Volkswagen of America

MANAGING IT PRIORITIES
INTRODUCTION
Volkswagen of America has been struggling for past few years. There have been shaky

growth rates and plans have been drawn out to help smooth them. There have also been talks

of positioning the company into two categories classic and sport. Executives have expressed

concern that high priority projects required for their areas of the company have not been

funded. Each executive has asked to insert an unfunded project into the IT department’s work

plans however, most of them get turned down. Volkswagen of America has been planning for

growth through diversification of products which also allows them to focus on short and long

term goals. The company’s goals will help them secure the future growth through the use of an

IT department. To prepare for the growth Volkswagen of America has proposed more than forty

projects, which require a total of $210 million when the allowed budget is only $60 million.

Obviously, Volkswagen of America cannot undertake all of these projects but the main challenge

has been to find the right projects for the company to prioritize and continue to invest in.

BACKGROUND
Ferdinand Porsche founded Volkswagen of America in 1930 when he designed the first

Volkswagen automobile called the “Volksauto”. Volkswagen, which literally translates to

“people’s car”, was originally designed to be geared towards families and was favored by most

people because of its modest fuel consumption and relatively affordable price. The company

gained its popularity with its signature brand in the late 1940s which was called the Beetle. This

new design had a reliable air cooled engine which made it popular all over the world. For more

than 20 years, Beetle kept the sales of Volkswagen of America racing skyward. It was at this

point the sales hit a million mark.

 After Beetle was introduced, it remained popular for a significant amount of time but

eventually interest declined throughout the 1970s. Since the Beetle was not being bought as

much, its importation into United Sates was discontinued, although the production of Beetle’s in

Latin America sustained into the 1990s. As far as North America was concerned Volkswagen

had its up and downs after the peak in the late 1960s. In fact, these ups and down were so

jagged that people starting calling it the “Himalayas Chart”. Sales fell sharply through the mid-

1970s to the early 1990s. This period was known loosely as the “Valley of Despair”.

It was at this point the executives wanted to break the pattern of low sales. With the

development of new models and rapid introductions, sales rose again. This time management

focused on repositioning the brand and developing effective advertising which helped move

Volkswagen of America into competition with other well-known brands. In the early 2000s

senior executives of VWoA had to think outside the box. They looked at the product offerings

the company currently had and observed that they were only selling small cars in lower price

segments where much of the industry growth had been occurring from sales of midsized

vehicles. They noticed that sports utility and special purpose vehicles were the emerging

segments.

At the same time Volkswagen of America consolidated their automotive brands into two

groups which had different positioning directions. One brand was sporty which included cars

like Audi and Lamborghini and the other brand was Classic which included Bentley and Skoda.

The CEO of VWoA at the time saw the benefits of product diversification. He knew that if all

models proposed got approved then the company would grow from importing nine models in

2002 to 22 models by 2008. This kind of growth was not seen before in VWoA history. In order
to prepare for growth the CEO initiated a program called Next Round of Growth and made it key

leadership focus. The goal of this program was to define goals and functions to enable and

support the product diversification strategy that was developed earlier. By 2003, sales leveled

off but they were still not as good as they were in the 1960s. The repositioning of its brands into

the sports vehicle market had gained favorable review and VWoA was poised for market success

despite the overcapacity of the worldwide auto industry.

C ONDITIONS LEADING TO F AILURE

Volkswagen of America was having trouble trying to develop a decision process for

picking which projects were priority and what should be included in the budget. There were a

few things that occurred along the years that caused VWoA to come into the predicament

explained in the case study. After the brand had peaked in the late 1960s, the pattern of sales

for the North American subsidiary of Volkswagen settled into a trying cycle of ups and downs

referred to the “Himalayas Chart”, as stated above, and eventually took a downward turn into

the Valley of Despair. The Beetle maintained the company’s sales growth up until the 1960s,

however, by 1977 sales fell to under 20,000 so this caused the company to develop a new

design. They released the Rabbit, or Golf known in the U.S. in the early 1990s which kicked off

the brand repositioning and development for effective advertisement for the sports automobile

market. The move towards innovative new designs and partnering with brands like Audi,

