IBM’s Globally Integrated Enterprise

Stephen DeAngelis

July 26, 2007

A year ago I wrote a post about a letter to the editor of the Financial Times written by IBM’s president and CEO Sam Palmisano [Globalization and Resilient Enterprises]. His main point was that multinational corporations are going to have to transform the way they operate if they are going to survive in the emerging business environment. He called this new, transformed business organization the globally integrated enterprise. The big difference between how multinationals and globally integrated enterprises act, according to Palmisano, is that multinationals set up “mini me” versions of the company (or, worse, simply exploit available local resources to use elsewhere), while globally integrated enterprises adapt to local conditions and work to improve rather than exploit local conditions. Instead of trying to create cookie cutter versions of the parent corporation, a globally integrated enterprise morphs as conditions change. That means that the various parts of the company must have a “plug and play” capability that can merge with other parts of the organization as required to reduce redundancies and to meet customer needs.

Earlier this month I again wrote about IBM [The Globally Integrated Job Market], citing a New York Times article by Steve Lohr. The article was about how IBM is taking advantage of the Globally Integrated Job Market Lohr once again writes about IBM’s transformation and how it seems to be working [“I.B.M. Showing That Giants Can Be Nimble,” 18 July 2007]. Lohr begins his latest article by noting that IBM’s transformation was a matter of survival, not simply Palmisano’s brilliant idea about how to change the business landscape.

“Two years ago, I.B.M. was stumbling. Its 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.”

In my post about the globally integrated work force, I noted that the natural evolution of the work force (from agriculture to manufacturing to service to information) can’t be stopped without serious global implications. Palmisano realized that IBM would only survive by moving up the ladder to the next level of products and services.

“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.”

While many multinational corporations grow through mergers and acquisitions, IBM has recognized that such a strategy can make a company big without necessarily making it better. True integration means taking advantage of hubs of excellence and reducing as many redundancies as possible. The “always on” world requires an “always on” organization.

“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.”

Maintaining its edge, Lohr writes, won’t be easy for IBM because competitor service companies in developing nations (especially India) are making huge inroads.

“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 percent. 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.”

I too think the Detroit analogy is inappropriate. Books like Clayton Christensen’s The Innovator’s Dilemma have made companies very aware of the dangers of being blindsided. Peter Schwartz and his Global Business Network associates as well as others make a good living helping large companies think about the future and consider alternatives.

“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. After the stumble in 2005, Mr. Palmisano decided to push the shift in services faster — to try to get more of the new global model in place. 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. ‘Software had to play a bigger role,’ Mr. Palmisano explained. ‘Then we could offset the transition in services.’ 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.”

As noted above, however, IBM’s M&A strategy hasn’t been about getting bigger but getting better. It has pursued companies that added value to its offerings and which could become hubs of excellence for other sectors of IBM.

“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.”

One particularly interesting aspect of IBM’s transformation has been how it uses software.

“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.”

I’m not surprised how IBM has used software. When I started Enterra Solutions and began considering options for helping organization’s transform into Resilient Enterprises, two of the challenges that quickly emerged were how to deal with change and how to automate processes while maintaining flexibility. Traditionally there has been a built-in tension between these two variables. Automated processes were generally hardwired into a system and were therefore difficult to change. Often the original reasons that processes were cobbled together in a particular way are forgotten. The innovative technologists at Enterra Solutions, led by Chief Scientist Jason Glazier, have developed a way to automate processes, making them easily upda
table as conditions change as well as preserving the essential relationships behind the processes. The idea behind automating processes is to relieve people from having to do mundane jobs, increase efficiency, and decrease errors. Human capital is precious and it should be expended on productive pursuits that are both interesting for the employee and profitable for the company. The use of flexible automated processes can help a company become more resilient as it integrates globally.