GE has a bright idea

The killing fields are emptying quickly.

The bodies of business-to-consumer dot-coms have been largely carted off. The business-to-business sites are following them to the grave. In corporate America, companies trudge forward with the sober work of e-commerce—becoming more efficient, more profitable, more competitive.

In that realm, few companies have been as closely watched as General Electric. Cisco Systems and Oracle have made plenty of noise about their e-commerce successes, but e-commerce is essentially what they sell. Dell is a paragon of Web-enabled supply chain efficiency, but it too is a child of the Internet age. Among the old-economy stalwarts, arguably none has executed its e-commerce transformation with the breadth and dexterity of GE.

By now, volumes have been written about how CEO Jack Welch finally "got the Internet" in 1998, then crafted a plan for the company to use the Web to turbocharge its heralded Six Sigma Quality Initiative. Six Sigma steeped GE employees in an almost obsessive quest for perfection and a customer-centric approach to solving every business problem. Welch soon added his voice to the chorus of executives touting the Web's endless potential, calling it an "elixir" for business.

But even as Welch entered his last year at the helm (he's due to retire at the end of this year), critics in the Internet press and new-economy consultancies took him to task for promising more than he delivered, for talking bottom-line results without demonstrating them.

Such criticism has only strengthened the resolve of GE's e-business leaders to put the numbers on the table—and defend them. According to GE executives, the company will add $1.6 billion to its bottom line this year, thanks to the Web. It will save roughly $600 million by purchasing goods through its online auction system. Another billion comes from production efficiencies across its 20 major business units. Analysts, who stand by GE's savings forecasts, also expect the company to trim between 10,000 and 15,000 jobs this year.

Meanwhile, executives say, e-commerce sales reached 10 percent of the company's $130 billion total revenue last year, with about 55 percent of those transactions coming from the Internet. (Electronic data interchange, or EDI, accounted for the rest.) That's far from the critical mass that GE is shooting for, but it's a sound beginning. Oh, and a vast majority of its Internet projects pay for themselves in a year; the others pay out within two.

Which is not to say GE has made it. Like every Internet startup, GE's divisions have made some mistakes of impressive magnitude. Not every division is charging ahead at warp speed into the Internet age. And for those seeking continual e-commerce savings of the 2001 variety, GE will no doubt disappoint.

Just as the big staff cuts of the 1980s still have an impact on GE's bottom line but are rarely spoken about, savings from online purchasing, selling, and production efficiencies become less of a story after the one-time savings.

To that end, efficiencies from online procurement, or "e-buy" in GE parlance, will start to level off by the end of next year. Production efficiencies gleaned from its "e-make" manufacturing effort will probably do the same within three years. The last place of refuge for flashy dollar savings will be in the "e-sell" arena, where the company is waiting impatiently for its customers to embrace the Web. And for a global corporation doing business in countries that are years—if not decades—away from boasting adequate Internet infrastructures, the company could be in for a long wait.

It's worth noting, though, that in reaching its online procurement and production goals that quickly, GE will be years ahead of most firms. And besides, company executives say, posting flashy savings numbers every year, in perpetuity, is not necessarily their aim. Nor is the Web expected to vastly increase the company's revenue by pushing the company into new markets. Asked about recent criticism that the company was not using the Web to attract new customers, senior VP and CIO Gary Reiner, GE's e-commerce point man, says, "We never, ever, ever used that as the objective of e-commerce. We view it as a source of productivity."

In that respect, GE will make its real progress in securing an ongoing advantage against competitors, by serving customers more effectively and efficiently using the Net, and by honing those Web-based skills to stay ahead of the competition.

Roger Torres is a good indicator of the way e-commerce can boost a company's competitive position. "Life is very good," says Torres, VP of purchasing for U.S. Home, a $2 billion home-building subsidiary of Lennar. "But the only problem is that when life is good, time becomes a precious commodity. And getting through to suppliers when we want to buy product can be difficult."

Torres, speaking from his office in Silver Spring, Maryland, says U.S. Home and Lennar build roughly 22,500 homes per year, each of which is filled with appliances the owner chooses from a short list the company provides. In past years, his eight purchasing employees would call GE's customer service line to place orders ranging from $1,500 to $3,000. "It was sometimes difficult to get through," he says, adding that even then the process was flawed.

Last year, GE set up a customized online ordering system for U.S. Home on its GE CustomerNet site, which has been running since 1996. "We wanted to figure out if this was just a new toy or whether there's real value here, so we measured it," Torres says. Making a single order on the Web "is about 15 minutes faster" than calling customer service. But using the call center for larger orders pays off.

Torres says U.S. Home's online ordering "has taken a lot of pressure off" his staff, but it hasn't let him trim payroll. At the same time, he says, his company won't necessarily order more appliances from GE because of the service.

How, then, does one measure the difference the online ordering system has made?

"Ask me what other appliances I sell," Torres says. The answer? "Zero. If somebody asks for another brand, we try to steer them away, because we don't need the extra hassle."

