Posted by: Linda Tucci
Budgeting and cost-cutting, CFO, CFO and CIO relationship, innovation, risk management
It’s a short week. I’ll get straight to the punch. I heard General Motors Co. CFO Dan Ammann being interviewed last week about GM’s strategy for running the business, one year after the carmaker’s initial public offering. CIOs should pay attention to what he said about lowering risk and investing in innovation. In fact, they should think of Dan Ammann as their canary in the coal mine.
GM has gone from losing billions of dollars to making money, $7 billion so far this year. Thanks to its reorganization and government bailout, North America’s largest car company is largely debt-free. Granted, Europe is a problem. Apparently the company is not doing so well in South America either, a big car market. And the stock price is not where it should be. But in distinction to life in pre-bankruptcy days, GM’s new executive management team now has the luxury of actually running the business (as opposed to lurching from crisis to crisis), Amman told The Wall Street Journal Senior Editor Darren McDermott during a session at the recent MIT Sloan CFO Summit in Boston.
What was GM’s strategy for lowering its risk profile? One big step was to dramatically reduce the company’s break-even point, Ammann said. “We had a huge fixed-cost base, so we had to build a certain number of vehicles to cover the fixed cost. We had a supply-push business model: You built the vehicles and then figured out how to sell them.”
“Getting the break-even point down allowed us to have a business model where we are building to demand, as opposed to building a particular level of volume, to allow the business to break even,” he added.
Building to demand: That should ring a bell for CIOs, I think. Calibrating IT supply to meet business demand is both tough and arguably more critical than ever if IT hopes to be a strategic partner. One way of building to demand is to build in the cloud, scaling up or back to keep the break-even point at a place where IT departments can spend less than their budgets. Why do that? So they can plow a predictable amount of money into innovation.
However, “you can’t cost-cut your way to prosperity,” said Ammann, whose New Zealand accent lends his statements a kind of matter-of-factness. GM invests about $16 billion a year in product development. The company needs to worry about whether it’s allocating the right amount and if it’s getting value for its money. With a debt-free balance sheet and low break-even point, on the other hand, GM can give its engineering department a predictable set of things to work on and a predictable amount of money to spend. And that, Ammann claimed, is the “best way to get efficiency into an engineering department.” That’s in distinction to the days when the fiscal crisis du jour resulted in billions wasted on engineering products that got canceled midstream.
To recap: Reducing the break-even point, so IT has a little money left over, makes it more likely that CIOs will have a predictable stream of revenue to plow into innovation.
Ammann didn’t get into the particulars of how that GM break-even point was lowered — the brutal job cuts, factory closings and production moved to China. That’s ancient history now. The current reality is that GM’s break-even production volume in North America is about half what it was pre-bankruptcy. And the executive team is relentlessly focused on keeping cost from creeping back in, he said. What’s important is that GM keeps “the break-even point down low enough so we are making money in basically any market environment,” he added. “It’s all about operational execution.”
One last observation, not exactly on point but germane: Ammann has inserted himself into GM’s product planning process — a nervy thing to do for a CFO, it seems. But product development is important for GM, so naturally he “went and got in the middle of it.”
“The role of finance … is that we are there to bring the information and insights to enable the right business decisions. And there are a lot of really important business decisions getting made when you are setting your future product portfolio and future investment strategy,” he said.
Ammann’s advice to the CFOs in the audience: “If you show an interest in the business, the business will show an interest back.” The same could be said to CIOs.