Aerospace & Engineering: Mergers Pose IT Challenge

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September 22, 1997

AEROSPACE & ENGINEERING:
Mergers Pose IT Challenge

A group of industry heavy-hitters imposes major demands on its IT units
By Andy Patrizio
IW 500 slug he past year in the aerospace industry can be summed up in just one word: consolidation. That, coupled with rapidly evolving technology, presented some intriguing new challenges for the industry's IS executives. In the past year, Raytheon and Hughes Aircraft announced merger plans, as did Northrop Grumman and Lockheed Martin. Also, Northrop acquired Logicon, a defense IT company in Torrance, Calif., for $740 million.
Boeing Co., already a giant in the sector, was the most acquisitive. The aircraft maker gobbled up Rockwell International's aerospace and defense unit in late 1996 for $3.1 billion, and acquired McDonnell Douglas, a competitor in the commercial airline business, in August. The $14 billion deal was almost scuttled by Airbus Industrie, the European commercial airline consortium, but the Federal Trade Commission let the deal go through, ruling that McDonnell Douglas was no longer a competitor in the airline business.
The companies resulting from these mergers are enormous. The combined Boeing-Rockwell-McDonnell Douglas will have about 225,000 employees, with estimated 1997 revenue of $48 billion. The Northrop- Lockheed marriage would create a combined company of 230,000 employees and annual sales of about $37 billion. The resulting integration-and consolidation-of their respective IT enterprises is daunting. (Research on the IW 500 aerospace companies was conducted prior to com pletion of the mergers, so the companies are listed separately in charts on the following pages.)
To operate on a global scale, Boeing is counting on distributed computing and the Internet to make China seem as close as one of its Seattle facilities. "Boeing's challenge is to design anywhere, build anywhere, support anywhere-anytime," says Terence Milholland, VP of IS and CIO for Boeing. "This must be achieved within a cyclical marketplace with customer and Boeing cost constraints." This makes IT issues like distributed computing, virtual collocation, long-term data management, and reliability, availability, and serviceability key issues. "Reengineering business processes without slowing down the business is a big IT challenge," he says.
However, Milholland says distributed computing hasn't yet reached maturity. "Like other technologies, it has been here for a while, and is still evolving," he says. "Things we had come to take for granted in the mainframe world are just not all there yet in the distributed world, such as reliability, scalability, and performance."
Tightening the budget is becoming a major concern for both defense and commercial aerospace companies. With Boeing signing deals with Continental and American airlines to supply hundreds of planes over a 20-year period, the company can't afford to let costs balloon down the road.
"They have priced their aircraft based on improvements in their cost structure," says Tassos Philippakos, senior VP and senior aerospace defense analyst for Moody's Investor Service in New York. "If those improvements don't happen, profit will be affected."
Consolidation hasn't been confined to the giants of the industry. Smaller companies that sell parts to the major firms have also been experiencing shakeouts and IT cost constraints. Eaton Semiconductor and Specialty Systems Group in Milwaukee has been in a "cost-containment mode" that has curbed spending on IT, says Jeff Smith, IT group leader at Eaton.
Eaton has three separate plants, each wit h its own staffs and IT systems, dedicated to the aerospace business. "We have to consolidate," Smith says. "If we don't share resources, the cost-effective strategy goes out the window."
Eaton's new challenge is to migrate from a defensive, survivalist mode to a more proactive one that uses technology to help drive down costs. It still has lots of old PCs running Windows 3.1. "We've been in cost-containment mode," says Smith. "Now it's, 'How do we get into a growth mentality?' We need an IT infrastructure that's flexible, cost-effective, and global."
Cost-cutting after a merger is even more important. Lockheed Martin, even before it merges with Northrop, is a global company with 60 business units in five sectors. This past year, it replaced 13 different E-mail systems and moved to a common E-mail backbone, Microsoft Exchange.
Most of the technology puzzles Lockheed has had to untangle in the past year involved legacy systems inherited from all of the mergers, says Joseph Cleveland, president of L ockheed Martin Enterprise Information Systems Co. in Orlando, Fla. "If you had a blank sheet of paper, things would be much easier," he says. "If we wanted to put in an E-mail system for 150,000 employees and they currently had none, putting in the new system is straightforward and it's an order of magnitude easier to move them to the new system."
