Big Blue has built a global network for client services and in the past three years has hired 90,000 people in low-cost countries
When Rogerio Oliveira strolls through the vast IBM (IBM) service delivery center in Hortolandia, Brazil, the contrast between the old and new IBM is stark. What was once a factory for mainframes is now crowded with hundreds of Brazilians on a different sort of assembly line. Their output is information, and they sit in rows of cubicles that stretch the length of a football field under a soaring, metal-trussed roof. A few years ago, the factory work performed here was just for Brazilian customers. Today, 100 clients for the facility's services, which range from software programming to financial accounting, come from 40 countries, including Canada, Mexico, South Africa, and the U.S.
Oliveira, a 35-year IBM veteran and general manager for Latin America, stands at the heart of IBM's effort to transform itself into what it calls a "globally integrated enterprise." IBM has talked about its new global vision for two years. But only recently have managers like Oliveira turned that vision into a practical and solidly profitable business.
This is not the IBM of the 20th century, when Big Blue defined what it meant to be a multinational. Back then, its subsidiaries in 160 countries behaved like mini-IBMs—essentially, standalone operations serving their local customers. But replicating itself became too costly for IBM. So now the company is reorganizing around the principle that it will perform work for customers where the jobs can best be done—tapping the right talent at the right price.
That philosophy has produced a monumental shift in how IBM operates. In the past three years, the company has hired some 90,000 people in low-cost countries including Brazil, China, and India. These people, working in so-called global service delivery centers, provide a wide array of services for clients. The work goes beyond software programming to include data center operations, help-desk call centers, financial accounting, and benefits management. Initially, cheap labor was the big attraction of this move, with pay in India 70% to 80% lower than in the U.S. But these days, tapping the abundant talent pools—and new ideas—in emerging markets such as India and China is important as well.
Many of those global service employees report both to local supervisors and to managers thousands of miles away. Pressure is most intense on those managers who run countries or regions, like Oliveira. "My worst day was the last day of the quarter," he says of his job as the Brazil country manager, which he held until he was promoted in late 2007. "I was measured for producing sales in Brazil, and at the same time, I had 6,000 global service delivery people with a different way of measuring. It was schizophrenic."
The task may be complex, but IBM is committed to it. "IBM is making real some new ideas about what it means to be global that were just a lot of talk before," says Rosabeth Moss Kanter, professor at Harvard Business School. The results are starting to come in. You can see them most clearly in the performance of IBM's $50 billion global services business, the focal point of the effort, which represents about half of IBM sales. In the third quarter of 2007, global services revenues grew 14%, to $13.7 billion, and pretax profit margins topped 10.7%, up from 8.2% three years earlier.
But there's still plenty of work to be done before IBM, with 375,000 people on six continents, is a smooth-running global machine. Says Chief Executive Samuel J. Palmisano: "The big issues for us are: Where do you put them? How do you retain them? How do you develop them? How do you move work to them or them to work?"
Palmisano began this journey almost three years ago. After getting the top job in 2003, he focused on innovation in high-end computers, chips, and software, and rapid expansion in emerging markets and services such as back-office information processing. Yet Palmisano's rise coincided with that of a handful of aggressive Indian tech services companies, which, thanks to their low-cost labor force, were able to undercut IBM's pricing. The result: Growth in services revenue slowed, and margins flattened out. IBM responded in 2005 by slashing more than 15,000 jobs in high-cost Western Europe, U.S., and Japan.
Cost-cutting alone wouldn't do the job: Palmisano had to transform how service work was done. He assigned Robert W. Moffat Jr., 51, a longtime IBMer, to the task. Moffat had already wrung $5 billion of annual costs out of IBM's manufacturing supply chain. For decades, IBM factories had focused primarily on one product and one geographic market. But by 2005 they made any number of products for a wide range of locales, so IBM was able to operate fewer plants and keep them running at higher capacity.
Moffat figured that the same approach could be taken with services. His team surveyed countries for costs, available talent, educational pipelines, languages spoken, proximity to markets, and political stability. They used this information to choose locations where IBM would serve clients anywhere around the world. Moffat set up finance and administration back-office centers, for example, in Bangalore, Buenos Aires, Krakow, Shanghai, and Tulsa.
Some longtime IBMers have found it difficult to accept the changes. When a bank in Spain asked IBM to provide financial services from two different delivery centers in order to reduce the risks of a major disruption, the first thought of IBM's Spanish staff was to set up a second facility within their country. Another executive pointed out that IBM's office in lower-cost Argentina could handle the bank's tasks. "Some people still think of themselves as being in separate companies," says Moffat.
Moffat and his colleagues also have used their manufacturing experience to keep track of IBM's far-flung employees. Just as every component used in an IBM computer is described in detail on inventory and planning documents, new databases contain profiles of employees that list their capabilities and their up-to-the-minute availability. Yet while a computer part doesn't change over time, people do. So the databases can be continuously updated by employees and their managers as employees gain skills and experience.
