Jack Welch's Encore
It started out simply enough. For years, General ElectricCo. sold CAT scanners, magnetic resonance imagers, and other medical imaging equipment to the 300-plus hospitals run by health-care giant Columbia/HCA Healthcare Corp. Then in March, 1995, GE persuaded Columbia to let it service all of the chain's imaging equipment, including that made by GE's rivals. And early this year, it added managing virtually all medical supplies to the deal--most of them product lines GE isn't even in.
But the piece de resistance was still to come. As the new contract evolved, Columbia executives invited a team of GE managers to help improve the way they run hospitals. GE is now providing Columbia with a big dose of its well-known management skills. From GE's fabled "workouts" to seminars on supply-chain management and employee training, GE execs are working with Columbia to boost productivity.
For Columbia, which has saved tens of millions of dollars, it was medicine well worth swallowing. But for GE, the benefits go well beyond added revenue. The open-ended relationship is a smart gambit to gain a greater lock on one of its biggest customers--and a sign of a profound shift now gaining steam at the world's most successful conglomerate. As GE faces slow domestic growth and cutthroat pricing abroad for its big-ticket manufactured items, Chairman and CEO John F. Welch is again transforming the global giant.
GOLD STANDARD. Call it Jack Welch's Third Revolution. Since the hypercompetitive Welch took the reins at GE 15 years ago, he has relentlessly reshaped this icon of the American economy. Through the 1980s, Welch barnstormed through GE shutting factories, paring payrolls, and hacking mercilessly at its lackluster old-line units. Welch's tough tactics presaged much of the reengineering that followed across Corporate America. But he was hardly done. At the businesses he kept, Welch pushed his managers to become ever more productive. Inventories were trimmed, bureaucracies dismantled, and inefficiencies attacked with a vengeance.
Today, Welch oversees a vastly more competitive company than the one he took over. And Welch himself has become the gold standard against which other CEOs are measured. With its stock up 86%, to 95, since early 1995, GE has become the most valuable company on the globe, with a total market capitalization of $157 billion. And with earnings expected to hit $7.4 billion this year, GE is now poised to become America's most profitable company.
But Welch isn't resting on his laurels. Just 15 months after undergoing triple bypass surgery--and four years from his expected retirement--he's turning up the heat again. The goal: to remake GE into what may be the world's only $70 billion growth company. In what could well be Welch's final legacy, the 60-year-old executive is hard at work assuring that GE builds on the strengths it has gained in his reign.
Over the last year, Welch has launched two huge company-wide initiatives aimed at revving GE's growth up to a steady double-digit clip. Early this year, he announced a drive to boost GE's quality that could one day yield billions in added earnings. But perhaps most surprising from one of America's premier manufacturers is a push launched roughly 12 months ago to bolster revenues by pushing GE ever deeper into services. Like everything Welch does, the effort is being closely watched--this time--as a pattern for the refashioning of an industrial company in a postindustrial economy.
In businesses as far afield as health care and utilities, Welch foresees tremendous growth providing sophisticated services that spring from GE's core industrial strengths. In a world without borders, Welch is telling his troops, GE can no longer prosper on manufactured goods alone. "Our job is to sell more than just the box," he says.
To sell more than the box, GE executives have hatched plans over the past year to do everything from helping utilities run power plants more efficiently to running engine service shops for airlines. GE even wants to set up and run corporate computer networks. Says Welch simply: "We're in the services business to expand our pie."
HIGH OCTANE. In fact, with revenue growth slowing in its traditional industrial units, the manufactured products that GE has long made have increasingly come to resemble the classic loss leader: They just get the customer in the door. And a big part of the service GE is selling is itself. Flaunting its skills at boosting efficiencies and squeezing costs, GE is increasingly positioning itself as a sort of consultant. "The question is can we create a business helping customers take costs from their operations?" says John M. Trani, CEO of GE Medical Systems. "It's a question mark now, but [potentially] an awful lot of money." To customers struggling to cut their own costs and boost efficiency, GE's knowhow is a pretty seductive inducement--one few rivals can match. "They've become part of our team," enthuses Columbia/HCA's CFO Sam Greco.
