NYT : IBM Transformation Is Globalization Case Study

Wednesday, July 18, 2007

…IBM’s financial performance in the first quarter of 2005 was well below expectations and the culprit was its big technology services unit, a business under increasing pressure from lower-cost Indian outsourcing companies.  “It wasn’t just the miss, it was that revenues were slowing in services,” Samuel J. Palmisano, I.B.M.’s chief executive, recalled in an interview.  Since then, I.B.M. has made impressive progress.  It has increasingly moved up the ladder to offer higher value corporate packages of research, software and services.  This is also higher-margin business, where specialized skills matter more than price.  In addition, I.B.M. has hired aggressively in India to narrow the cost advantage of its offshore rivals in traditional technology services like operating data centers for customers and upgrading and maintaining their software.  I.B.M. has been reorganized from a classic multinational company with country-by-country operations, working in isolation, to a more seamless global enterprise with centers of expertise in industries and technical skills, scattered around the world, each a hub in a global network for delivering services.  The changes, according to Mr. Palmisano, amount to “a huge reinvention” of the company.  Its experience offers a textbook case of a company successfully navigating the twin challenges of globalization and rapid technological change, at least for a two-year stretch.  So far, it seems to be working.  Profit margins at I.B.M. have risen steadily and it reported record earnings and cash flow in 2006…..Despite the recent improvement, I.B.M. still faces daunting long-term challenges — particularly in its services business, which contributed 52% of the company’s revenue and 37% of pretax income last year.

The Indian insurgents in the technology services business continue to enjoy a sizable cost advantage.  The leading Indian outsourcing companies, like Infosys, Tata Consulting Services and Wipro, have average operating profit margins of more than 20%, according to a recent analysis by Sanford C. Bernstein & Company.  The margins at I.B.M., according to Bernstein, are less than half that — though a bit higher than the average for the next six largest American technology services companies including E.D.S., Accenture, BearingPoint and Computer Sciences.  The leading Indian companies are gaining ground at an impressive pace.  Last week, for example, Infosys reported that its quarterly revenue rose more than 40%.  I.B.M., the world’s largest technology services company, dwarfs any of the Indian outsourcers and offers a much wider range of services.  But the Indian companies see themselves as the wave of the future in services, and they say their Western rivals, who are hiring by the thousands in India, are struggling to cope with the situation.  “We are leading, and the old-line players like I.B.M. are forced to copy our model,” said Nandan M. Nilekani, co-chairman of Infosys.  In his view, the American companies are much like the Detroit automakers years ago and the leading Indian services suppliers are similar to the Japanese car producers.  The Japanese upstarts, Mr. Nilekani noted, began by supplying lower-cost models, but retained a continuing cost and quality advantage as they moved into the mainstream and luxury car markets.  I.B.M. bristles at the Detroit analogy, and it does seem to be adapting quickly to the global competition instead of being blindsided by it.  In fact, the poor performance in early 2005 was an alarm bell — not so much a call to alter the company’s strategy but to accelerate one that was already being put in place…..After he became chief executive in 2003, Mr. Palmisano began a campaign to change the profile of I.B.M. toward businesses requiring specialized skills and advanced technology, thus commanding higher profit margins.  I.B.M. has sold hardware businesses with lackluster profits including disk drives, personal computers and printers…..If services revenue was going to flatten for a while, I.B.M. needed to find a way to increase profits elsewhere.  The answer was to step up the buying spree in the high-margin software business…..In software, I.B.M. started to build up that high-margin business mainly with acquisitions of small companies in fields like security, data management and Web commerce.  Since 2003, I.B.M. has spent $11.8 billion on 54 acquisitions: 36 software and 18 services companies.

The transition into services has been the most ambitious and difficult, involving a wholesale reorganization and a change in the culture of a business that now has 200,000 employees worldwide.  The traditional multinational company, Mr. Palmisano explained during an interview at I.B.M’s headquarters in Armonk, N.Y., was a collection of local fiefs, while networked teams will be the hallmark of the global corporation of the future.  I.B.M. has set up global centers for tasks like software development and maintenance, which is a reason I.B.M. employs 53,000 workers in India today.  It has also created global and regional teams of skilled experts in particular industries, from airlines to utilities, who travel as needed on projects.  The only way for I.B.M.’s services business to grow without continually adding more people is to automate more data center maintenance and other computing chores with software.  “The goal is to replace a lot of labor but do it with software, not replace labor with lower-cost labor,” said Virginia M. Rometty, senior vice president for global business services.  Profits have also been helped by moving into high-end services projects that tap I.B.M. expertise in research to apply computer science and advanced mathematics to fields like utility grid optimization and energy conservation, genetics-based personalized medicine, fraud detection and prediction, and traffic management using sensors and congestion-pricing models.  A. M. Sacconaghi, an analyst at Sanford C. Bernstein, says the unanswered question about I.B.M. is, Can the new, higher-margin business grow fast enough to offset the maturing of its traditional services business and rising competition from the Indian outsourcers?

Reference : http://www.nytimes.com/2007/07/18/technology/18blue.html

One Response to “NYT : IBM Transformation Is Globalization Case Study”

  1. NK Says:

    The paradigm shift that businesses worldwide have to go through is not just becoming increasingly and rapidly apparent in the world of Information Technology/Services.
    Boeing’s newest jet, the 787 Dreamliner, has forced Boeing to radically alter the way it thinks about the entire process of manufacturing an aircraft. Not only is this the first aircraft ever made entirely from composite plastics, and not aluminium as has been traditional, but, for the first time in history, over 50% of the aircraft has been outsourced to “partner companies” or Boeing subsidiaries overseas. Even crucial parts like the wings and fuselage-traditionally ONLY manufactured at their facility outside Seattle, were manufactured in Japan.
    So IBM is not the only company to move to a “more seamless global enterprise with centers of expertise in industries and technical skills, scattered around the world, each a hub in a global network for delivering services”.
    So is this the new way of doing business globally?
    The 787 Dreamliner, by the way, now holds the distinction for being the highest-selling aircraft in Boeing’s history, without a single model ever having left the ground.

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