GE Needs Digital, Just Not the Immelt Version

(Bloomberg Opinion) -- Digital is the next frontier in bringing good things to life, and GE needs to play a role, one way or another.

Fresh off the announcement of its breakup plan, General Electric Co. is continuing to look for ways to streamline and simplify its business. That reportedly includes exploring options for its software arm, which uses sensors and data analytics to help manufacturing equipment run more efficiently. The Wall Street Journal reported on Monday that GE is seeking buyers for key parts of the digital business. A financial or strategic partnership seems more likely.

There's no doubt that GE Digital as it existed under former CEO Jeff Immelt needed to be rethought. Immelt wanted GE to be a top 10 software company, a goal that necessitated broad strokes and billions of dollars. He shunned a more focused strategy, arguing a centralized digital arm endowed with the resources of the parent company would give GE's businesses an advantage. Roper Technologies Inc. CEO Brian Jellison perhaps said it best in 2016 when he was asked about industrial giants looking to get big in a crowded digital field his firm had long catered to in a more niche way: “Trying to get into a software arena from scratch, man, that's heavy lifting. You run ads and tell people, ‘It's OK to work for my moldy industry company as a programmer.' But that's going to be tough.”

Today, GE the conglomerate is dead, as are the spendthrift ways of the Immelt era. GE no longer has the luxury of throwing money at an idea and hoping it will work. A big, centralized digital operation has no place in CEO John Flannery's plan to run GE's remaining divisions more independently after he divests its health care, transportation and Baker Hughes energy businesses. Already, he's refocused GE's digital sales on customers in its core industrial operations and deepened partnerships with Microsoft Corp. and Apple Inc. That's meant job cuts and a big reduction in spending. 

But rethinking GE Digital does not mean capitulation. Immelt may have gone about it entirely wrong, but he wasn't wrong in viewing digital as crucial to staying competitive.

Consider the other big industrial M&A news of the day as evidence: Fortive Corp., a maker of GPS tracking and motion control tools, announced on Tuesday that it would acquire software company Accruent for about $2 billion. Its software is used to extend the life cycle of real estate, facilities and other physical assets and to ensure compliance with regulations. The technical details are obviously different, but the premise is akin to GE's Predix software platform. Meanwhile, GE rival United Technologies Corp. is paying $30 billion to buy avionics maker Rockwell Collins Inc. and get a leg up in the push for more-connected aircraft.

The point is that digital is not a business GE can just walk away from and sell to the first private equity firm willing to open its checkbook. It's unclear how the company would even begin to pull out pieces from digital to divest. A more-focused digital strategy can work. Frankly, higher-margin software and services offerings are necessary to the business case for the power and aviation divisions that will be left over after its breakup, with those businesses already more vulnerable to economic downswings than the health-care unit that's being spun off.

That said, GE's cash crunch does put it at risk of falling behind on the digital front. Flannery has said he expects no drag on profits from digital by 2020. That's where a financial backer could be incredibly useful. Immelt actually alluded to this possibility on the way out the door. Alternatively, GE could expand its partnership with Microsoft or strike similar deals with other technology companies. Already, GE has integrated its Predix offerings with Microsoft's Azure Internet of Things infrastructure, freeing it to focus on the kind of industrial-specific applications that can differentiate it.

GE Digital will — and should — evolve to adapt to the company's streamlined reality. But this is one part of Immelt's legacy that Flannery most likely doesn't want to dismantle. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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