GM's Prescription for Profitability

GM and many other U.S. Companies have followed a prescription that is taught at all major business schools that are supposed to lead to long term profitability. The formula looks like this:

• Outsource work
• Reduce workforce
• Sell off business units

This formula always works: In the short term. When labor accounts for 30-40% of the business costs, a 25% cut in employment results in an immediate 10% gain to the bottom line.

Outsourcing work also has an immediate positive impact. Often, by outsourcing, companies like GM can get an immediate 20% cost cut. Again when 60% of your costs are in-sourced this is a powerful lever. But each time you pull the outsourcing lever, it is less and less effective.

There is a delayed cost increase with the outsourcing. Often, overhead costs do not keep pace with the outsourcing so the remaining business becomes even more expensive leading to more outsourcing. Additionally, as more work is outsourced, both knowledge and power shifts to the suppliers and supplier costs actually begin to creep up.

Finally companies sell off entire parts of the business for a one time gain. In the past decade, GM sold off Delphi and Alison Transmission. Each time the company justifies this by saying "this isn't our core business".

The results speak for themselves. The prescription works in the short-term but destroys the company over the long-term.