The online ordering system in particular—and the effort GE's corporate sales staff makes to improve the site for its customers—helps insulate GE from competitors, Torres says. In the case of just the Washingon, D.C., division of U.S. Home, that translates to about $1.4 million in sales GE has sealed off from the competition.

GE's appliances division comprises $6 billion of its total sales, but it is under more pressure than many other divisions to find cost savings and establish competitive beachheads via technology. Because increased competition has forced price cuts on virtually all products, the division has to trim $150 million to $200 million a year in costs just to stay even.

Enter the Web. Almost 100 percent of GE Appliances' sales now come over the Internet. The cost difference between a phone order and a Web-based order is $5 versus 20 cents. And although those savings are real, they have not allowed the company to shrink or close call centers—the black holes of corporate spending.

The question of when to make substantial reductions in call center infrastructure and other redundant systems, says Reiner, "is one of our biggest challenges. In order to get the kinds of productivity we want out of this, we need to be able to shut down the parallel process.

"When it involves customers, we won't do it until they're ready. The hardest thing is to pick a date and say that [now], no other thing will be allowed except doing it over the Web."

Reiner says it's impossible to say when GE will require all orders to come in via the Net. But the move toward that day is on: Starting November 1 all GE's suppliers and internal purchasing agents must be ready to invoice and receive payments electronically—or they won't be doing business with GE.

"The task—and I'm totally confident we can do it—is to shut down all the other ways of doing it," he says.

But GE's critics say that one of the chief failings of the company's e-commerce effort is that it has not shut down its call centers and other redundant systems. Speaking broadly of traditional companies making the move to e-commerce, Jean-Gabriel Henry, a senior analyst with Jupiter Research, a unit of Jupiter Media Metrix, says he's seen "a lot of managers saying, 'Hey, we've got this e-commerce software, the procurement software, the CRM [customer relationship management] systems, how come we're not shutting down these call centers?'

"In GE, there hasn't been that vast a movement over from the offline to the online channels. You have to offer things online because people want it, but that doesn't mean you can lay off all these people. But [e-commerce] is no longer something that'll make you more profitable. You have to do it because everyone else is doing it. If your online sales are, say, one-third of total sales, you're managing an extra system and paying for that, not reducing the cost of the systems you already have," Henry says.

Other analysts dispute that point, but whatever the case, GE says it is shaving costs. Terry Dunn, general manager of global communications for GE Appliances, says the division has seen "significant double-digit reductions" in call center volume in the past year. Dunn would not say how much those reductions would save in labor or telecom costs.

Of course, not everyone believes that such gains by early movers in e-commerce will translate to a significant long-term competitive advantage. In business-to-consumer e-commerce, for example, hundreds of companies rushed their sites to market, only to find that their target customers weren't ready to transact with them online.

Likewise, some executives believe that they do themselves no great favor by investing in systems that their corporate customers are not yet willing or able to take advantage of—particularly as the economy weakens. Most of them are loath to say so on the record, but some snicker at other companies that are buried in legacy integration problems, and wonder who will be the better off for all the technology spending.

Such logic is the source of either heartburn or ridicule among most analysts. Prudential Securities' Nick Heymann, for one, says GE is "head and shoulders above other traditional companies in this e-commerce conversion process," which will give the company a "big advantage."

Michael Regan, an analyst with Credit Suisse First Boston, agrees, and adds that GE stands to make long-lasting bottom-line gains as a result of its e-business push. "Not much went to the bottom line in 2000 because while there was some benefit, there were also a lot of expenses to get things going," he says. "But those benefits far outweigh the expenses in 2001."

As to the longer lasting competitive benefits of this effort, Regan says, "lots of others will try to digitize, but lots of others have tried to follow Six Sigma as well, and nobody's been able to do it as well as GE."

The biggest hurdle GE faces, he says, is cultural: "But that's the case with any company. It's also why we've got more confidence in GE than in anyone else. They thrive on change and challenge."

Analysts and executives agree that the credit for that culture belongs squarely with Welch. "Without this type of leadership, e-business is hard to implement," says Tim Chapman, who leads the operations practice at consulting firm McKinsey.

Chapman and others say that because Welch elevated e-commerce to the "initiative" plateau—one of only four the company has had in its history, and the only one since Six Sigma—corporate managers were quick to carry the flag.

"One of the things that would've made digitization a failure is if we were digitizing poor processes," says Steve Hacala, GE Capital's managing director of corporate technology and e-business. The core tenets of Six Sigma, "customer focus, insisting on excellence, and eliminating bureaucracy, have all set us up for digitization."

To see how Six Sigma and e-commerce work hand-in-hand in areas other than online selling, one must look no further than GE Medical Systems, which received $7.6 billion in orders for equipment and supplies last year.

"A few years ago, we thought of everything in terms of quarterly figures," says Naren Gursahaney, GE Medical Systems' CIO and general manager of e-business. "In the last couple of years, we've gotten people focused on a monthly rhythm."