Before, project managers assembled teams largely made up of people they had worked with. But as IBM expanded around the globe, managers found it harder to pull teams together. Now project managers post detailed requests in one of the databases called Professional Marketplace that lists more than 170,000 employees along with their skills, pay rate, and availability. Other managers monitor the database and serve as matchmakers between jobs and people. The databases have shaved 20% from the average time it takes to assemble a team and have saved IBM $500 million overall.
By sifting through several personnel databases with sophisticated software, IBM's top managers can quantify the skills they have on hand worldwide and compare them with projections of what people they'll need in six to nine months. When they spot a coming shortfall, managers coordinate with colleagues in other countries to recruit or train people. In one case, IBM managers in Phoenix wanted to build a team in Brazil to test software for a large U.S. corporate client. After they put a request on Professional Marketplace, a manager in Brazil assembled a team in a week. Now IBM has 30 software testers working in Brazil.
IBM Brazil is a true microcosm of the enterprise. In five years the workforce has grown from 4,000 to 13,000 people, many of them based in Hortolandia, Brazil's Silicon Valley, about a 90-minute drive from São Paulo. Employees fly the national flags of their clients on their cubicles. Walk down the aisles and you'll hear English, French, Portuguese, and Spanish spoken. Salaries are about half of what IBM pays in the U.S. for similar work.
While most of the management team in Brazil is local, IBM mixes in people from other countries to hasten the global integration process. One such "assignee" is American Robert Payne, a 22-year IBM executive who runs part of the tech services organization in Brazil. Payne, 48, immerses himself in the cultures of the countries where he's assigned. He learned Japanese for his Tokyo gig. When he arrived in Brazil three years ago, he promised to conduct all of his meetings in Portuguese within nine months. And he did.
Yet at the start Payne found that when resources were tight, Brazilians favored local customers, while IBMers from other countries pushed for their clients. The rule of thumb, Payne advised them, was to "think as if you're the president of IBM. What's best for the company long-term?" That reduced the conflicts.
Payne and other senior executives know that operating globally requires a great deal of hands-on management. In the old days at IBM, projects often were born and died within a single office building in New York State. These days, they're broken into pieces and farmed out to small teams worldwide.
To understand how IBM choreographs this dance, consider Lotus Symphony, a package of PC software applications. Work on a new version of Symphony started last July. Teams in Beijing; Austin, Tex.; Raleigh, N.C.; and Boeblingen, Germany, are all contributing. Remarkably, it's the first time ever that the Beijing team is heading up a global project. Having an important role is vital for attracting and keeping top Chinese programmers.
It didn't sink in with the Chinese that they were actually in charge until five days after a test version of the product was released. The programmers were getting complaints about the software from testers and knew they needed to make improvements. They realized that they were responsible for the success or failure of the product. "The team had a Holy crap!' moment. They were just terrified," recalls Michael Karasick, a 48-year-old Canadian who runs the Beijing lab. He and the local Chinese managers calmed the programmers by setting priorities. The project is now on schedule.
One of the major challenges in this setup is the difficulty of communicating by e-mail or even videoconferencing when programmers have never met one another. Strangers don't readily share knowledge. "A big problem is trust," says Dirk Wittkopp, director of IBM's Boeblingen lab. "It works better if you can go out to dinner with somebody and have a beer. But we can't put people on planes to visit each other all the time."
So Big Blue is trying to bridge the gap with software that borrows heavily from social networking. A new program called Beehive is essentially a corporate version of Facebook. IBM employees create profiles and post photos, list their interests, and comment about company events or happenings in their private lives. Klaus Rindtorff, an engineer who works for Wittkopp, lists his five favorite places to revisit, such as Death Valley, Calif., and includes photos of IBM colleagues in Germany, Italy, and the U.S.
Another program, called Small Blue, is a search engine for finding experts within the company. The software scans employees' blogs, e-mail, instant messages, and reports, then draws conclusions about each participant's skills and expertise. When other employees search by topic on Small Blue, the program scans its findings to get a list of experts. Currie Boyle, an IBM consultant in Vancouver, used Small Blue to find a specialist for a Canadian client. His initial search turned up people in the U.S. and Europe, who in turn led him to an IBM staffer in Haifa, Israel, who had just the information he needed to help his customer.
Last month, IBM introduced a version of Small Blue called IBM Atlas for sale to customers. The company is positioning itself as a helping hand to other corporations who are taking similar paths to globalization. That puts extra pressure on IBM to succeed as a new sort of organization. If it thrives, that's good marketing. If it stumbles, that would be a very poor advertisement for itself.
Nike (NKE) calls it a "human-capital supply chain." Every year the shoemaker hires some 3,700 temporary employees—from electricians to programmers to marketers. And Nike has tapped Kelly Services (KELYA) to recruit and manage them, reports Workforce Management magazine. Expect lots of similar deals as companies turn more often to temps and contract workers, who now make up 12% of the U.S. labor pool.
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