How IT can drive business process reorganization: An interview with the CIO of Volkswagen

How IT can drive business process reorganization: An interview with the CIO of Volkswagen

Volkswagen chief information officer, Klaus Hardy Mühleck, has championed the CIO's role as the arbiter of business process and enablement.

Detlev Hoch and Jürgen Laartz

September 2006

At a time when many CIOs find themselves increasingly distanced from the executive suite, Volkswagen's CIO Klaus-Hardy Mühleck sits on the executive board and has responsibility for defining business processes throughout the company. In that capacity he has championed a new organizational IT structure to use resources more efficiently and effectively. Process integration officers work across business units to simplify the capabilities of entire business domains—for example, a PIO in the order-to-delivery unit evaluates processes from the customer order back through sales, manufacturing, and design. Throughout Mühleck's career, he has promoted the use of IT to simplify processes, gain a competitive advantage, and create value. Detlev Hoch and Jürgen Laartz, directors in McKinsey's Düsseldorf and Berlin offices, respectively, recently spoke with him about how and why he has reorganized the IT function and the results that Volkswagen expects from the effort.

The Quarterly: You've helped lead Volkswagen through a transformation over the past few years—from a company whose IT function just supported the business to one where IT leads change and works hand in hand with the other functional leaders to innovate. Can you tell us about that transformation?

Klaus-Hardy Mühleck: In many companies and in a lot of industries, you will find that IT isn't a core competency. It's more or less a historical discipline—running data centers, preparing and servicing different clients. And management views it as a cost center.

But over the past ten years at Volkswagen, we've begun to talk about the role of the CIOs and how to focus their skills on business enablement. This is not a hard leap to make for executives in some younger industries, like mobile communications. But in more established industries, like automotive or energy, it takes a little more work, since explaining to senior managers in other functions how IT can help play this leading role is a real paradigm shift. So if we discuss finance and control with finance leaders, we tell them how we work with SAP to prepare standard processes for accounting and controlling work. From there, we have to agree that to map out new processes, we must work collaboratively, bringing together the IT and business knowledge to design what's possible. We call this "concurrent engineering."

And of course the same is true in automotive design. It's no longer possible to talk about designing automobiles or manufacturing facilities without IT's input, because the vehicles and the factories are all digital—all based on digital models. In fact the biggest challenge in the product part of our business is to accelerate product development and manage the complexity of different products and versions. In a company like ours, this complexity is intensified by the high degree of interaction we need between the R&D departments of our various brands and of our external engineering partners. It's no longer enough just to involve IT; innovation must be driven by IT.

The Quarterly: So you reorganized the IT function to align it with the business domains?

Klaus-Hardy Mühleck: Yes, we designed the organization to better suit this evolving vision of IT. First, we created a new role, that of the PIO, to lead the strategic redesign in several areas of the business. We have four of these positions so far. One PIO works in the product creation process, including design, engineering, prototyping, production planning, and tooling—the total process of creating a new automobile. A second works in order to delivery and helps to rethink processes from the first customer order back to the factories, supply chain management, shop floor processes, and then back to the customer. The third is in sales, marketing, and after-sales support, coordinating these activities between Volkswagen, the wholesalers, and the retailers. This responsibility includes auto sales through all distribution channels, as well as after-sales service, warranties, and spare parts. And the fourth manages strategic and supporting processes, which include human resources, finance and control, and treasury. All of these officers work closely with their counterparts in the business departments, whether in accounting, engineering, production, or logistics, to design new architectures and processes to enable innovation. And they've also had to develop new skills within their own organizations, to bring those IT people up to speed on the businesses they're working with.

We also defined a new organization of IT architects under the chief technology officer. We carved this group out of the old IT organization and staffed it with developers and application-management folks with strong architectural skills. This group is responsible for all the technology definitions and platform standards and also for managing delivery. And we grouped our application-management activities—separate from development—into one organization, to provide higher-quality services at lower cost.

The Quarterly: Much of Volkswagen's IT supply organization is found in gedas, Volkswagen's former subsidiary, which was taken over by T-Systems in late 2005. How does that fit within this transformation?

Klaus-Hardy Mühleck: As we redefined our IT strategy, we thought about how IT demand and supply work within our organization. Our main IT services supplier is gedas, but it needed more scale if it was to bring its costs down. Although gedas was a subsidiary, we operated it as an independent third-party business so that we could expect industry-competitive services and costs. And its competitiveness is demonstrated by the fact that it recently won a big contract with Fraport, the owner and operator of the Frankfurt airport. Our board looked at several options, including taking gedas public or investing more in it. But in the end we got a good partnering model with T-Systems—they offered a long-term commitment, being culturally in sync while covering the full-service portfolio of gedas. So we made that deal.

Now, while our PIOs focus on project management and relationships with our internal customers, we outsource much of the commodity IT to gedas, which focuses on IT operations and application development. And since we were already running gedas as an independent business unit with its own management capabilities, we do not expect any new challenges or obstacles to be caused by separating it from Volkswagen.

The Quarterly: Does any of the remaining in-house IT compete with gedas?

Klaus-Hardy Mühleck: Since our objective is to continue our partnership with gedas, we are aiming for a complementary relationship. But that hardly means that gedas doesn't have to keep an eye on its competitiveness. It means that gedas may have to compete with other IT service providers, not with Volkswagen's in-house IT.

The Quarterly: Has this new structure changed the portfolio of initiatives you're working on?

Klaus-Hardy Mühleck: Even in the short period we've had the structure in place, we've seen some fairly dramatic indicators of change. Before we set up the process integration teams, only about 18 percent of our work was on new projects; the rest was services. Over the past year, we've changed to 30 percent project work and 70 percent services—all while decreasing the total IT budget. So the integration work done in these teams has resulted in focusing investment on innovation.

For example, using this integration process, we've redesigned the sales channels, centralizing our global spare-parts business and redefining our model for customer relationship management. Volkswagen has 18,000 retailers around the world, and before this there was no standard for customer relationship management. But we've designed one, and as we roll it out this innovation will save a lot of money.

Product life cycle management is another initiative with extraordinary importance. The complexity of product data has grown enormously over the last years, with broader product portfolios and many more functions within each. It becomes essential to continuously improve your product data management. In our case, a process-oriented structure was a precondition for integrating processes and systems for product development and order management.
About the Authors

Detlev Hoch is a director in McKinsey's Düsseldorf office, and Jürgen Laartz is a director in the Berlin office.