Now, with what GE insiders refer to interchangeably as a digital cockpit or digital dashboard, managers track key business metrics on the Web on a weekly basis.

"In real time, we can see how we're doing vs. financial targets we've set for that acquisition," Gursahaney says. "We can also drill down to see which function hasn't completed tasks we've set for this date. Considering the number of acquisitions we've done, it's been a huge help with productivity."

Other online innovations have helped deliver substantial efficiencies in manufacturing, sales, and service. In GE Aircraft Engines, for example, the company has used the Internet to build revenue delivered from servicing its customers' engines. On the GE Aircraft Engines Web site, customers can see high-resolution photos of parts they've sent in for repair. The site describes the defect and recommends whether (and how) to fix it, saving both companies the time and cost of reviewing the part in person.

"We cut the cycle time" for such decisions "from between two to four weeks to two minutes," says Russ Mayer, GE Aircraft Engines CIO. "The customer picks up cash flow because they minimize downtime of the engines."

GE Appliances, meanwhile, uses its intranet to set up collaborative design teams on different continents, with the goal of cutting the time it takes to bring, say, a new dishwasher to market. Since each of the design and manufacturing teams can collaborate with high-resolution graphics and account for scheduling conflicts among colleagues in different countries and time zones, "we can get up to a 50 percent reduction" in the time it takes to roll out a new product, says Joe Deangelo, GE Appliance's COO. A dishwasher that would have taken 18 to 24 months to design and build, for instance, now takes as little as nine months.

One easily overlooked aspect of GE's e-business effort is that the company is getting collectively smarter about the Net, thanks to an intensive knowledge-sharing project led by Reiner. Deangelo, for one, is quick to point out that he leans on colleagues at other divisions for advice on implementing various Internet programs. One example is the division's Internet procurement system, which was built by interns in the Transportations Systems division in the summer of 1999. "That fall, we beefed it up so we could use it, and last year we bought over $1 billion worth of materials with it," he says.

For global companies with so many diverse business units, collaborating among divisions can be particularly thorny. How, for example, does an executive at one division get access to the wisdom of another executive's mistakes or successes? In some companies, the e-business team is the repository of such wisdom, and is therefore inundated with calls and e-mail from other executives. In other cases, the wisdom never leaves the executive or unit where it was spawned.

To combat this, Reiner created two antidotes. First, he holds monthly best-practices conference calls where managers log onto an intranet and explain their progress in shutting down systems that e-commerce has made expendable. On that site, managers post updates and details concerning their own best practices for everyone to see. The company uses a suite of tools from Lotus, including Sametime instant messaging and the QuickPlace collaboration service, to make these virtual meetings possible.

Reiner adds another team of e-commerce mavens who talk to managers about their best practices and spread the word throughout the company. "For that team, a defect is a best practice that other people don't know about," Reiner says.

Such e-commerce evangelism has helped change the culture within GE faster than even Reiner expected. "Frankly, until two or three years ago, GE was not IT savvy," he says. "The culture change here has been nothing short of remarkable."

"We don't manufacture anything, so for us, it comes down to simplifying communications with our customers," says Steve Hacala, GE Capital's managing director of corporate technology and e-business. The company is rolling out "e-deal rooms," where all players can make deals in a secure online meeting place, reducing travel and overnight delivery bills. The rooms will also slash the time it takes to close a deal, says Hacala, who predicts the system will save $5 million this year.

The biggest e-boon to GE Capital has been GE's e-Auctions, a system that GE senior VP and CIO Gary Reiner promoted last year to consolidate the company's purchases across departments.

Through buying everything from office paper to raw manufacturing materials online, GE saved roughly $480 million in the past year.

GE Capital plans to move 100 percent of its purchasing online this year (GE expects e-commerce to account for 35 percent of its total purchasing by year's end). Already GE Capital has realized a 25 percent drop in the cost of office supplies and a 29 percent decrease in telecom costs in Japan.

Not all of GE's Internet initiatives have been smashing successes. Take GE Aircraft Engines. The company launched a glitzy customer service Web site early last year, with beta-testers that included Delta Air Lines and Continental Airlines.

Several weeks into the process, the company realized that few customers were using the site. The reason? "It was really slow," says one Delta employee who used it. "We had to wait like 20 seconds for a photo to download, and for all the graphics."

GE soon learned that at the desktop level, 70 percent of the airlines' employees connected at speeds slower than a 56Kbps modem.

"We were throwing so much infrastructure at this ourselves, we didn't realize that we were ahead of some of these people," says Rick Kennedy, spokesman for GE Aircraft Engines.

Now the site is built for speed, with just a smattering of graphics. The result? "Much better," says the Delta employee. "We told them, 'We know who you are—you don't have to try and impress.' And we don't really care about pretty."

Bob Tedeschi writes the weekly e-commerce column for The New York Times.