Bentley, and Skoda stated earlier resulted in more focus on marketing and repositioning the

brands to gain higher margins. VWoA made marketing and selling activities funding priority

during the time between 1992 and 2002. If a company is focusing heavily on one part of the

business for such a long time as 10 years, this will create a hole in the knowledge of the
departments which are not being properly funded. Every company needs an IT department and

has projects essential to the business that are IT related. Especially in a period of emerging

technology, VWoA made a mistake to consider information technology a source of overhead

deciding not to provide any funds for this department. What they did was actually outsource

their IT services to a company called Perot Systems which took on the responsibilities for

maintenance, repair, and operation of the IT production environment. A 10-year contract with

Perot Systems was signed and VWoA’s IT staff was reduced to fewer than 10 employees in

house. Because the company had such a small IT department for over a decade, they lost most

knowledge of IT within the company and were not keeping up with current technologies. They

didn’t even possess the knowledge to administer the outsourcing contract. No IT projects were

being discussed or funded, and no implementations of new systems trying to innovate with the

latest technologies occurred. VWoA had a disadvantage with their competition because they

were not focusing on the business as a whole, they were only focusing on the marketing aspects

and repositioning their brands. They lost all organization of projects and how to plan for them

accordingly and make the right decisions which caused a huge problem for the company’s

future.

THE ROOT CAUSE

In 2001, Dr. Bernd Pischetsrieder arrived as a VW group chairman and initiated a

strategy of diversifying the product offerings from the VW group companies. This began the

migration of funds from the IT functions to eventually all of the marketing initiatives. After

Pischetsrieder proposed this new strategy, the CEO of VWoA, Gerd Klauss, saw that the product-

diversification strategy developing in Germany would have a large impact on the U.S. and
Canadian importer operations and he needed to prepare for it. He instituted an organizational

readiness program called “Next Round Growth” and made that the company’s key leadership

focus organizing itself around core processes that enables sales and marketing, logistics of

vehicle distribution, and after-sales service. They had no intentions of innovation for IT or

developing a process to make decisions for IT during this time of emerging technologies. The

NRG program only helped define the goals, functions, and organizational changes in preparation

for the new global product diversification strategy. For 10 years this is what CEO Klauss aimed

his team at and is what caused the company to cut their IT department down to almost none.

After the contract with Perot Systems ended in 2002, a new group called gedasUSA assumed

responsibility of IT operations and undertook development project work. GedasUSA absorbed

all 28 employees working in the IT area of VWoA thus leaving the company with absolutely no IT

department. There was not good communication between gedasUSA and VWoA which is

essential to have a successful planning process and determine projects required to benefit the

company as a whole. Among the attempt to rebuild the IT functions within VWoA, the company

set up e-business teams for the purpose of creating digital marketing assets and interacting with

customers in new ways. Because they had not had IT knowledge within their company for so

long, this process was very difficult and cause VWoA to fall behind their competition with using

the internet to support automotive sales and marketing activities. This ultimately led to the

realization that there was no single organizational entity in control of the overall IT management

process. In 2002, the Executive Leadership Team (ELT) at VWoA decided that a new business

unit was required that could become the single point of governance for all IT issues.

IMPACT OF THESE ISSUES ON OPERATIONS AND FINANCIAL PERFORMANCE

 As stated previously there were many problems that Volkswagen of America ran into

when they decided to outsource their IT department to Perot Systems. The first operational

problem they ran into was that they had eliminated much of the IT knowledge within the

company itself. Volkswagen realized that this was a problem because when you outsource your

IT department then if someone within the company has an IT related problem, instead of just

going over to the IT department they now need to call their outsourced company and get an

answer from them. This causes a problem because now the time it could possibly take to fix the

problem will more than likely take even more time because everything has to be said and done

over a phone instead of in person. This did lead Volkswagen to realize its mistake and they

started adding staff back to their internal IT department to bring it up to 28 employees.