To better manage its enormous infrastructure, Lockheed created an enterprise information systems unit after its merger with Martin Marietta in 1994. The goal was to serve as an outsourcer for Lockheed's IT needs. Each of the five companies in Lockheed Martin has its own CIO, who acts as the account manager and reports to unit president Cleveland. The units are served as an account by the EIS company. This lets the company keep a better grip on its overall IT needs than if it left buying decisions to each unit.
AlliedSignal is in the opposite situation. Its aerospace sector is a collection of 26 different companies, fused together by growth and acquisition, e ach with different invoices and billing cycles. That's because the corporate philosophy had been to give the divisions autonomy in their IT decisions.
"Everything about doing business with us was radically different from one business to the next," says Paul Hoedeman, CIO at AlliedSignal Aerospace, in Torrance, Calif. "The average customer dealt with eight locations, and we were driving them crazy." The company recently updated its systems so now clients can electronically order parts without requiring human intervention 70% to 80% of the time.
Like so many other types of businesses, aerospace companies are customers of one another while at the same time they're in competition with one another. For example, Northrop sells parts to Boeing for its commercial aircraft while it competes with Boeing for next-generation warplanes. This means companies are forced into a balancing act of dealing with one another as subcontractors while keeping an arm's length away.
"Aerospace is looking to implement c ommon integrated internal systems, simplify the IT infrastructure, and reduce costs, while at the same time staying well connected to customers, suppliers, and business partners," says Peter Janak, CIO at TRW Corp. in Cleveland. "That can be a real challenge, because a customer on one job is a competitor on another."
Online Commerce
Something that everyone seems to agree on is the role of the Internet and intranets. While the Internet is widely viewed as a good research and communications vehicle, it's the emerging intranets that have been far more important to aerospace companies this past year.
"The intercompany commerce and collaboration will continue to be a significant effort and challenge, and the Internet will play a definite role," says TRW's Janak. But the company is still cautious about how much computing it does over the Internet and what it transfers. "Using the public Internet is something we're approaching a bit cautiously," he says.
Bill Gauld, VP of information manageme nt at Textron Inc., a Providence, R.I., multi-industry company that counts aerospace as part of its business, agrees. "The two driving technologies for us are the Internet and intranet," Gauld says. "We no longer have to be as dependent on the paper documentation or long schedules for integrating systems. The ability to extract information and put it out as Web pages is so much easier than integrating applications to share information."
For AlliedSignal Aerospace, the Internet "isn't even a separate component, it's part of every project we do," says Hoedeman. "With almost everything we do, it's sort of assumed you will communicate by the Internet." Like Textron, AlliedSignal has made a large amount of paper documents available online.
The network computer also has support from aerospace's IT professionals. Most see it as an ideal alternative to the fat client in areas where a dedicated system for specific tasks is needed.
"We will see the network computer used effectively within specific workgroup s," says Lockheed's Cleveland. "What I need on my desk is a similar device to the PC with good graphics, but I don't need a lot of storage because the applications will be on multiple servers."
Aerospace CIOs say that their main online strategy has been building an internal intranet and using the Internet only for basic communications and research. But in the future, their use of the Internet will expand.
"The intranet and Internet will become a lot more pervasive in what we do in the process of connecting to customers," says Cleveland. "Already, we are designing internal systems, like electronic cataloging."
The goal over time is to expand what has been done internally to customers, who very often are also competitors. And if consolidation in the business continues, they may eventually become merger partners.
The number of defense industry mergers should drop off, mostly because there are so few companies left, but also because the government is getting leery of further consolidation, says Mo ody's analyst Philippakos. "The Department of Defense was in favor of consolidation in the beginning, but they feel they got as much as they wanted."
The next step will be megamergers on a global basis, Philippakos predicts. Defense companies in the United States and Britain could possibly partner, given the close ties between the two countries. "This is a global market," says Philippakos, "and to the extent you can reduce the financial risk, and at the same time enhance the market potential, it's a win-win situation."

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