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Covisint's last chance

Covisint's last chance

Harold Kutner is Covisint LLC's last chance. That's because this General Motors Corp. insider -- its purchasing chief until he retired in 2001 -- was also its first chance, helping to form the auto industry e-commerce exchange with his bitter rivals at Ford Motor Co. and DaimlerChrysler AG. Both of those companies, like GM, had begun building their own public exchanges to conquer the industry before deciding to throw in their lot together with Covisint. Wall Street analysts valued Covisint at US$5 billion at its formation in early 2000, at the height of the Internet bubble. These days, however, it's not clear that the auto industry needs even one public exchange, much less three.

Seething enmity and mistrust between vehicle manufacturers and their suppliers aside, Covisint (pronounced CO-viss-int) has not developed a product or service that has caused either group to completely abandon its old ways of doing business. Kutner was lured out of a brief retirement last June to find a winning path before the bureaucracies within the Big Three automakers and the sceptical supplier community write off the exchange altogether.

It's ironic that the gravely voiced, plain-spoken Kutner, who spent 10 years beating down suppliers on prices for tires, steering systems and the like, is now trying to sell them on a new-economy vision as Covisint's CEO. But if suppliers don't necessarily like him, they do respect him. He knows their business better than the dotcom types who were steering Covisint. He may also be able to twist some arms inside the Big Three, which have shown a reluctance to drop their own e-commerce ambitions. "He is a leader, and he is respected in the Big Three," says Anjan Chatterjee, North American director of the automotive and assembly practice in the Detroit office of consultancy McKinsey & Co. "So if you define his charter as forging consensus -- agreeing to define what is sharable and should be shared in the interests of the entire community of OEMs as well as suppliers -- I think he will be heard."

Whether Kutner can get suppliers to do more than listen is still a very open question. He claims that more than 11,000 auto parts makers have used Covisint in some fashion, but they provide only 10 percent to 15 percent of the exchange's revenue -- which means they are dabbling. (Car makers account for the other 85 percent to 90 percent of revenue.) Kutner will have to do without any more subsidies from the Big Three, which each own nearly a third of the exchange and have put a total of $US200 million into it so far but are now struggling themselves. He slashed staff and expenses and says Covisint will be "cash-flow positive" by the end of 2002. He knows the Big Three are looking for more than that, however, and he promises to make Covisint the electronic hub of the auto industry for both manufacturers and suppliers. The odds against success are great, but Covisint is Kutner's baby, and he refuses to give up.

CIO: How has the technology vision of Covisint changed over time?

Harold Kutner: When we started, the vision was, How can we connect with our supply base and go to market with a process that doesn't cost more than the one we already had? I think that vision came true, but the vision expanded when we started thinking that the [biggest direct suppliers to the auto manufacturers, the tier-ones,] would be connected to various tiers of their [own] supply base [through Covisint]. So now you move from just a procurement-type process to an industry-connected-type process.

And yet we hear about how suppliers have resisted using Covisint. What are the primary reasons for that?

Well, for one thing suppliers feel this is a manufacturer-owned company. So there is a little bit of lack of trust, where they think if they [make purchases through] Covisint that the car companies would find out the prices they're paying -- and if they save a lot of money, car companies are going to go after them [for price breaks]. Now obviously, no company with any integrity would share pricing, but there is that feeling of lack of trust out there.

The second thing is that OEMs have run thousands of auctions with the suppliers. Some suppliers have won business through them, and some have lost business. So when you talk about Covisint, there is a little bit of a bad taste because people think of auctions, and they think of the way the car companies have used them to drive cost out of their materials. And then there's just an attitude of, We'll wait and see. Is this thing really going to be real? Are the car guys really going to demand that we connect up so we can do business faster and better?

What's your plan for dealing with each of those issues?

We've brought people onto the Covisint board from [big suppliers like] Delphi, Intier, Johnson Controls, Lear and Magna International. We're spending more time with the CEOs of the supplier community. We know these people, and we're opening doors because of the historical relationships we have. Once people get a chance to really see our products, they're very interested; they're positive.

The other thing that we're doing is trying to create industry standard products. In this industry, every car company has a different set of rules and regulations for every business process that they do. One of the products that we successfully made an industry standard in North America is what we call our Advanced Quality Planning product. Part of the feedback that we got from the supply community is that if [the Big Three] can communise, they can take some cost out of all the business processes and systems. We've got products that respond to the suppliers' needs in common so that they don't have to have different systems for their reporting to each car company.

One road to standardisation would be the adoption of these technologies inside the Big Three. Yet there seem to be parallel efforts going on inside the Big Three and Covisint to build similar technology platforms.

Some of this technology was decided on before Covisint. For example, we've got a great product called Quote Manager. It's a Covisint product, but it had a tremendous design influence from GM. On the other hand, before Covisint started designing its own products in-house, Ford developed its own quote manager. Similar to that, General Motors has got the best supplier communication portal in the world, called GM Supply Power, and yet Covisint is doing portals and Ford, DaimlerChrysler and others are using the Covisint portal. But certainly if somebody's got a product equal to ours, we wouldn't expect them to use [our product], especially if they developed theirs years before Covisint was an operating company.

If you're saying that it's not necessary for everybody to be using the same software, how then do you get that standardisation across the industry?

There are ways of having tie-ins to various legacy systems. For example, General Motors goes into Covisint through its Supply Power portal, and when GM connects up with its suppliers using the auction product it's the same for all the suppliers, be it if they go through a Covisint portal or a General Motors Supply Power portal. So the idea is, we're developing software, and if someone already has [similar software], we're trying to put a product in there to connect up to the suppliers and the existing system at the car or truck company.

I've heard that Covisint's revenue is primarily from the reverse auctions, which is a technology that is fairly easy to duplicate. What technology is Covisint going to offer that really differentiates it and gives suppliers and the Big Three value that you can't get anywhere else?

If you think about our competition that just does auctions, the thing that we offer is not just the auction -- we offer the connectivity to their major customers. That's what we're trying to drive for.

What is the killer app for Covisint, either now or in the future?

Well, I'll tell you this. You'll see the product coming, but I don't think I want to go public with it and tell everybody else what we're doing. Our portfolio process is not stagnant.

You were the head of GM's purchasing for years. In that role you demanded price cuts from suppliers, and you had a reputation for being a hard-nosed guy. Why should suppliers trust you in this new role?

If you really talk to people I did business with, I think you'll find out that people did trust me. I think I helped a lot of suppliers survive. I think my reputation was for being tough but fair, and when I gave my word it was delivered. I think they are going to do business with us because of that reputation. [The car companies] are putting a lot of faith in the fact that this company can do what it is intended to do, and I think that's a strong message to the supply community.

It's said that no one cares about a company as deeply as the founder does. You called Ford and DaimlerChrysler and said, Let's do this together instead of separately. Are you going to let this fail?

No. I addressed every person in [Covisint] the first day and said, I haven't had a career of failures. I'm proud of that. I have a very strong work ethic. I think I understand the vision of this company, and I intend to win with this company. No matter what it takes, we're going to win. I think the value proposition is there, so we will win.

What would be your advice to other industries starting or in the midst of building their public exchanges?

We spent a lot of time developing products from the voice of the car manufacturer and didn't spend enough time getting input from the suppliers. I think you've got to understand who your customer base is, and you need strong input relative to what products you are going to provide them, and have a tracking mechanism to make sure that the techies don't deviate from that voice of the customer. I think if you do that, you'll be successful.

Can Kutner cut it? Tell Executive Editor Christopher Koch what you think. Write him at ckoch@cio.com.

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