On April 4, 2008, Tata Consultancy Services (TCS), a leading global information technology services provider, announced it had signed a multi-year, multimillion dollar outsourcing contract to provide Chrysler LLC with a comprehensive set of information technology services. Was this a good move for Chrysler?
Tata Consultancy Services is a unit of the Tata Group, and a sister division to Tata Motors, a company that will compete in India – and potentially other parts of the world – with Chrysler.
Tata Motors recently purchased the Jaguar and Land Rover Brands from Ford Motor Company. One of TCS’s focus markets is the automotive industry. TCS provides services for products development, manufacturing, supply chain, and customer service support to the leading auto manufacturers and suppliers in North America, Europe, and Japan. More than 15 percent of TCS’s $4.3billion in annual revenue came from services for auto manufacturers.
A preliminary version of the agreement had been announced earlier in February. Tata agreed to take over Chrysler’s application maintenance and support services, particularly for Chrysler’s sales, marketing, product development, shared services, and after sales functions. In providing theses services, TCS will leverage its Global Network Delivery Model, a collaborative best-of-class framework of people, processes, and infrastructure that uses TCS’s tools, methodologies, and products to help customers reduce implementation time and realize business benefits.
The Global Network Delivery Model is considered a benchmark of excellence in software development. TCS has over 108.000 IT consultants in 47 countries, including the United States.
According to N. Chandrasekaran, TCS executive director and chief operating officer, “The expertise and in-depth knowledge of the automotive industry and Chrysler’s business, coupled with our ability to deliver certainty of results, will provide sustained value to Chrysler”.
Chrysler declined to disclose the cost of the contract, but Tata officials indicated it might be worth around $100 million. They did not indicate how long the contract runs. Jan Bertsch, Chrysler vice president and CIO, said that ‘This is really the next step in our continuous effort… to operate more efficiently and effectively… We do have the expectation of significant cost savings and that will allow future growth within this company.”
Bertsch declined to say exactly how much savings this outsourcing arrangement would produce. Dennis Greathouse, third vice president of United Auto Workers Local 412, sated that Chrysler cost estimators – employees with technical backgrounds who examine competitive price issues involved in parts work – believe ther jobs will eventually be taken over by Tata. Annual compensation for a cost estimator in the United Sates is around $70,000 to $80,000 per year. Greathouse said he was told that Tata could hire two to three people for the same price as one U.S. employee.
Chrysler’s IT workers questioned how outside firms could be as efficient as people who had been working on Chrysler systems for years. But Bertsch asserted that the change will improve the company’s IT operations. Chrysler’s new management had determined that the company was spending too much of its IT budget on core maintenance of systems and not enough in reinvesting in the business. Chrysler had about 2,100 people doing information systems work, of which 1,000 were full-time Chrysler employees and the rest supplemental workers on contract.
Bertsch said that about 200 people, 20 percent of the full-time employees, were scheduled to lose their jobs because of the new outsourcing arrangement. Detroit’s automakers have struggled during the past few years as rising fuel prices and a housing meltdown hammered sales of pickup trucks and SUVs. Chrysler lost $2,9 billion on operations and restructuring costs in 2007. The company was spun off as a privately held company in 2007 when the venture capital firm Cerberus Capital Management bought it from Daimler for nearly $7 billion. Since that time, four products have been eliminated, thousands of jobs have been cut, and new executives have been appointed.
Cerberus puts a premium on not being bound by old practices. Chrysler was the first of the Detroit Three automakers to pull back on auto leasing in the tight credit market. Cerberus is betting it can get the company back to the break-even point by fixing its operational problems
and cutting costs. According to Jim McTevia, managing member of McTevia & Associates consultants, “There are only a couple of things they can do to turn this company around, and in this economy they have to keep chipping away at expenses.”
Sources: Lawrence Walsh, “Tata Will Drive Chrysler’s IT”, Baseline Magazine, February 21, 2008; Patrick Thibodeau, “Chrysler Moves More IT Work to Offshore Giant Tata” , Computerworld, February 21, 2008; “Tata Scores Again with Chrysler TI Outsourcing”, Detroit Free Press, April 4, 2008; “ Tata Consultancy Services Wins Multi-Year Deal with Chrysler LLC”, PR Newswire, February 20, 2008. Case Study Questions: 1 – What management, organization, and technology issues should Chrysler have explored when deciding whether to outsource to TCS?
2 – What point should Chryler have addressed in its outsourcing contract with TCS? 3 – Was Tata Consultancy Services a good outsourcing choice for Chrysler? Why or why not? Explain your answer. MIS in Action: Explore the Tata Consultancy Services Web site and then answer the following questions: 1 – What kind of services does TCS offer its clients? 2 – Select one of the TCS offerings and describe how it could benefit Chrysler.