Alcoa's Billion-Dollar Software Savings

Aluminum may be a soft metal, but it's a hard business.

Demand has been hurt by the global economy, bloated inventories and falling prices. And the market is not expected to improve any time soon, as many big buyers—particularly airplane manufacturers and construction firms—continue to wrestle with problems in their own industries.

Market leader Alcoa, however, is increasingly counting on an aggressive cost-cutting campaign—one that relies on a software standardization effort begun in June 2000—to withstand the market's downward pressures.

Under the Enterprise Business Systems (EBS) software initiative, Alcoa is replacing most of its applications with a single Oracle software package that's designed to handle everything from financial management to order fulfillment to human resources. The EBS project is considered by some software analysts to be one of the more ambitious attempts by a Fortune 100 company to use a common set of software applications globally. At the beginning of the EBS initiative, Alcoa was running some 3,000 different software programs—from Ariba, Hyperion, PeopleSoft and Siebel, to name a few—on 1,400 servers in 510 locations.

Alcoa Chief Information Officer Rudolph Huber says employing a common applications set allows the company to more easily share knowledge, collect information, analyze business and financial performance, and improve internal processes—all of which adds up to lower operating and administrative costs.

Huber says EBS goes hand-in-hand with a companywide program initiated in January 2001 by Alcoa Chief Executive Alain Belda to reduce corporate costs by $1 billion by 2003. The company says it is on track to hit that goal.

Download a chart detailing Alcoa's financial progress. (Portable Document Format)

While Alcoa has shuttered some facilities and installed more efficient manufacturing equipment on its plant floors, EBS is one of the big reasons Alcoa is meeting its cost-reduction goals. Chief Financial Officer Richard Kelson calls EBS the "underpinning" of Alcoa's efficiency strategy.

using software to cut costs isn't just some alchemist's dream—it can work, but it's not easy. Alcoa has encountered numerous problems including project delays and cultural resistance. The most serious technical challenge, Huber says, was software stability. Alcoa brought in the Oracle software package—the 11i suite—about 2-1/2 years ago, when it was still showroom-new. And, like other companies that deployed the initial version of the package, Alcoa found itself slowed down by the software's bugginess.

Alcoa also ran into resistance from business-unit staffs reluctant to deviate from their usual processes and systems. "Individuals have to learn new ways and adjust to new processes," Huber says. "Change management is certainly something one can't underestimate." The company has an ongoing change-management program in place to bring the units along, but, Huber says, "it takes a lot of effort."

Alcoa's Obstacles

Despite the obstacles, Alcoa felt it needed to implement EBS to support operational improvements and minimize the impact of falling aluminum prices. Aluminum plunged from 76 cents a pound last year to around 60 cents a pound recently.

"If you can't control the price, the only thing you can control is your costs," Huber says.

Cost-cutting, in fact, is becoming ingrained in Alcoa's culture. CEO Belda's latest cost-reduction initiative comes on top of an earlier two-year, $1 billion cost-cutting program that was completed successfully in December 2000. While the earlier drive depended on business managers constantly striving to find ways to boost productivity and eliminate waste, much of the responsibility for this second round of cuts falls on the shoulders of Huber and his team of technology specialists.

Prior to the implementation of EBS, the various units of Alcoa's manufacturing operations, such as the extrusion group producing car bodies and the forged-products unit making wheels, all dealt with customers independently. The two groups could both be working for Ford, for example, with little knowledge of the other's business dealings with the carmaker.

While information from Alcoa's various businesses could be tied together with data-integration tools, Huber says a software platform with common definitions of data allows information to be shared quickly and easily with all of Alcoa's business managers. This cuts down on redundancy and eliminates waste. "By having common data, we can cut and slice data to understand profitability by customer, by product, by market—which we couldn't do if we always had different systems and different data," Huber says.

Some of The reductions resulting from Alcoa's streamlining are hard to pin down. But CFO Kelson says a lot of the savings drop to the selling, general and administrative expense line on Alcoa's income statement. SG&A was $277 million in the second quarter, down from $326 million last year.

"Where you really save is in the collapsing of back-office functionality—multiple divisions duplicating financial functions, purchasing functions, order-management functions," says Lawrence Crooks, a managing director at KPMG Consulting, which is helping Alcoa implement EBS.

Alcoa is deploying EBS in four phases. The first two phases address finance and purchasing, and are scheduled to be completed by the beginning of 2003. The goal is to allow business units to collectively gather and exchange financial and purchasing information so those functions can act as shared services. In the purchasing area, this will allow Alcoa to consolidate buying operations, eliminate transaction costs, and trim the number of people on the purchasing staff.