However they were still in a 10 year contract with Perot Systems so even if they did add more

people to their IT department they were still expected to work with Perot Systems for the rest

of the contract. Another problem that Volkswagen ran into was when GedasUSA assumed

responsibility of their IT department in 2002 and promptly transferred all of the internal IT

personnel from Volkswagen to GedasUSA part of the company. This now again took away the

internal knowledge from VWoA and while they did not lose those employees entirely, they were

now part of a whole different department of the company and because of the arms-length

relationship between GedasUSA and Volkswagen, there was not a lot of communication

between the different departments. Another problem that came with this was that there were

now too many people trying to manage IT and no single organizational entity were in control of

the overall process. This caused problems with communication because there were no

standards established for either company to follow. This left the IT department confused on
exactly what they were supposed to do when it came to IT related projects and how to plan for

them.

ANALYSIS OF THE KEY MANAGEMENT DECISIONS

Some of the key management decisions that led to the issues/problems stated above

were that Volkswagen was taking their IT department for granted. The decision to outsource

their IT functions may have sounded good on paper but when you outsource your IT

department that comes with its own set of problems. First off outsourcing can take much more

time than having an in house IT department because instead of being able to just go down to

the IT department to get something done now a phone call has to be made or an IT specialist

needs to be sent out, this means that even more time would be spent trying to fix a problem

that could have been easily fixable if there had been IT staff in house that had the knowledge of

how to fix the problem. Outsourcing also cause a problem when it comes to in-house

knowledge of the current software that the company is using. An outsource company will be

coming in from the outside and more than likely is working with many other companies and

their systems too. While there is certainly no doubt that an outsourced IT employee could learn

the system that is being used at Volkswagen it may take them a lot longer and again that goes

back to how much time is spent on fixing internal IT departments. Security can also be a factor

because now people outside of the company have access to all of the companies’ data and

other information. Extra security may need to be implemented to keep this data safe from being

looked at or accidentally changed or deleted when an outsource IT employee comes in to try to

work on the system. Also there is priority. When a department is being outsourced, no matter

what department it is, where it stands with priority to other companies always comes into play.
If Volkswagen is not at the top of Perot Systems priority list something that may have taken an

hour or two to fix may take a few days up to a few weeks to fix because they are not high

enough priority to rate someone coming out as soon as something starts not working correctly.

Finally there is employee morale. When employees see that an almost entire department is

being outsourced then they may begin to worry about their jobs and how secure their job really

is too. This can cause employees who have a lot of knowledge of how the company works to

decide to start looking for employment elsewhere where they feel like they have more job

security. This can cause the company a lot of cost because it costs a lot more to hire and train a

new employee than it does to keep an old one. Overall the biggest mistake that Volkswagen

made was taking their IT department for granted and outsourcing it. This caused IT project

decisions to not be properly looked at and a lot of money spent and also inter-company

knowledge within the IT department to be next to none. Luckily Volkswagen realized their

mistake and started revamping their IT department and trying to make it a more dominant force

within their company rather than just seen as a necessary evil.

MANAGEMENT’S ACTIONS AND REACTIONS

The main problem for VWoA was that there was no single organizational entity to take

responsibility for managing IT services among multiple providers (Perot and gedasUSA). In order

to solve this issue, the ELT decided to create a new business unit within VWoA, “Business

Process, Technology and Organization (BPTO)”. This unit consolidated the technical elements of

the eBusiness teams and acted as a point of contact for gedasUSA (VWoA’s lead IT delivery

partner). This unit consisted of 23 people who dealt with challenging projects from the past.

Manager of the BTPO team, Matulovic, took a couple of steps to reduce the current issues.
Matulovic empowered the Program Management Office (PMO). PMOs main function was to

plan the project throughout before the execution phase of the project, providing weekly status

reports and monthly budget reviews for all projects.The PMO would take over all IT projects and

appoint qualified project managers for each project. Once these changes were implemented,

on-schedule and on-budget projects became normal in VWoA.

Finding out which projects to complete was the second major problem faced by VWoA.

