The hundreds of billions of dollars handled by the many manufacturing, investment and asset management teams under the General Motors umbrella are subject to extensive outsourcing programmes. Indeed the company has been a pioneer in adopting the practice, being one of the first multibillion-dollar corporations to see the value in splitting off functions from its main parent body.
The giant US services firm Electronic Data Systems (EDS) was owned by GM between 1984 and 1996, an early example of lateral thinking in business process management. By 2006, GM had expanded its outsourcing strategy to a point where it had several hundred contracts with companies including Capgemini to conduct global purchasing and supply chain work, sales and marketing and business services. This was an unmanageable number and the company decided to consolidate its resources into fewer providers.
General Motors Asset Management (GMAM), meanwhile, has US$170bn in assets under management including private equity funds, funds of funds, real estate and US equity accounts. In a deal signed earlier this year the company outsourced a number of back office functions to SS&C Technologies, to cover around US$20bn of GMAM’s subsidiary General Motors Investment Management Corporation (GMIMCo)’s investment portfolio, including portfolio accounting, trade processing, custodian reconciliation and reporting services.
According to Michael Cloherty, deputy chief operating officer for GMAM, the rationale behind the move was to limit ‘key man’ risk and standardise processes, moving away from the ‘customised’ approach of having custodians on-site (some of them full-time). “We wanted to move towards a platform that is scaleable and portable so that we can unwind as much customisation as we can,” he told Operations Management publication. Having standardised processes in 80% to 90% of operations should mean that a new employee could come in and learn the firm’s processes in good time.
GMAM uses more than 100 external managers for more than 30 plans and employs more than 120 third-party vendors for functions, all of them part of an outsourcing programme in which they are reviewed twice a year.
In the case of SS&C taking on GMIMCo’s back office functions, the asset management company aims to gain greater focus on “core activities including pension asset investment, alternative investments, liability duration management and related client servicing. “We believe the middle and back office outsource services market was mature enough for us to take the step to streamline our operational paradigm,” said Michael Cloherty at GMIMCo. “What impressed us most about SS&C was its long-term commitment to technology solutions as an outsourcing provider, its strategic commitment to technology solutions and the experience of its industry-focused service team.”
At SS&C, chairman and CEO Bill Stone argues that: “We are seeing the trend towards asset management firms wanting to focus on what they do best for clients while needing a sustainable solution that allows them to grow and launch new funds fairly quickly into the market. Outsourcing back office functions removes distractions and enables money managers to focus on making investment decisions.”
General Motors’ pension’s liabilities have been a huge liability for the company in recent years, helping to drag its profitability down and make it one of the biggest casualties of the 2000s so far. In Q2 of 2008 the company posted a loss of US$15.5bn, one of the worst quarterly losses in the company’s history.
Although this loss was due more to market conditions, including a slumping economy, high petrol costs, declining truck and SUV values and employee strikes, the underlying pensions black hole has meant that GM has little to fall back on in troubled times. The company has announced that it is laying off between 15% and 20% of its salaried employees in the US and Canada.
With so many hundreds of thousands of current and former employees depending on GM’s asset management team for their current and future financial health, the responsibility on outsourcing partners to keep this US$170bn pot in good shape is tremendous. “I think GM will get through this, but it’s going to be a very difficult time for the company,” says Gary Chaison, industrial relations professor at Clark University in Worcester, Mass. “They fooled themselves a few years ago into thinking this was just an adjustment period, when evidence has shown a major restructuring was needed.”
GM as a corporation has shown an eagerness to embrace outsourcing across many aspects of its operations, sometimes taking too many contracts and at others becoming annoyed when two large contractors merge. For example, when Hewlett-Packard cut a deal to acquire GM’s former subsidiary Electronic Data Systems for US$13bn this summer, it meant that two of GM’s outsourcing partners would become one. Analyst Bob Djurdjevic at Annex Research points out that “GM’s unhappiness with putting all its eggs in one basket goes back five years,” and says the corporation “cannot be happy” at the news. More outsourcing contracts to other partners may be in prospect as the drive to cut costs and minimise risk continues.