GE Takes to the Net to Lower Company Costs

At General Electric Co.’s transportation group, which makes locomotives and other heavy duty equipment, employees usually decided when they needed to travel and made their own reservations.

Not anymore.

Now they must log on to a GE computer program to file their plan, which then goes to their division manager, who grants or denies the request. The result: “The number of requests for travel has gone way down,” said Patrick McNamee, the group’s chief information officer.

More important, the computer program--which cost only $5,000 to develop--saved GE Transportation $4 million in travel costs in the June-July period this year. Then it was expanded throughout GE in August, and saved the entire corporation $40 million in travel expenses in one month compared with August 1999.

It’s part of an electronic revolution within GE, the Fairfield, Conn.-based industrial Goliath that’s run by John F. Welch Jr., the company’s aggressive and innovative chief executive who’s expected to retire in the spring after being at GE’s helm for two decades.

This effort is effectively the last chapter Welch is writing in the story of his remarkable career. Under a mandate he handed down in January 1999, GE--which had $111.6 billion in revenue last year--is embracing the Internet and new computer programs companywide to slash GE’s cost of doing business.

GE, in fact, is a good example of how the Internet world doesn’t just encompass “dot-com” companies with funky names and corporate histories going back only two years. GE, which traces its roots to Thomas Edison’s lightbulb company in 1878, epitomizes how a large, old-line manufacturing company is also using the Web to its advantage, mainly by exploiting the Internet to cut costs, hike productivity and generate new sources of revenue.

“It’s also fun,” said Gary Reiner, GE’s corporate chief information officer and the point man for its Internet move. “This is work, but you see the results of your work very quickly, and you feel like you’re cutting edge.”

Welch said last month that, under the new Internet effort, GE wants to erase up to $12 billion from its operating costs within the next 18 months. To put that number into context, a company with $12 billion of sales would rank about 150th in the Fortune 500.

Welch’s drive also is a bellwether for other companies, because GE’s size dramatically demonstrates how the Web can be a huge money saver for companies of all stripes.

“The Jack Welches of the world are really bringing focus” to the technology, said Dave Hagan, chief executive of Firstsource Corp. in Santa Ana. Firstsource’s own business is running an Internet purchasing system so that small and mid-size firms can order goods and services from suppliers. “It’s one of those areas where there’s incredible interest in figuring out how to use it,” Hagan said.

For GE itself, the Internet strategy is now making its way to the company’s bottom line, which is one reason GE’s stock has gained 13% since the end of the second quarter, while the broader stock market--as measured by Standard & Poor’s 500 index--has slipped 1%.

In the quarter ended June 30, GE’s profit jumped 20% from a year earlier, to $3.4 billion--a quarterly record for GE--on a 20% gain in revenue to $32.9 billion. And GE’s second-quarter pretax profit margin from operations amounted to 20.4 cents for every dollar of revenue, also a record for the company. GE doesn’t break out how much of the gains come from its Internet moves, but confirms that the savings are definitely swelling its profit.

Moreover, the $12 billion that Welch wants to carve out of GE’s operating costs represents about 10% of GE’s annual revenue. It’s also an astonishing one-fourth of the $46 billion that GE spent last year both to provide its goods and services for sale, and for its overhead--such as travel, payroll and advertising, what the bean counters call its “selling, general and administrative costs,” or SG&A.;

“The SG&A; is where the big cleaver will come” from using the Internet, said Nicholas Heymann, an analyst at Prudential Securities in New York. “And the next leg of this whole process [for GE] will take off like crazy next year.”

But GE also is using the Internet to wipe out billions of dollars in its other operating costs. The company is using the Web to place orders for goods and to sell goods to others, rather than using more expensive call centers and sales forces.

Take GE Appliances, which sells everything from refrigerators to irons. The division formerly relied on a huge call-center to field inquiries from consumers, at a cost of about $5 per call. Now, with much of the information disseminated via the Web, “instead it costs about 20 cents” to handle a consumer’s question, said CIO Reiner. And GE Appliances gets about 20 million calls a year, so the savings equals roughly $96 million annually.

The Internet also is the centerpiece for GE’s purchase of supplies for its vast range of products and services, including not only the locomotives but also medical systems, jet engines, appliances, lighting systems, plastics and industrial and power systems, financial services and the NBC entertainment group.

A key piece of that effort is the business-to-business online marketplace called Global Exchange Services, of GXS, that GE organized last March. In the past, each of GE’s divisions held separate auctions in which they would buy supplies from certain vendors. GXS now converts all of those auctions to the Internet.

So now GE has more suppliers to choose from, the suppliers get easy access to more than one GE division and GE’s overall cost of buying supplies has gone down. Indeed, through the first eight months of this year, GXS saved GE about $234 million in supplies compared with a year earlier, and that figure is likely to rise to $500 million a year.

“The Internet gives us a standard way of talking with all our suppliers around the world, and they are all over the world,” providing GE with everything from safety goggles to office supplies to factory tools and sheets of metal, said Bob Brooks, GE’s vice president for marketplace solutions.

“A supplier might have only done business with GE Transportation in the past, but tomorrow they can do transportation, medical systems and everyone else,” Brooks said.

GE Capital, the company’s huge financial-services arm, likewise is developing a new Internet-based program to process loans and other transactions. The move not only will slash the processing time for many deals to 10 days from 60, but the program--which will cost $3 million to $4 million to create--will save GE $12 million in the first year, Reiner said.

This will also make Welch happy, since it will help him retire with GE still the nation’s most profitable industrial company. Among the Fortune 500 last year, GE’s earnings--what it had left over after it paid every single bill--totaled $10.7 billion.

And that was when Welch’s Internet strategy was just taking shape.