For Welch, the thrust into services represents the culmination of a long career at the giant conglomerate. The son of a Boston & Maine Railroad conductor and a housewife, Welch began as a chemical engineer. But his scrappy competitiveness moved him quickly up the ranks. In 1981, at 45, he was CEO.
In his tenure at the helm, Welch has thoroughly dominated the company. So when he underwent the surgery in May, 1995, it immediately raised questions about who would replace him. But today, he seems fitter than most men his age. Welch walks five miles on a treadmill most mornings, and his grueling travel schedule regularly takes him to Europe and Asia. "I feel great," he says.
An intensely private man, Welch refuses to speak of his illness or succession. He returned to work full-time after Labor Day, 1995. And those who work closely with him say that, if anything, he appears to have more energy than ever. "He's about 120%," says Walter Wriston, the former Citibank chairman who served as a GE director for three decades before retiring in 1993. "I think he's actually better than before." Indeed, inside the company, managers joke that Welch's furious pace is likely to give them, not him, the next heart attack.
Welch sits on no outside corporate boards and devotes virtually all his energy to running GE. Living quietly with his second wife Jane--he has four adult children from his first marriage--Welch has a house across the street from the Country Club of Fairfield, the better to indulge his biggest passion next to running GE: golf. He and his wife, a former mergers-and-acquisitions lawyer, also frequently spend spare time golfing at their second home on Nantucket. And since his operation, company officials note pointedly, Welch's game is stronger than ever. This year, he broke 70 for the first time.
Yet if Welch refuses to talk about the transition ahead, he is clearly preparing for the home stretch. Although GE is one of America's most competitive companies, its revenues grew an average of around 5% a year between 1990 and 1994. Sure, GE boasted a 17% revenue hike in 1995, and earnings rose 11%, to $6.6 billion. But few expect that one-time spike to be repeated, coming as it did largely because of big acquisitions, a booming economy, and a turnaround at NBC. Still, Welch argues GE can do far better than in the early 1990s: He's aiming for steady growth upwards of 10%.
This year, anyway, he looks well on his way to delivering. For 1996, analysts expect sales to hit $78 billion, an 11.4% rise. Even better, profits should jump 12.1%, to $7.4 billion. To keep up the pace, Welch is pushing forward on three fronts. His early 1990s push into global markets is already yielding huge dividends. International revenues soared 34% last year, to $27 billion.
Down the road, Welch is also counting on big gains from a multiyear program to boost quality launched early this year. From installing a gas turbine at a power plant to quickly answering a service call for a faulty washing machine, Welch wants GE to become virtually flawless in all it does. GE is also applying its engineering mind-set to the far squishier notions of service productivity and business processes. That should allow GE to trim its working capital needs and boost productivity. If it succeeds, Welch's quality push could cut $7 billion to $10 billion from operating costs over several years.
But to fuel revenue growth, Welch is increasingly looking towards services. Of course, it's hardly a new arena for GE. Almost from the day Welch took the helm, he has preached the need to shift from manufacturing. "All I talked about was the drive to get into services," he recalls. Nearly 60% of GE's profits now comes from services--up from 16.4% in 1980. "I wish it were 80%," he says.
Much of that shift is the result of the stunning growth of GE Capital Services. The financial-services unit has grown sevenfold since 1985, from revenues of $3.8 billion to $26.5 billion today, while operating profits leapt from less than $500 million to nearly $3.5 billion. Today, GE Capital provides nearly a third of total operating profits of $11 billion. GE's move into broadcasting with its 1986 acquisition of NBC has also cut manufacturing's role. NBC's revenues have doubled to $4 billion, while earnings have hit $738 million.
Now Welch is moving to the next stage of his services drive. He's pushing managers in GE's core industrial units to grab a bigger share of related services. Reengineering guru Michael Hammer sees GE as a bellwether. "This is the next big wave in American industry," he says. "The product you sell is only one component of your business."
