Getting Off Track?

Dec. 21, 2004
Computer-integration woes aggravated Union Pacifics troubled merger with Southern Pacific.

Its no secret that Union Pacific Corp. has struggled -- and stumbled -- in its efforts to integrate the operations of Southern Pacific Corp. in the nations biggest railroad merger. The Dallas-based transportation giant fouled up the combination of the two operations in myriad ways -- losing rail cars, clogging ports, and jamming rail depots. The resulting gridlock from Houston to Los Angeles cost the nations shippers an estimated $2 billion and prompted the federal government to step in and try to straighten things out. The effect on the manufacturing and shipping community was so pervasive that a number of companies, including Dow Chemical Co., Union Carbide Corp., Entergy Corp., and DeBruce Grain Inc., took the unusual step of suing their shipper, UP, as a result of business interruptions caused by the railroads drastically impaired service. Hurt most of all by UPs tangled mess in the Gulf region and in the West is UP itself. In last years third quarter alone, the merger-related troubles cost the railroad more than $80 million. A third of that resulted from added expenses, including additional labor and car-rental costs. The rest was the result of lost revenue. The company had to cut its dividend by nearly half. What went wrong? UP executives have blamed SP, a lack of rail-line capacity, high shipping volumes, and too few locomotives, among other things. And, yes, theyve admitted that problems arising from the combination of the computer systems of the two rail lines led to disruptions in service. A closer look shows that UPs merger with SP offers some lessons in how the operations of two merging companies can be impacted by differences in computer systems and the processes they support. A key piece of UPs merger strategy was to move SPs aging systems over to UPs more modern ones only gradually. "Our approach was to implement UPs systems and processes on SP," says L. Merill Bryan Jr., senior vice president for information technology at UP in Dallas. Unfortunately, this required the two not only to communicate but to work in tandem for more than a year, often supporting different business processes and rules for the way work is done. Communication alone proved a stickler -- between computer systems as well as between managers and line employees of the two railroads, which had differing cultures, procedures, work rules, and union contracts. "Each of the railroads has a very extensive car-control system to keep track of cars and movements of trains and, of course, theyre all incompatible with one another," explains Dick Schiefelbein, a Ft. Worth transportation consultant and former federal railroad administrator. The resulting incompatibilities in information contributed to myriad operational problems. "Freight shippers felt like Ping-Pong balls when calling in to find out where their cars were," Schiefelbein says. UP staff would tell shippers to check with SP, and the SP workers would refer the caller to the UP operation, he adds. Meanwhile, rail cars literally disappeared, and customers were unable to find out where their shipments were. "Either yardmen were not recording data accurately, or their systems were not handling the information," says Terry Clower, professor of applied economics and associate director of the Center for Economic Development and Research at the University of North Texas in Denton. "Thats the only way a rail system can lose cars. And they had lots of cars lost." Clower tells of one instance in which a car bound for Houston from Chicago wound up in Los Angeles. In another instance, a Beaumont, Tex., firm awaiting a shipment from Los Angeles learned that the car was within a few miles; later it turned up somewhere in the Midwest, without having reached its destination. Complicating matters was the fact that Southern Pacific "still used various reporting codes [from four other railroads it had acquired] that had to be designated in routings," UPs Bryan says. The decision to cut over some smaller lines first, rather than starting with the more critical Houston area, also may have aggravated matters, experts say. "They chose to cut over the smallest line -- the Denver & Rio Grande Western subsidiary unit of SP -- and learn from that," says Schiefelbein. "In retrospect, theyve said it was an unfortunate decision, because it would have been better to have started with Houston, where both had operations and an actual physical merger, too." The biggest single chunk of SP, referred to "SP West" by UP management, wasnt converted until July 1 of this year, nearly two years after the merger. SP West included 42 reporting locations, five ports, and 16 intermodal shipping locations. UP dispatched more than 500 field implementers to monitor the effort and ensure that the changeover went smoothly, Bryan says. "We finished in July," he says. "Now we have just one network and one system, so we are in a position to provide the level of service expected by our customers." Converting SP to UPs systems and work rules wasnt easy. Concedes UPs Bryan, "Their system was different from our system. Ours is functionally richer." A significant difference, he explains, is that UPs main transportation-control system is built around car scheduling. "We plot out a path for every car to its destination, and then generate work orders for the crewmen. SPs was mostly an after-the-fact reporting system." There were important differences between corporate cultures and union work rules, as well. It was the failure to take into account the complex relationships among all these problems that ultimately led to UPs service meltdown, those close to the companys merger plans say. "You dont take a list of problems and solve them separately," says Todd Berger, director of the transportation practice at Arthur D. Little Inc. The Cambridge, Mass.