Big Blue Shift
IBM's annual investor briefing is typically held in a bland hotel conference room in New York. But this year look for something radically different. It's kicking off the event 10,000 miles away at Bangalore Palace, a sprawling Colonial-era edifice modeled on Britain's Windsor Castle, in the heart of India's Silicon Valley. Speakers at the June 6-7 extravaganza will include Indian President A.P.J. Abdul Kalam and Diya Mirza, Bollywood's answer to Lindsay Lohan, who will emcee an event attended by 10,000 IBMers.
What's all the hoopla about? IBM is sending the message that India and the rest of Asia are crucial to its future -- as fast-growing markets and as pools of low-cost talent that IBM must tap to fend off pesky Indian competitors who are biting into its market share. IBM's (IBM ) India staff jumped from 9,000 to 43,000 in the past 2 1/2 years, making it No. 2 behind the U.S.
But cheap labor is just part of the story. For IBM, globalization is about reorganizing its 200,000-strong services workforce along skill lines, not just geography, and about coordinating operations worldwide to deliver services that are better as well as cheaper. In essence, it's all about revamping the people supply chain.
Yes, this big shift is about Bangalore, but it's also about Tulsa, Okla., where modestly paid accounting specialists process paperwork for clients who want the tasks done in the U.S.; Boulder, Colo., where hard-to-find specialists fix problems in computers all over the world; and Yorktown Heights, N.Y., where scientists in IBM's unrivaled research labs dream up ways to take some of the labor out of tech services. "Some people think the world is centered in India, and that's it," says Senior Vice-President Robert W. Moffat Jr., who is in charge of the makeover. "Globalization is more than that. Our customers need us to put the right skills in the right place at the right time."
IBM has even devised math formulas to tell it just who should be plucked from those various centers to work on any given contract. Researchers came up with a standard way of describing skills within the company and algorithms for optimizing the use of individual employees. That work has been put to use in a project, Professional Marketplace, which helps consultants put together teams from among 70,000 IBM résumés.
Last July, Moffat was tapped to be the crucial player in remaking a large piece of the workforce. He had spent the previous four years wringing out $5 billion per year in efficiencies from IBM's manufacturing supply chain. Now he's on the spot to do the same with its people. The 27-year IBM veteran has made two presentations to IBM's directors and is to speak in Bangalore.
The transformation that's sweeping IBM could soon be showing up at companies everywhere. In the 20th century, IBM was a pioneer of the multinational business model. It created mini-IBMs in each country -- complete with their own administration, manufacturing, and service operations. But that approach is too top-heavy at a time when lean Indian tech companies and Chinese manufacturers produce high-quality goods and services for a fraction of what the multinationals charge. Now IBM is pioneering what it calls globally integrated operations. IBM aims to lower its costs and at the same time provide superior service so it can be more competitive, win more deals, and drive revenue and profit growth.
Here's how the thinking goes: In tech services, which account for half of IBM's $91 billion in annual revenues, low-cost labor is necessary but not sufficient. The company needs to bunch employees in competency centers (collections of people with specific skills) that are distributed around the world. That way it can take advantage of the low costs in some places, and in others have highly skilled employees in close proximity to customers. Rather than each country's business unit having its own workforce entirely, many people are drawn from the competency centers.
Here's just one example of how that can pay off: In the past, many software installations for clients' PCs were done for each machine individually by an IT employee who walked around from one machine to the next. The cost: about $70 per PC. Now, IBM has 200 people in Toronto running a software installation factory for clients worldwide. They assemble packages that are delivered to machines over the Net. The cost: 20 cents per PC.
"A COMPELLING THREAT"
The computing giant doesn't have the luxury of making these changes gradually. Indian tech companies, with their low costs and high quality, have rewritten the rules of competition in the $650 billion tech-services industry. Under this assault, IBM's services revenues declined 1.2% in the first quarter, to $11.6 billion. IBM and other Western tech-services giants are being forced to realign their workforces. "After years of putting their head in the sand, they're seeing it as a compelling threat," says Nandan M. Nilekani, chief executive of Infosys Technologies Ltd., one of the top Indian players. "They're acknowledging the megatrends but not moving fast enough."
It's too early to call the endgame. IBM and other Western outfits have deep ties with customers and vast resources of talent, so analysts expect the competition to be fierce. Most anticipate that IBM and Accenture (ACN ) will be among the winners, along with a handful of Indian companies. But they warn that IBM should take nothing for granted. "They still have a huge way to go to be cost- and price-competitive," says analyst Paul Roehrig of market researcher Forrester Research (FORR ).