The new approach is needed because many of GE's manufacturing markets rumble along with single-digit growth. Moreover, as product life cycles shorten and technology becomes easy to emulate, companies end up with few real competitive advantages. With Welch seeking returns on capital of 15% to 20%, says Aircraft Engines services chief William Vareschi, "we have to participate in more of the food chain."
HUGE POTENTIAL. So far, many of GE's efforts are fledgling. But the potential is huge. Nicholas P. Heymann, a GE-watcher at NatWest Securities Corp., estimates that today GE brings in $7.8 billion--roughly 11% of its revenues--servicing its huge installed base of industrial equipment. By 2000, Heymann expects service revenues to more than double, to $18 billion. Moreover, margins typically run 50% higher on services than on product sales.
Of course, GE is far from alone. After watching its hardware margins shrink, IBM has aggressively moved into outsourcing in recent years. At Otis Elevator, two-thirds of its $5 billion revenues now comes from service and maintenance, since software-controlled elevators are far more reliable than older, electromechanical models. Xerox Corp. reorganized its Business Services unit in 1992 to chase the growing outsourcing market for corporate copy centers. And since winning the Malcolm Baldrige National Quality Award, Xerox has also been selling its quality-enhancement skills along with its products to customers such as Volvo and Amoco Corp.
Yet because of the size and scope of its operations, GE faces perhaps the biggest challenge. Insiders say the move got a big push a year ago, when a cadre of rising executives were named to develop services in many of the industrial units. At the same time, Welch asked Vice-Chairman Paolo Fresco to set up a Services Council through which top managers can exchange ideas.
A trip to the Milwaukee headquarters of GE Medical Systems, traditionally little more than a maker of high-tech imaging gear, offers a clear idea of where Welch wants GE to head. As with its multiyear deal with Columbia/HCA, servicing the products of rivals is already a key initiative. Altogether, services--including looking after GE's own huge installed base--account for 40% of Medical's $3.5 billion in revenues.
ULTIMATE PITCH. To spur double-digit growth, Thomas Dunham, Medical's head of services, is acquiring independent medical service shops. In February, GE Medical bought National Medical Diagnostics, a leading independent servicer of imaging equipment. Six months later, GE added a private equipment maintenance insurance company. The moves have rivals riled. "I am not sure you keep competition when you lock everybody else out," says Carl Reilly, vice-president of Philips Electronics' medical imaging unit.
Yet that's just the beginning. GE Medical spent $80 million building a state-of-the-art training center, complete with a TV studio, to develop educational programming. For fees ranging from $3,000 to $20,000, hospitals can tune in to live broadcasts on subjects such as proper mammography techniques. Dunham is also trying to use GE's own management expertise to help its customers better run their businesses. And then there's the ultimate sales pitch for hospitals that buy a certain amount of equipment and maintenance: Recently, the top brass at Medical Systems gave the executive team of a regional hospital chain a half-day management seminar on topics such as strategic planning, employee evaluations, and time management. "They probably got $100,000 to $200,000 worth of consulting," says Trani.
Even in the company's more tradition-bound units, similar change is under way. Ernest Gault, an engineer recently named to head a new global services unit at GE Power Systems, says the Services Council meetings have helped him realize the value of strategic acquisitions. Gault now expects 50% of his growth to come from acquisitions and joint ventures, moves he wouldn't have considered a year ago. In May, 1995, GE signed a joint venture with the Milan-based power company Societa Nordelettrica. The pair will offer utility maintenance and operation services throughout Europe.
Back in the U.S., Gault is also aggressively chasing what he foresees as a $1 billion market managing power plants for independent power producers and coordinating fuel purchasing for deregulated utilities. In one typical deal, GE is running a 500-megawatt gas-fired power plant for Ocean States Power in Rhode Island. Of course, many utilities and independent energy companies also see power plant management as a big growth opportunity. One rival argues that, in the U.S. at least, few utilities will want to buy equipment and services in a single package that may make pricing hard to judge. "You can question whether it will be that competitive," he says.
