Dan Haar: Flannery’s digital retreat at GE suggests he would have stayed in Connecticut

November 28, 2017 GMT

Listening to General Electric CEO John Flannery talk about paring back the company’s ambitions, it’s hard not to think he would have kept the headquarters in Connecticut, the state where he grew up.

Does that matter now that GE flies its flag in Boston? Probably not, but it’s one way to think about how deeply Flannery — raised in West Hartford — deplores the pretension and overreach Jeff Immelt showed as CEO for 16 years.

Look past Flannery’s halving the dividend, grounding the corporate jet fleet and shedding $20 billion in assets as he focuses the industrial businesses on three main areas — health care, aviation and power generation. His main message: Let’s stop trying to be what we are not, and return to a culture of excellence and execution, basic blocking and tackling.

Immelt did simplify an unwieldy GE. But his Big Idea was that GE could revolutionize the world with unifying software that could take trillions of points of data and turn it all into smart action — not just for GE businesses but for the entire world.

The move to Boston was a piece of that striving. Immelt tried to redefine GE from an industrial-financial behemoth to a fast-moving tech disrupter, and a ubiquitous one, to use the word of analyst Nicholas Heymann at William Blair & Co.

Two big problems: First, the burn rate of cash on assets that didn’t show results. In the digital platform alone, Heymann points out, GE’s cumulative outlay grew from $1.5 billion in more than four years through 2015, to $6.6 billion by the end of 2017.

That included training what would have totaled tens of thousands of independent developers to write apps for GE’s systems. And that was just one place where GE was spending wads of cash without immediate returns.

The spending was done in the name of becoming, yes, ubiquitous in a global industrial economy that runs on software upgrades and ongoing maintenance contracts, not mechanical advances and repairs.

“The reality of the cost of achieving that began to sneak in,” Heymann said.

Heymann rates GE as a stock that will outperform because he believes Flannery can succeed in “narrowing the scope,” of digital ambitions to serve GE businesses and core customers rather than the whole world.

“This isn’t just a GE phenomenon,” Heymann said. “GE just happened to take a path that was acute in using cash.”

That brings us to the second problem with Immelt’s Big Idea that Flannery is curtailing. Although GE has long built software into its products, it could never become the pure software development company Immelt imagined. Sukhmander Grewal, a former longtime GE technology executive and developer who now heads Veoci, a New Haven software company, was among many people who held that view two years ago.

Back then, Immelt was winning praise for his expansive vision, including the Boston move. Shares traded over $30. Grewal called the idea unrealistic in 2015.

At least four times since the 1930s, Grewal points out, GE has tried and failed to pioneer a computing revolution — including, for example, the wave of factory automation in the ’80s.

“There has been widespread skepticism that GE can compete with independent software products on their own,” Grewal said Monday. As for Immelt’s ambition, he said, “The problem wasn’t that it was a conglomerate ... the investment decisions and the direction of the C-suite were in retrospect misguided.”

Flannery has now confirmed that skepticism. So far, the market isn’t on board with his plan to dig out. GE shares closed at $18.12 Monday on the New York Stock Exchange — down 40 percent for the year and barely changed since a 12.5 percent decline after Flannery cut the dividend on Nov. 14.

None of this means GE is out of the game of disruptive innovation. Potential game-changing advancements include a strong additive manufacturing in its new generation of jet engines, for example. And Predix, the industrial data analytics platform, is making strides in some industries, Heymann said.

“GE is in good stead as it relates to, quote unquote, critical new technologies,” he said.

Flannery even sounded downright effusive at times in his Nov. 14 restructuring presentation.

“The world is fundamentally going to run on the back of GE, it’s going to move on the back of GE, it’s going to heal on the back of GE,” Flannery said. “There’s still incredible things going on inside the GE businesses…We’ll end up inventing a future that no one frankly can imagine right now like we have always done.”

Still, he’s fundamentally a pragmatist, not a dreamer. It’s a fair guess he would not have thought the 2016 headquarters move to Boston from Fairfield was worth the bother, as GE has no shortage of development sites around the world.

In Connecticut, GE now has fewer than 3,000 employees, down from 7,000 in 2006 and 5,700 three years ago. The headquarters move cost a couple of hundred jobs with the vast bulk of the decline coming from the breakup of GE Capital.

Flannery has delayed the Boston buildup. He isn’t likely to return the head office to Connecticut — but he should, Grewal said.

“It would send a message that GE is back to reality,” Grewal said. “He doesn’t need to be on the cover of Wired magazine.”