IBM's Moffat suffers no illusions about the difficulty of the path ahead. Even after years of reinvention at IBM, many of its people are set in their ways. Earlier this year he found out just how challenging it will be to win over hearts and minds. More than 10% of the 450 managers he invited to a three-day organizing meeting for his globalization initiative in January were no-shows.
Moffat is no screamer, but he made clear his disappointment when he took the stage in the ballroom of Disney's Yacht and Beach Club Resorts in Orlando on Jan. 30. About three minutes into his remarks, the athletic 49-year-old pointedly told the crowd that 50 executives had stood him up. "You could have heard a pin drop," recalls George Welleck, a vice-president who now leads 1,100 engineers specializing in data-center software, one of the new global competencies.
Welleck had been skeptical, too. A 25-year IBM veteran, he suffered through his share of corporate reorganizations that really didn't change things. But he approved of Moffat's strategy after hearing it laid out, and he hoped this re-org would be different. After the briefing, Welleck met with a dozen managers assigned to work for him. Right off, several Europeans told him they wanted out. They figured U.S. executives would run things and they would be left on the fringe. "I promised I will globalize," Welleck says. The Europeans agreed to stick with him.
To understand IBM-style globalization, consider the company's operations in Boulder. They're centered at the foot of the Rockies in earth-brown buildings used from the 1960s to the 1990s for manufacturing data storage devices. The assembly lines are long gone, but the workforce of 6,200 is still near its peak. Many of them work in data centers, which serve 100 customers, and a recovery facility for clients whose computers are knocked out of service.
The most important venues are two nearly identical global command centers. These are large rooms similar to NASA's Mission Control. Engineers sit along tiers of tables monitoring computer screens for signs that machines at 426 data centers scattered worldwide are experiencing glitches. On the front wall are huge electronic displays that show CNN, national and world weather maps, even a globe pinpointing earthquakes. If something happens anywhere in the world that could interfere with the flow of bits and bytes, these folks are likely to know. They call on experts within the Boulder office or in competency centers worldwide to help set things right.
IBM's global shift makes it possible for many of the people who manage machines and software in data centers to be separated from the centers themselves. That means it can tap low-cost talent in India, where it operates a twin to the Boulder facility, for much of this kind of work. Some of the data centers are interchangeable, so if India has issues, IBM can route computing jobs and calls for expertise elsewhere. That's what happened on Apr. 12, when the death of beloved Indian actor Rajkumar sparked riots and office closings in Bangalore. To avoid interruptions, IBM quickly shifted data center management duties to Boulder and help-desk work to South Africa. "I bet the Indian companies had some frustrated customers that day," says Arvinder Surdhar, the IBM vice-president in charge of end-user support.
Eventually, the Indians will build big networks of global delivery hubs, but they still won't match IBM's scientific research capabilities. That's why IBM has brought together its global services and research organizations to bring automation to bear on services. Fifteen projects are under way and two of them are already being piloted in Bangalore. One is a system for turning each kind of service into a series of standardized processes. The tasks are broken into pieces and moved electronically between people who perform them. "It's a virtual factory," says Mahmoud Naghshineh, director of service delivery for IBM Research. If it works, the company believes automation will allow it to slash more than 10% from overall outsourcing costs, giving it an advantage that others can't easily match.
For some highly skilled employees, the globalization initiative offers a chance to raise their profile in the company. One group of 10 software programmers got a jump on Moffat by forming a volunteer global collaboration network so they could help each other out with projects. Employees such as these, with rare skills and the flexibility to use them in new ways, can practically write their own career tickets.
But many others face the prospect of losing their jobs to low-cost rivals in developing nations. Last year more than 15,000 IBMers left in a cost-reduction program. Tom Kennett, a software specialist whom IBM cut loose last year, says he was forced to train his Indian replacement. "They came and said your job is being outsourced and you'll train your replacement. If you don't, you won't get the severance package," says Kennett.
There's no turning back for IBM. Moffat says the globalization effort is still in the early stages, but ultimately he hopes to provide about one-third of IBM's ongoing earnings-per-share growth through productivity improvements. Already, operating margins in the services business rose by 2.5 points, to 10.3% in the first quarter. "I like our hand," Moffat says.
Investors aren't showing much interest yet. IBM's stock price hasn't budged all year. Longer term, though, IBM could start to look more attractive. Analyst Cindy Shaw of equity researcher Moors & Cabot expects IBM's declining pension expenses and savings from globalization to boost earnings growth over the next two years. "Investors will be watching earnings growth. If they see that, they'll get excited," she says.
By Steve Hamm