Big Blue Gets Wired

IBM is learning how to use Web technology to streamline its own operations

Richard B. Anderson has one of those jobs that can make or break a career. Along with a 150-person staff, he has been given the task of turning IBM into a business that takes as much advantage of the Internet as any dot-com. Last year, he helped IBM sell $15 billion worth of goods online and save nearly $1 billion by using the Web to cut costs and boost productivity. But he happens to work for one of the most demanding bosses in Corporate America--IBM Chief Executive Louis V. Gerstner, Jr. So who could blame Anderson for cold sweats? "I wake up every night worried about speed," he says. "Are we moving fast enough? And the answer is never, not in this world."

That's because all the easy stuff is done. From 1993 to 1998, IBM slashed $9 billion in costs by hacking away at head count and unprofitable operations. Now, Gerstner wants to turn things up a notch--or three or four. So he gave Anderson the onerous task of figuring out how IBM can become a model of efficiency.

Gerstner has little choice. Net-savvy competitors such as Dell Computer Corp. already have snatched the personal-computer market from IBM and others. About 50% of Dell's $25 billion in sales are online, while 17% of IBM's $87.5 billion in revenues are over the Web. And in the hot-growth PC server market, Dell's streamlined business model is paying off with gross profit margins of 27%, a good 10 points higher than IBM, according to market researcher Technology Business Research Inc.

Rivals such as Hewlett-Packard Co. and Sun Microsystems Inc. are no online slouches, either. They are turning inward, focusing on using the Net to make their already lean organizations even more efficient. Sun, for example, has created My Sun Web pages tailored to each customers' needs, not unlike what Dell does. (IBM has done the same for 300 of its largest customers and expects to have 2,000 set up by yearend.) Sun also has launched a program to look for ways to leverage the Net to cut supply-chain costs by 30%. And Sun is outsourcing many of its Net operations. Says Sun President Edward J. Zander: "This year, for the first time, every one of my division chiefs has to explain their core competencies to me. They have to defend every person because now there's the Web and outsourcing."

IBM has a more fundamental problem. It has been trying to persuade Old and New Economy companies that it is a leading supplier of e-business knowhow. But how can customers trust their online business to any company that isn't turning the Web into an advantage itself? "We should be the world-class users and early learners," says J. Bruce Harreld, IBM's senior vice-president for strategy. "We ought to be, frankly, on the bleeding edge here, not only to improve our own business but also to help our customers."

IBM is trying to do just that. Nearly 90% of the company is wired and handling operations over the Internet. A new online procurement system has eliminated 5 million pieces of paper a year. Software that streamlines the hiring of temporary workers is shaving $3 million off expenses. IBM bought $13 billion worth of goods and services over the Web last year, saving more than $270 million. And by automating customer handled more than 43 million online calls--the company saved an additional $750 million last year. "I've been pretty impressed by what they have been doing," says Erik Brynjolfsson, a professor at Massachusetts Institute of Technology's Sloan School of Management who has done research on how companies use information technology. "Gerstner is one of those CEOs who gets it."

Especially when it comes to his employees. Gerstner is on a jihad to make it easier for IBM workers to order supplies online. It used to take at least 30 days for a worker to get approval to buy new equipment such as a fax machine or even pens. That's why nearly 30% of IBM's employees would break the rules, buying equipment from suppliers that did not offer preapproved discounts or prices. Today, IBM employees log on their PCs, and in under two hours they can get what they want.

IBM is getting smarter about saving money on computer parts, too. It buys from suppliers who may build only a small part of a machine--say, the motherboard for a personal computer. But in the case of a motherboard, scores of microprocessors from other manufacturers go into the making of that part before it's delivered to IBM. So, Big Blue asks the company building the motherboard to zap it a list of all the chips, along with their prices and their suppliers.

That may sound simple, but to make it happen, IBM had to wire some 12,000 suppliers to its network. All the information IBM gathers is then dumped into a huge database that includes what IBM pays for every microchip, or part, used to make other products the computer giant sells.

Then IBM starts chewing over the data. The company uses data-mining software to see whether, for example, chip X used by its motherboard supplier also is used elsewhere within the company. The software compares the price IBM pays with what the motherboard maker spends. If IBM is getting a better deal on chip X, then IBM will go to the manufacturer of chip X and demand the motherboard maker get the same price. There's a catch: The motherboard maker has to lower its prices to IBM by the same amount. "It sounds tough, but it turns out that almost all of the suppliers we deal with have HP or somebody else as customers too," says Harreld. The supplier slashes what it charges IBM but keeps the old price for other customers. "Guess what? We won't tell HP," laughs Harreld. IBM has saved $175 million by using this software tool.

Ditto the distributors who sell IBM products. For Savoir Technology Group Inc., speedy links to IBM via the Net will add up to nearly $1.4 million in savings and productivity gains this year. New orders go directly into IBM computers, eliminating costly errors that used to happen when Savoir employees would mistype purchase orders to send off to IBM. What's more, Savoir can tap into IBM's computers to find the status of orders, complete with serial numbers and delivery dates. That's something only Dell offers customers who buy direct. Compared with other computer makers such as HP or Sun, which still sell mostly through dealers and distributors, "IBM is leading the pack," says Savior President Joe Mertens.

That's good news to Anderson. But he's still sleepless at night, tossing and turning, worrying whether IBM is moving fast enough.

Before it's here, it's on the Bloomberg Terminal.