Completing the projects that are aligned with the enterprise goals are essential to business

growth. VWoA’s business goals were ranked as follows; “Build Brand Customer Loyalty” (1),

“New Vehicle Value” (2), “Stable Business Infrastructure” (3), “Pre-Owned Vehicle Business” (4),

“Optimize the supply Flow” (5). With a limited budget and resources, VWoA had many projects

to complete. For the proposed 40 projects by 10 business units of VWoA funding requirement

was $210 million but the budget was only $60 million as stated previously. To select the right

projects to fund, members of the BPTO, corporate strategy groups at VWoA and strategy

consultants from gedasUSA created a high-level business architecture. This helped the team to

understand the key resources and many more important factors to determine which projects to

complete.

This new business architecture required multiple team involvement to execute. ELT had

the primary responsibility to execute the NRG program (This includes the new IT governance

Processes). The ITSC team (IT Steering Committee) composed of senior business and IT

representatives would guide and approve the process of IT project selection and prioritization,

the PMO team would administer the IT project proposal and approval process and the DBC

team (Digital Business Council) will categorize projects, assessing their business impact,
discerning their alignment goals and making trade off decisions required to reach a final list of

projects that needs to be funded. This process played out in three phases: Phase 1 – Calling for

projects, Communication Process, and Identifying Dependencies: Phase 2 – Formal Project

Requests from Business Units: Phase 3 – Transforming Business Unit Requests into Enterprise

Goal Portfolios.

After DBC members followed this three phase solution they were able to find out the

projects that are dependent on other projects and proposals that can be directly combined with

enterprise projects; the overall project list for 2004 was changed due to this reason. DBC

members decided to choose three top projects for each business unit. Also PMO teams and

corporate strategy teams regrouped the top three picks for each business unit in to five goal

portfolios. There was one problem with this prioritization process; one project that was critical

to the company’s global supply chain management was left unfunded.

CHANGES MANAGEMENT COULD HAVE MADE

IT governance is very important for company’s success. As Professor Morelli explained in

the class “a company can outsource its IT tasks but cannot outsource the responsibility” (Prof.

Morelli). VWoA is a classic example of this statement. In order to financially support the

marketing and selling activities, executives cut down IT budgets. Also to reduce short-term IT

costs VWoA entered into the 10-year contract with Perot Systems. This is a very important for

an organization because when they outsource the IT tasks to an external entity they are

completely focused on meeting their budget requirements and on time project submission. In

order to complete the tasks on time, sometimes companies use short cuts and in the long run

this will cost the organization who hired them. If the organization doesn’t have a team to verify
and measure the quality of the tasks that they outsourced to third parties, there is no way the

organization can measure the quality of the project. According to “IT Governance – What is it

and Why is it Important?” by Doug Shuptar, “Governance also involves establishing

measurement and control mechanisms to enable people to carry out their roles and

responsibilities. The goal of governance is to ensure the results of an organization’s business

process meet the strategic requirements of the organization” (Doug). VWoA should not have cut

down the IT staff after the contract with Perot Systems. Instead they should have assigned the

tasks of overseeing the projects since they know the company’s overall strategies.

The PMO strategy was a great idea and it supported the organization with on-schedule

and on-budget projects. The problem was how to find out which projects are the most

important to the organization. This was partially solved by creating high-level business

architecture to determine level of significance. This plan lacked organization goals and IT

knowledge and had one enterprise project unfunded. According to Shuptar, attaining agreement

on priorities as a group looking at and entire enterprise, it is making determination as to what

initiatives move forward and attaining agreement on which priorities should finish first are the

two most important topics of IT governance (Shuptar). Matulovic must reconsider the projects

that are chosen for execution. Also he should have valued the entire organizations strategy

when it comes to prioritization process.

WHAT AFFECT DID THESE DECISIONS/ACTIONS HAVE ON THE PROBLEMS?