At GE's Cincinnati-based Aircraft Engines, Vareschi also now sees servicing engines as more of a growth business than making new ones. He envisions more deals like the 10-year, $2.3 billion contract GE signed with British Airways PLC in March under which GE will now do 85% of the engine maintenance work on BA's entire fleet--including engines made by rivals Rolls-Royce PLC and Pratt & Whitney.
Today, GE is busy transforming the carrier's maintenance practices. It's moving BA to a just-in-time inventory system for parts, and instituting self-directed teams and other advanced management practices from its own plants. David J. Kilonback, who oversees the deal for BA, says the shift saved the carrier money and management time, in addition to speeding engine turnaround. Building on the BA deal, GE inked a $1 billion, multiyear contract in September to service USAir Inc.'s GE engines. And to broaden its global base, GE acquired Celma, a Brazilian repair shop with about $140 million in revenues.
GE's moves haven't gone unnoticed by rivals. Pratt & Whitney has also begun promoting its servicing capabilities for its own engines, although it lags well behind GE. And Rolls-Royce--which has built a $300 million servicing unit since 1993--recently formed a joint venture in Hong Kong to do servicing for Asian-Pacific carriers.
Managers throughout GE's industrial units are developing similar new markets. Executives at Transportation also recently signed a deal for roughly $550 million to sell and service 150 new locomotives for Burlington Northern Santa Fe Corp. And they've formed a joint venture with electronics specialist Harris Corp. to design and sell global-positioning systems similar to those used in air-traffic control. In a pilot project, the GE/Harris system has enabled the railroads to run twice as many trains over the same length of track.
Much of Welch's new services drive has been geared toward revving up GE's industrial units. Yet even within GE Capital there is a new aggressiveness. "You can't make money selling money anymore," says GE Capital CEO Gary Wendt. By far the biggest sign of GE Capital's new turn is its rapid build-up of a $5 billion global computer outsourcing business. Although GE has long financed computer purchases and run help desks for corporate clients, it now wants to compete head-on with IBM and EDS for multimillion-dollar deals running computer networks for others. In May, it bought Ameridata Technologies Inc., a $2 billion Stamford (Conn.) company that sells PCs to corporate buyers. In July, it added CompuNet, a fast-growing German outsourcer.
REGULATORY HACKLES. So far, rivals seem more dismissive than threatened. "Moving from being a product company to a service company is much more difficult than some of these folks think," sniffs one EDS exec. Adds Perot Systems CEO James A. Cannavino: "We haven't bumped into them yet."
But as corporate customers start turning to GE, they might soon. In a 1995 deal that GE execs hope will prove typical, GE and Andersen Consulting--a software-services leader--joined forces to beat major competitors for a 10-year, $350-million contract to manage LTV Corp.'s mainframe-based computer needs.
Still, GE's moves to get more deeply involved in its customers' operations have raised regulatory hackles. In August, the Justice Dept. charged GE with placing illegal restrictions on hospitals that use its remote diagnostic software for CAT scans. GE doesn't let customers use its software to service rivals' equipment. This has raised fears among independent service providers. "Customers want choices," says Claudia Betzner, executive director of the Independent Service Network, a trade group. GE says the suit is "meritless."
Yet the greatest challenge facing Welch in redirecting GE may well be human. Service was always a backwater in a company with a rich engineering heritage. As the hot shots from services gain influence, the shift has brought tension. "It's been hard for the old equipment businesses, where building the latest high-efficiency this and high-efficiency that was the route to epaulets on your shoulder," says Welch.
With customers unwilling to pay for engineering perfection, there's no going back. And as the differences among GE units blur and old-line manufacturing businesses begin to more closely resemble its fast-moving services units, Welch is pushing all of GE to take on a more entrepreneurial mind-set. That has clearly been his aim since he began reconfiguring the company 15 years ago. Welch's GE is still a work in progress, but there is no doubting its direction. Welch will leave behind a company that remains synonymous with the ever-changing American economy.