The other two phases, which the company hopes to have completed by the end of next year, cover human resources and order-to-cash, which includes everything from order management to process manufacturing. Here, the company says using a common set of applications—particularly in order management and fulfillment—will allow it to better collect and analyze data. This, in turn, will give Alcoa the ability to better manage inventories, assets, and plant maintenance, resulting in lower operating costs and headcount.

Still, cutting jobs is not the fundamental purpose of EBS. "Some jobs will be eliminated, but the goal is to be able to move people into new jobs—more analytical jobs," says Kevin Horner, Alcoa's EBS project manager. Alcoa, he says, "wants to reinvest the resources."

The Standardization Downside

Despite the potential benefits, there's a downside to standardizing on a single software platform, according to Andrew Bartels, a research leader at Giga Information Group. He says a corporation gives up a degree of flexibility by going with one suite and runs the very real risk of being stuck with one or more pieces of second-tier software. "It's hard for any vendor to be best-of-breed with everything," he says.

Other risks include the possibility that a vendor may be slow to develop a needed application, or that its software products may be deficient in some area. "These are all concerns that need to be factored into these decisions," he says. And, indeed, Alcoa's software savings come at a price.

Alcoa looked at other suites, including one from SAP, before deciding to go with 11i from Oracle. Huber says both vendors' products were strong, but there was already a sprinkling of Oracle database and applications software through the organization. "Since we had some experience with Oracle, that was probably the deciding vote," Huber says.

But Alcoa ran into problems as it rolled out Oracle 11i.

"There were defects with the product," admits Gary Pola, a strategic account manager with Oracle Consulting, who has been working with Alcoa. Those involved with the EBS project declined to detail the 11i faults Alcoa encountered, although Pola did say the glitches experienced by the aluminum maker were similar to those faced by other early Oracle 11i customers. When it was first released, 11i buyers found the package to be plagued by bugs. A study last year by Forrester Research found more than 5,000 separate problems in the suite, with some applications, such as order management, being especially problematic. Other early users complained some modules were light on features. Oracle today maintains it has eliminated the bugs and bolstered the suite's modules.

Still, people involved in the Alcoa project agree the Oracle problems held the project back a couple of weeks. While not an extensive delay, Alcoa has a rapid rollout schedule and the Oracle setback put pressure on the team.

"We spent a lot of time and effort getting through that process," Crooks says of the effort made by KPMG, Alcoa and Oracle to fix the problems.

While dealing with its technical difficulties, the company also had to address cultural issues surrounding the change.

To get broad buy-in, Alcoa set up a process that begins with each unit assessing itself, to see how ready it may be for a software switch. A change-management specialist is brought in to prepare the unit for the new software and procedures. And then pilot tests are run to make sure the operation runs smoothly on the new applications.

The information-technology group also is sensitive to business needs and, Huber says, will continue to support some non-Oracle applications that perform functions particularly well—including Hyperion's financial performance management software and Plumtree's Internet portal software.

Initiatives such as EBS are so difficult to pull off that it's rare for any corporate giant to standardize on just one software package, according to Jennifer Chew, an analyst with Forrester Research. In addition to the risks laid out by Giga's Bartels, Chew says it takes years for a global, multibillion-dollar company to implement software end-to-end. And, she says, there are any number of business variables—including shifts in corporate strategy, acquisitions, and market shocks—that could throw an enterprise software project off track.

In the end, when it comes to deploying a common software applications set, Chew says, "it's not unusual for a company to have it as a strategy, but it's very unusual for a company to put it into practice."

Another reason companies may shy away from these projects is the expense. Alcoa refused to say how much it spent, but Chew says a project as extensive as EBS—including software, support and training—could run more than $100 million.

Alcoa , however, expects a significant and long-lasting payback. As EBS project manager Horner points out, the real savings will come when the Oracle software is fully deployed across Alcoa at the end of next year. As promising as the EBS results have been to date, Horner says, "you'll see the major contributions of EBS in 2003-2004."

Alcoa Base Case

Headquarters: 201 Isabella St., Pittsburgh, PA 15212-5858

Phone: (412) 553-4545

Business: World's leading producer of aluminum

Chief Information Officer: Rudolph P. Huber

Financials in 2001: $22.9 billion in sales, $1.6 billion in operating income, $908 million in net income

Challenge: Implement common set of software applications in support of corporate cost-reduction program

Baseline Goals:

Cut $1 billion in costs by the end of 2003 Eliminate most of 3,000 corporate applications and establish global software standard, based on Oracle 11i suite, by end of 2003 Drive sales, general and administrative costs down from 2001 level of $1.3 Billion

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.