The decision to set priorities to projects did not have a great impact on correcting the

problems because some of the projects were underfunded from the beginning and then

stopping some projects to carry out others didn’t go over well with every part of the company.
Therefore the decision making and prioritizing process contained many flaws. Though Matulovic

was looking at the global company, places like Germany didn’t understand what exactly was

being accomplished. In the case study it states that the corporate strategy was clear but

implementations were the hard part. So setting overall the decision making part became much

easier with the new way of prioritizing projects, however the follow through was not as

effective. Still it was a step that needed to be taken so that Volkswagen could bring the company

from the mid-1990s to the current market environment. Matulovic at the end of the case study

is quoted saying, “You try to involve everyone in the process and make it transparent, so that

everyone owns the outcomes. But there is always room to second-guess the process or

decisions made in the process. People have a tendency to forget why decisions were made, or

that we all agreed on the decision when it was made. What they see is “my project didn’t get

funded, and this is keeping me from doing my job.” IT looks like an obstacle. If there’s one thing

I’d like to turn around, it’s the idea that IT is an obstacle.” This is a great example of how people

usually look at IT, but in the world we live in now it is unavoidable to be fully involved with IT. It

gives companies that edge they may need to grow their business or to have a leg up on the

competition. However IT is expensive and like we spoke about in class not all projects are

successful, therefore other departments might not understand the importance of IT.

OUR RECOMMENDATIONS
There are many things that could have been done differently by Matulovic and his team

to get their desired results. For example, we learned about IT sourcing options and since

Volkswagen did go a long time without a functioning IT team, because they outsourced

completely in 1992, it was important to get a functioning IT team back. Then from 1999 to 2002
gedasUSA took on the role of IT for Volkswagen, again outsourcing and at “arm’s length” with

the company. This made is hard to be on the same page and again no real knowledge was

within Volkswagen. The case repeatedly states that the knowledge that was needed was not

there. The company was very large now and IT needed to keep up with the company.

Like the diagram above shows the strategy and business architecture changed within the

company. This also means that their IT needs have also changed, therefore we believe that to

get the IT department back on its feet, Matulovic should have looked into a partnership. The

partnership should have brought in knowledgeable people that knew what they were doing and

understood what Matulovic and VWoA wanted to do to the company and its IT team to help

reach their new goals. They should have made sure to keep the IT team within the company

rather than what they did in 2002, the partnership would only help the team get on its feet and

lead it in the right direction and that’s it. Volkswagen was growing so fast and expanding in the

market it would have made the transition process much smoother for the company as a whole.

When dealing with anything that is IT related it is hard to predict the outcome, so when you
take on projects that it important to keep in mind. At the end of the case study Matulovic is

quoted saying that he wishes IT wasn’t an “obstacle”. In large companies it is hard to let

everyone know what exactly is happening so that they are part of the conversation and process,

however it is very important. If the lines of communications are always open and each

department has a say in what is happening with IT projects it would be much more effective

than them feeling as if they are not part of the team or company. For example, the case study

mentioned a problem with the budget being predicted way over what they could actually spend

which made it inevitable that a lot of those projects would have to be rejected, however the

employee or department should never be alienated. The overall problem for the company was

the implementation of the strategy, and the major recommendation we would give is make sure

that the whole company is involved in the change, and everyone has a part. We spoke a lot

about the effects open conversation have on a company. When employees feel invested and

part of the company they perform better and work harder, which would make the implantation

process for Volkswagen much easier.

SOURCES
https://ct-ccsu.blackboard.com/bbcswebdav/pid-9747805-dt-content-rid-
26004650_1/courses/CCSU41233.201640/Volkswagen%20Case%20Study.pdf

http://www.autointell-news.com/european_companies/volkswagen/vw_marke/volkswagen-
history/volkswag22.htm

http://www.cnn.com/SPECIALS/2001/yir/stories/technology/
http://www.techrepublic.com/blog/10-things/10-problems-with-outsourcing-it/

Shuptar, Doug. "IT Governance – What Is It and Why Is It Important?" Digitalist Magazine.
Digitalist Magazine, 07 May 2012. Web. 22 Apr. 2016.