two-man war between Apple and Google for who gets the mind share and the market share of PDAs.
A big theme at GE these days is innovation. How does IT help it along?
In most of our heavy-equipment industrial businesses, it's hard to separate innovation from our new-product-introduction process. So if we're developing an aircraft engine or a gas turbine, the real issue is the speed with which you can bring it to market - getting ahead of our competition and providing more value to our customers. So the role of IT becomes assisting in speeding up the innovation process or the product-development process. We spend a lot of time looking at tools that will help us develop the next great engine more quickly and more effectively. And that's really where the role of IT plays biggest in GE.