IT During a Downturn

Boom-and-bust cycles are a fact of life in the auto industry.

Boom-and-bust cycles are a fact of life in the auto industry. After enjoying one of the longest uninterrupted periods of economic prosperity, the industry is about to face a business downturn, according to several indicators. Such a turn will definitely affect the information technologies (IT) areas both in the auto industry and the computer industry that serves it.

Ominous signs on the horizon suggest a downturn is imminent. General Motors is slashing vehicle production by 15%. The annual University of Michigan survey of consumer confidence in the economy showed the fourth largest drop in the history of this measurement. Dealer inventories have swelled far above the 60-day supply that’s considered healthy.

Acknowledging that the industry is on a cusp, upper management is now shifting its focus. They are scrutinizing proposed capital expenditures much more thoroughly. In particular, Information Systems (IS) proposals must very strongly show business value. The silver lining in this greater belt-tightening is that hopefully only the strongest initiatives get funded. This contrasts with the more blasé approval process when the industry was still in its “fat and happy” days.

But even during a period of drooping auto sales, the best companies move forward and become stronger. Some areas, nevertheless, are likely to take a hit. Preparing early for a potential crash can soften the blow. At the same time, the best-positioned manufacturers and IT vendors will capitalize on the different landscape.

Indeed, with their backs against the wall, some firms have initiated some of the industry’s greatest innovations. A recent example was Chrysler’s bold reorganization into platform teams during the 1991 downturn. Toyota, facing a devastated Japan after World War II, launched the Toyota Production System that is still yielding competitive advantages. An example of a potentially bold innovation today is electronically auctioning excess manufacturing capacity, as Oxford Automotive has proposed to do.

IT buyers during a downturn are likely to extract better prices and deals from IT vendors. Fewer sales opportunities have vendors scrambling to win the remaining deals still on the table.

Likewise, the stronger manufacturer will be able to at last hire Internet talent that had previously been beyond its grasp. Internet experts who demanded lavish stock options last year now look at straight bricks-and-mortar jobs much more favorably. More fundamentally, IS managers must review their current staffing and IT vendor portfolio. They must assure that their department will be able to manage tomorrow’s IS configuration, whatever form that may take. For instance, yesterday’s programming skills may have to give way to managing IT business service providers.

With fewer new IT purchases, companies now have a chance to digest their earlier purchases. This could be more fully integrating last year’s enterprise resource planning (ERP) or product data management (PDM) package into the enterprise.

Perhaps the biggest road kill in a downturn are IT infrastructure investments (e.g., the bigger “pipes” to satisfy users’ ever-growing demand for more bandwidth). It is also easy to short change Internet security expenditures since security software does not directly put cash in a manufacturer’s till.

Longer-term investments such as creating a high-availability “web-tone” capability on every desktop (especially for collaborative work) can also appear exorbitant to a company fighting for its economic life. Likewise, the big push for e-business transformation may quietly recede as upper management returns to a very short-term, bottom-line financial focus.

Likely trends in a downturn will be to push costs off into the future. Big-bang ERP purchases simply will not happen. Looking more attractive is monthly, subscription-based pricing provided through a Web host such as Internet Operations Center (Southfield, MI) or Exodus Communications (Mountain View, CA).

Far fewer dot-com companies, such as SupplySolutions and Autobytel, will enter the auto market. Instead, the “incumbent” vendors such as IBM, Sun, Oracle, Microsoft, Andersen Consulting (Accenture), and others are likely to consolidate their existing, long-standing positions.

The much-heralded e-business revolution of the auto industry will still happen, but a bit more slowly. This will relieve some of the pressure on manufacturers who had been moving quickly in some cases to protect their threatened customer base.

Prudent IS managers are now anticipating various levels of budget cuts. Doing so early can help avoid the painful “blunt knife” approach such as flat, deep cuts made across-the-board. Not all areas are equally as critical to the enterprise, so anticipating the ax could better keep the really high-payoff programs intact during a bloodletting.

In anticipating cuts managers should begin investigating as early as possible the following:

  • Where cuts could be made
  • Where spending must be held constant
  • Where new expenditures must be made.

Furthermore, IS management must ruthlessly link every “must-have” project with strong, easily demonstrable business benefits. Without this, many extremely worthy projects will die simply because their value was never fully communicated to upper management.

The ebb and flow in the auto industry is inevitable. Wise managers know how to take advantage of these changes. When prosperity returns, they will have their firms strongly positioned to capitalize on the next market upswing.