Alcoa's IT Continuous Improvement Journey

In the various conferences I was at the week, the best presentation I listened to was by the CIO of Alcoa, Bill O'Rourke.

I had heard Alcoa present at a Hackett benchmarking conference in 1996. They have continued to benchmark every 3 years, and it was great to see how they have evolved to the first quartile in both Finance and IT benchmarks. The other companies in the benchmarks are not slouches - they are peer Fortune 500 companies who continue to evolve themselves.

They only spend 1.29% of revenues on IT and credited among other things:

• elimination of over 1,900 applications - from 44 procurement systems to 1, 40 ledgers to 1 (Oracle is the enterprise app, though Bill specifically said they could have done just as well with SAP or another global ERP platform)
• consolidation down from 50+ data centers to one
• doubled delivery of business services (not just IT) from low cost locations (mostly India)

What I particularly liked was so he said there was another "2/3rd of value" still to be captured from better IT around supplier collaboration and management, constraint based planning across plants and better integration across the supply chain. He is also pushing for best practices I have written about before such as more shared services from his vendors (I have called it "empty calories" in offshore spend), and moving from low cost countries to low cost cities. The journey continues.

He told the audience of CFOs to not forget all the cool new stuff coming out of tech markets. At lunch I asked him what he thought was cool - and he mentioned telepresence and cloud computing among others.  

And how does his CFO react to emerging technology? "Loves it" was the response. Sounds like a first quartile CFO/CIO relationship....

Update: another perspective from Francine McKenna

Comments

[Simon G]

I would have liked to ask him what the process is for a subsidiary in a small country, like S.Africa, to implement a local system to address a country-specific issue. Sounds like everything is handle centrally and therefore bureaucratised

[vinnie mirchandani]

Simon, will forward your question - but that is an inherent tradeoff if you want economies of scale and standardization - and we are talking about basic AP, AR, and other transaction processing activities in the shared service areas, not analytics or higher value stuff.

[Bill O'Rourke - as emailed to vinnie mirchandani]

Response to Simon comment above

"I like the question posed by your South African reader. We learned a lot of lessons on the Shared Services journey at Alcoa. One lesson was that if a process, system, issue or situation was purely local - it should be handled locally. That being said, there were a lot of local managers that tried to characterize a lot of issues as "local" when indeed they were not. And, there were a lot of Shared Services Managers who tried to characterize an issue as Global - when indeed it was not. So the only real issue is to identify what is truly local and what is not.
Some of my favorite arguments into what is and is not local are in the procurement area. Some Procurement Managers want to characterize everything as being a global commodity. Imagine buying lumber, snow removal, janitorial services, gardening - on a global basis? It would never work. Likewise, I've heard local buyers claim that they could negotiate metal supply cheaper on a local contract - that should never be true.
But, if the issue is purely local, a corporation needs to identify that and not try to spend the time, money and effort to pretend that there are synergies in managing it globally. We have a lot of rules - but I like to think that "apply judgment" is implied in all of them."

[Ravi Ramakrishnan]

You often refer to HP IT transformation, so I thought I will quickly compare Alcoa using HP's publicly available data:

- IT spending 2.11B, that would be approx 1.9%
- Elimination of 3500 apps
- 85 data centers to 6 [incl. redundancy]
- 84 procurement systems to 5

Would be interesting to see Alcoa's IT workforce reduction numbers and reduction in annual energy consumption.

[Bill O'Rourke - as emailed to Vinnie Mirchandani]

Thanks for your note.
I think the comparison between HP and Alcoa is interesting and the results are directionally similar, however we have to remember that Alcoa is basically a mining and metals company. Our IT spend should be lower than that of a lot of other industries (banking, health care insurance, transportation & logistics, telecommunications, etc.)
I had the opportunity on Wednesday evening of this week to be with Mark Hurd in Pittsburgh with other CIOs from this area. Mark recounted the HP transformation story. Although I am familiar with the story I still find it fascinating and I admire the results that HP achieved. The HP transformation is most impressive because it drove the ultimate in corporate results - earnings per share - from just over $1.00/share to about $3.60 in about four years. Holding the cost structure of the corporation "level" through that transformation was a stellar achievement. This is not easy or automatic, it's hard, hard work. These results can only be achieved through enlightened, driven, passionate leadership and dedicated employees. Like Robert Townsend's turnaround of Avis in the 1960's, and Jack Welch's performance at GE in the 80s and 90s, the HP transformation is now being hurd in all the B schools in the World.
Alcoa was following the lead of the "best" corporations through our own IT transformation during this same time (2004-2008), and HP was one of the "best" that we were following. Our number of Alcoa IT employees shifted from insourced to outsourced (from 30% to 66%), and from high cost country to low cost country (from 18% to 53%), but the total number (if you count all the contractors) fell very little (only about 5%).
Our total energy usage fell through the consolidation of data centers, and we continue to focus on reducing our IT energy requirements, making server energy efficiency a critically important criteria in our purchases of that hardware. (At Alcoa energy is a critical component of making aluminum, so our employees are keenly and constantly focused on energy management.)