Merged Railroads Still Plagued by IT Snafus

This is the story of how two railroads merged, botched the integration of their computer systems and, seven months later, are still losing millions of dollars worth of business.

Things are getting better at Norfolk Southern Corp. since the June acquisition of most of Consolidated Rail Corp. (Conrail). But freight trains are still misrouted, crews are still misscheduled, and customers are still temporarily losing their products somewhere on 21,600 miles of track.

Henry Wolf, chief financial officer at Norfolk Southern, acknowledged in an interview that some problems continue and that they are still pinching the company financially. Wolf, who oversees information technology, insisted that most of the technology glitches have been fixed and that others will be in the course of this year.

It wasn't as if the companies failed to plan.

The deal was complicated. Norfolk Southern, in Norfolk, Virginia, would get 58 percent of Philadelphia-based Conrail, and CSX Corp. the other 42 percent. Each company would exclusively own different sections of Conrail track, but they would also share routes in some regions.

Norfolk Southern and CSX were each responsible for meshing their respective IT systems with Conrail's. Both companies had problems after the merger, but Norfolk Southern's were bigger and more costly, according to rail industry experts.

Early in 1997, Norfolk Southern's IT staff started to look for commonalities with Conrail's systems. There were few, mainly because both railroads used text-based mainframe software they had built themselves. Norfolk Southern decided to build middleware to bridge the gap and spent more than a year on coding and testing.

Executives met regularly to mark progress and set goals. Everyone did what management gurus advise.

But looking back, Wolf said, insufficient training, programming errors and mysterious data-quality glitches -- sometimes information disappeared or prior data reappeared -- all but wiped out the delicate logistics of running a railroad on time.

The Domino Effect

It started with an unfortunate human mistake on go-live day, June 1. Instead of actual details about train loads and itineraries, a tape of old data originally used in testing was loaded into the system.

That initial goof was corrected within 12 hours, but Norfolk Southern couldn't recover; a spiral of other mishaps had already begun.

"As we started to experience some data problems, we ascribed them to the bad data dump," Wolf explained.

Norfolk Southern, which calls itself "the thoroughbred of transportation," issued a press release June 2 patting itself on the back for the merger.

The company figured everything would smooth out as clean data circulated through the system. "That was a wrong conclusion," Wolf said.

Instead, the system generated faulty waybills -- the instructions on where and when to move individual train cars.

As a result, full train cars sat idle in increasingly congested yards, awaiting crews. Some loads ping-ponged between terminals without being emptied, while empty cars were moved along unfilled.

Last month, railcars blocked a train crossing in Ohio, forcing firefighters to crawl under them to get to a fire and children to scuttle under them to get to school, said Rex Damschroder, an Ohio state representative.

During that same three-hour block, an ambulance driver had to take a 21-mile detour around the congested crossing to get to an accident victim, Damschroder said.

Meanwhile, the average train speed dropped this summer from more than 20 mph to 16.7 mph.

It may seem like a small dip, but for railroads, such a slowdown means big trouble. As velocity slows, train cars build up. As train cars build up, velocity slows even more.

Meanwhile, crews worked longer hours and, by law, had to be replaced with fresh workers. One of Norfolk Southern's biggest problems, which continues today, is ready-to-go trains waiting for crews.

The situation hit the railroad's customers right away.

United Parcel Service of America Inc. and others yanked their goods off the tracks in favor of trucks. (UPS has since returned most, but not all, of its business.)In June, right after the merger, Norfolk Southern lost more than US$40 million worth of business to trucking companies and other railroads. On top of that, Norfolk Southern spent $29 million that month on alternate transportation for major customers with which it had service-level contracts.

In its most recent quarter, ended Sept. 30, it lost another $73 million in business, and profits dropped 88 percent. The company has also spent $49 million since July on bonuses to coax employees to work overtime.

That's a big bill, but Wolf said it was unavoidable. "You have to satisfy customers that you have done everything humanly possible to meet their needs," he said. "Some suffered severe inconveniences."

For the chemical industry, which spends $4.8 billion per year on rail transportation, "the problems have not abated," said Tom Schick, an executive at the Chemical Manufacturers Association Inc., a trade group based in Arlington, Virginia.

For example, some chemical companies have had to slow production because there aren't enough trains to haul products on schedule, Schick said. He declined to name the firms.

During the height of the chaos last summer, he said, chlorine for water treatment nearly didn't make it on time to several East Coast cities but for "extraordinary efforts" by both chemical makers and Norfolk Southern. They had to put extra trains on tracks and reroute crews, which, in turn, delayed other customers' shipments.

"This created a lot of anxiety," he said. "Imagine if Philadelphia or New York didn't have clean water to drink."

The Surface Transportation Board (STB), a federal agency that oversees rail mergers, has closely monitored the tumult. It already had been blindsided by the disastrous merger of Union Pacific Corp. and Southern Pacific Rail Corp. in 1996.

Soon after trouble from the Conrail deal emerged, the STB told Norfolk Southern and CSX to report exactly how many trains were affected and why, as well as other weekly metrics. But it hasn't insisted that any specific fixes be implemented.

The STB acts mainly as a conduit for shippers' complaints, a board spokesman said. "We're still receiving reports. This part of the merger is still unwinding," he said.

"It still mystifies me," said Ed Rastatter, director of policy at the National Industrial Transportation League, a major shippers group in Washington. "We insisted they fully test and plan the integration of the computer systems," Rastatter said. "They assured us in May [1999] they were ready, that they had tested seven ways to Sunday."

Wolf acknowledged that, in hindsight, testing and training fell short. For example, tests were conducted with pristine data, so no one knew how to respond or how the system would react if mistakes were entered, he said.

Attitude Adjustment

Arrogance, according to some critics, helped create the computer systems problems.

While trucking firms don't own highways and airlines don't own air, railroads own and control large sections of track. It isn't unusual to find miles of country serviced by a sole rail line.

Railroad companies "have done things a certain way for a long period of time and been protected from having to compete with each other so much that they've never had to deal with information [processing] in another, more efficient way," said Diane Duff, executive director of the Alliance for Rail Competition, a lobbying group in Washington.

"Microsoft has argued they're not a monopoly because even though they have 90 percent market control, there's 10 percent out there. The railroad industry is not much different," Duff said.

She suggested that the railroads would be better at customer service if they used global positioning systems to keep track of their railcars and if they learned some lessons in logistics from the airlines and companies such as Federal Express Corp.

For its part, Norfolk Southern is counting on new client/server software, dubbed the Thoroughbred Yard Enterprise System (TYES), that it developed in-house. TYES should fix many of the lingering problems, especially data-entry errors, Wolf said.

Rather than having to type in words and numbers to route train cars, for example, TYES users can click on prefabricated menu choices.

The company finished installing it on its part of the old Conrail tracks last month, cutting its original deployment schedule from 30 weeks to 18. The rest of Norfolk Southern should get TYES by the end of the year, Wolf said.

Rastatter said shippers appreciate Norfolk Southern's hard work to mend the situation, but they're frustrated.

"It's like poking a balloon in one place: It gets bigger somewhere else," he said. "Fixing a particular problem in a particular place may cause problems elsewhere."

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