-based consulting firm serves as a safety-issue consultant to the U.S. Surface Transportation Board (STB) for the sale of Conrail to CSX Corp. and Norfolk Southern Corp. "You need to understand all the relationships. UP has been fixing one problem and causing another, month after month after month," he adds. Others who have been closely tracking UPs troubled merger agree. "They may have improved things in Houston, but things got worse out west," says Ward Uggerud, chairman of the Alliance for Rail Competition (ARC), representing a large number of industrial companies, shippers groups, and even some states. Indeed, cultural issues may have played an even bigger role in the disconnect between the two rail lines, Berger believes. "There is a history in this merger where there was a failure to understand the culture -- the unwritten rules in an organization that define how people behave," he says. "UP people didnt think much of the former SP folks, so when there were problems and they asked them for help, the SP people said, Were just a bunch of know-nothing railroad folks -- what do we know? All you need is a couple of bad things like that to foul things up in a railroad merger." Regardless of the two different labor contracts, UP went forward with the plan to convert the former SP operation to its computer systems. Unfortunately, the business rules contained in the systems were different from those supported by the union rules. "The railroad didnt have the right information-technology stuff to support the labor contracts they had," explains Berger. In a hypothetical example, two different dispatching systems are set up to assign crews to trains according to terms of their union agreement. When management tries to integrate the crew-dispatching systems into one, the company ends up operating with crews being assigned under one set of rules and a group of workers still operating under another set of labor rules. UP found itself in one such dilemma when it ran up against a shortage of locomotive engineers qualified to run in the newly acquired areas. "UP debated how to manage the assignment of pilots, but they grossly underestimated the complexity of distribution of pilots needed in this merger," says Berger. "In 36 hours after the merger, they were out of pilots." UP has made no secret of the impact on service that its systems-integration difficulties with SP have caused. In public hearings on the companys service troubles, UP chairman and CEO Dick Davidson repeatedly attributed at least part of the companys difficulties to information-technology problems stemming from the merger. "During the course of their service meltdown over the last year, Davidson blamed part of the problems they were having on the continuing hassles of their two information systems," Clower notes. The culpability of the systems combination in helping scramble the companys ability to track freight is recognized by UP. The main operational program, called Transportation Control System (TCS), "is the glue that holds the railroad together and allows it to function as an efficient, integrated system," the company explains. According to UP, "TCS is the recognized industry leader in railroad management systems." TCS controls schedules for trains and monitors shipments, accounts for freight cars, orders cars, and bills customers. It tracks movement of cars in yards, helps yardmasters build trains, and assigns both locomotives and crews to trains. "Orderly conversion of SP to TCS is critical to efficiency, the integrated operation of the entire combined system, and the full achievement of merger benefits," says the company. The only problem: Things didnt work out that smoothly. UP planned to move SPs systems to TCS according to a timetable based on geographic region. Once problems occurred, the company tried to accelerate the schedule by two months to help with the service crisis. "There was a lot of pressure to get Texas fixed," says a UP spokesperson. But things only got worse. As the company states, "Although . . . each TCS cutover phase . . . produced some temporary dislocations, it [TCS] has been an indispensable element in the substantial elimination of congestion that has been achieved in the Gulf Coast area." Explains Bryan of UP, "When you implement a new system, there is a learning curve. It takes a while before you get productivity improvements." He adds that the merged railroads "congestion problems were not the result of the cutovers -- the congestion was well underway before." With this merger and the subsequent merger of eastern railroads, the number of top-tier railroad firms serving the nations shippers has shrunk since 1980 from 45 to just four. In the meantime, federal regulatory oversight for the industry was shifted from the former Interstate Commerce Commission, which was disbanded, to the far smaller -- and some say, more acquiescent -- STB. While not exactly a rubber-stamp outfit, the STB has been loath to take action against the UP-SP merger for having snarled a major chunk of the nations freight. (STB officials, who approved the 1996 UP-SP merger, did not return IWs repeated calls for interviews.) The agency issued one emergency order allowing additional competition to operate in Texas, the state whose shippers were affected most dramatically by the railroads ineptness. The STB lifted that order in late summer, despite reports from states such as California that UP continues to suffer major service dislocations. "Our company is embarrassed at the time it has taken to recover from our congestion crisis," Davidson told the STB in March. California officials attributed a major backup of container traffic at the Port of Oakland in August to UPs problems. Others report continuing sporadic bottlenecks and slowdowns affecting the ports of both Los Angeles and Long Beach. Meanwhile, some shippers and shipper trade associations remain dissatisfied. "There were some very negative consequences to shippers from this merger," says ARCs Uggerud. "Were an electric utility, and when we use gas versus coal, were not cost-effective." Similarly, for grain shippers, hauling by truck is more expensive. "UP and SP were hard-pressed to operationally handle that merger, and the result was service disruptions that continue, costing shippers considerably. And there is upward pressure on shipping rates." UP certainly is not sitting idly by. The company announced a $1 billion investment plan to expand rail yards and tracks and to purchase locomotives. It already has hired more than 60 IT professionals to help it with new systems.

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