Is it the destiny of every firm to become an IT Vendor?

The nation's top automaker announced that it would move into the worlds of online mortgages, cellular services and information delivery. And, it would sell its vehicle-based Internet technology to other carmakers.

As is the case with every computer-oriented publicity campaign, the rhetoric and new profit-promising visions permeate everything that GM has so far generated about its plans to also become a "new economy" company instead of continuing to be identified only as an "old economy" maker of vehicles. The idea is to "...grow profits, expand relationships, drive up revenues and the stock market price..." with ventures such as selling customers GPS (Global Positioning System) and cellular technology services. It sounds good and enticing, but I'd like to understand better how well GM is doing in the automobile business it has known for 70 years before it shifts into the volatile world of the information marketplace.

My first take on this was from the shareholders' standpoint. How well has GM managed its shareholder equity? It's discouraging. During a period of recent unprecedented prosperity and growth in the values of giant U.S. firms, GM's shareholder equity has declined from $23.3 billion in 1995 to $15.1 billion in 1998, recovering to only $20.6 billion last year. That's why GM may be pursuing the information business: It needs more profits to boost shareholder value.

With last year's revenues of $177 billion, it would take an enormous increase in revenues and profits for GM's information services business to make up the difference between its current financial results and the spectacular profit growth that some of the leading information services firms have shown. For such expectations to be realistic look at other indicators of GM's demonstrated superiority.

How well does GM manage its information expenditures? One way to tell is to examine how much information overhead (e.g., research and development; and sales, general and administrative expense) is needed to coordinate its operations that produce and deliver what the customers are buying as tangible products, or, the cost of goods sold. The results are discouraging. As the table shows, since 1996, the ratio of information costs to the cost of goods sold has been creeping up from 11.5% to 14.9% in the last three years.

The steady rise in information costs, which can be traced back to 1990, raises doubts about GM's claims that it has made gains from imaginative uses of IT, from e-commerce and from improved utilization of computers.

To comprehend the significance of the 3.4% rise in the overhead ratio, one must realize that GM's ratio of net profits to all its costs is only 5%. Consequently, for GM's entry into the information services business to generate better profitability, it may have to first overcome its steadily rising internal information costs. That would be necessary before it could hope to reap significant profit gains in a marketplace already dominated by highly efficient and entrenched competitors.

Implications

CIOs are feeling an urge to extend their influence from just tending internal information operations to becoming agents of a "strategic" repositioning of their firms. There's no clear connection between adding information value to existing operations and further diversifying a company into the information business. My advice to ambitious CIOs: Don't divert significant energies and resources into risky marketing ventures unless the fundamentals of the existing operations are already well under control.