Please Look, We’re Changing

Change by itself is not new. But when change takes place at a 92-year-old company that has 315,000 employees and $81 billion in revenues, it becomes a big exercise. Not that this 92-year-old giant–IBM–has not been through change earlier. It has, during its history, changed from a company selling weighing scales to a company selling computers! And in many of these years it has been seen as the undisputed leader in computing. Now IBM is moving from being a hardware- and products-oriented company to a services-oriented company. Across all its divisions, subsidiaries and departments, in a parallel move, it is trying to give all these changes one pole star–e-business on demand.

The why

The ongoing change is driven by the need to re-establish its leadership position and adjust its offerings and ways of doing business to a new business order. Hurt in the late 80s and early 90s, when the world saw the dominance of the Windows and Intel combination, IBM has spent the last decade or so in reinventing itself. The origins of this change are to be found at the time when Lou Gerstner took over a troubled–and many say egoistical–company that had lost sight of the world reality.

Today, the company is more than candid about it. “Of course, you know that IBM stumbled badly in the early 90s, largely because it strayed from its own values and stopped listening to customers and to its own smart people,” says Samuel Palmisano, chairman, president and CEO of IBM, in the opening lines of the company’s 2002 annual report. And, of course, there is a drop in revenues caused by the tough economic conditions sweeping the world. IBM’s total revenues dropped from $85.1 billion in 2000 to $81.2 billion in 2002. Correspondingly, its income fell from $11 billion to $7.5 billion.

In conjunction, the last five years have seen a fundamental change in the worldview of computing, when compared to the previous 50 years. IT is no more about chips and computers and storage and networks and response times. IT is about running the entire process and, in many cases, the business itself. The bits and pieces have been computerized–back-office operations, manufacturing, logistics, finance, purchases–and efficiencies have been gained from them. But these are sub-systems that are working in silos connected by thin pipes. For an entire organization to work as one machine there have to be horizontal processes cutting across the silos. The pipes have to become the silos. Not that this integration is some new theory of relativity. Computing literature–especially marketing brochures–has been full of it for the last couple of decades, if not more. The difference is that it all seems much more possible now with powerful machines and communication networks. Managing individual processes is no more the issue in most organizations. Managing the complexity of these processes is the issue. And, therefore, that is where all sellers would like to be. IBM is no exception.

The third major change is that business uncertainties have increased, or at least become much more visible and far reaching. A stone thrown in the Atlantic Ocean today creates waves in the Arabian Sea. Global organizations with tightly integrated operations cannot insulate individual units from impacts across the world. Communication makes distance irrelevant and time is now 24x7. That has increased the need for businesses to be able to make very rapid changes to fluctuating demand patterns. Airlines can run to capacity one day and be flying empty planes the next day. Communication companies can have networks clogged with phone calls or chunks of bandwidth waiting for a byte. Hotels have similar problems. The patterns of customer demand keep changing. And goods are made and shipped across the world in many cases. Customer demand soars up and down like a yo-yo. Businesses have to adapt to these changes quickly and comprehensively. Technology is seen to be the key enabler. It also has to be a cost-effective enabler. What that means is that IT customers will want IT processing capacity as a service–and pay by use. Essentially, convert fixed costs to variable costs.

No surprise then that all technology companies are scrambling to find new pedestals to stand on in a rapidly changing technology world. IBM calls it the “On Demand World”. HP offers many on-demand solutions and runs a campaign that has the catch line “Demand More”. Oracle is pushing its database products for grid computing, which delivers “computer power on demand, automatic load balancing of systems and easy management of IT infrastructure”. Sun has a large numbers of options offering on-demand services as a search for “on demand” on its website indicates. On demand, grid computing, utility computing–these are all terms that are being used to create a new computing paradigm.

Finally, hardware is a commodity now. Even as hardware power spirals upwards, margins spiral downwards. Margins and future values lie in software and services. There is a huge number of mips–growing each day–populating the planet. Their usage, however, is low. Huge computing power lies idle. In many cases, applications are limited by lack of software and adequate business processes rather than hardware.

IBM would like to ride–and drive–these changes to get growth and retain its leadership position.

The how

The history of this transformation for IBM is a decade old. Under Lou Gerstner, IBM decided to remain integrated but consolidate its offerings. It moved away from businesses like disk drive manufacturing and strengthened its consulting and services businesses. It decided in the 90s that its real strength lay in its diversity and completeness across the world of IT. So, instead of breaking up the company into smaller focused units, it decided to reorganize and adapt to the changes. The glue to hold all this together was e-business. That has evolved into on-demand computing–the mantra which it chants now. And would like the world to chant. It claims to be driving itself the same way and is becoming an on-demand company. States Linda Stanford, senior vice-president, Enterprise On Demand Transformation, “IBM seeks to reinvent buyer experience around solutions, build trust through repeated and consistent delivery of value and improve ease of doing business.” IBM’s on-demand supply chain resulted in 95% on-time delivery and installation quality above targets. It is also expected to result in savings of $6 billion for IBM in the current year. The backbone of this transformation is IT–and a vast enterprise wide infrastructure, which supports 250,000 same-time users.

The infrastructure spans all the businesses and other units of IBM. At the top end of its business offerings is IBM Business Consulting services, which offers not technology but process innovation and integration services. IBM Global Financing seeks to provide finance facilities to customers in competition to banks to ensure that customers can spread their financial outlays.

IBM Global Services provides services to customers who would like to outsource their IT infrastructural needs and facilities management rather them have them in-house. The Personal Systems Group sells PCs, printers and other smaller hardware items. The Systems Group sells servers and storage products. The Software Group provides DB2, middleware and operating systems, Lotus Groupware, Tivoli management solutions and other software products. And the Technology Group provides semiconductor technology and packaging solutions to OEMs and IBM itself.

And these groups are being strengthened by internal reorganization and acquisitions. With the acquisition of PwC last year, it brought in business expertise to a technology company in a wide range of functions. At $4 billion it was, IBM feels, a small price for change. Earlier, it had acquired Lotus to strengthen its workgroup computing arsenal. It also acquired Informix for a $1 billion cash payment and Rational at $2.1 billion. It has a close working relationship with PeopleSoft, now a $2.8 billion company with 11,000 customers, over 70% of whom work with IBM server platforms.

The changes are reflected in the revenues of the company. Of the $81 billion 2002 revenues, 45% came from services, 16% from software, 4% from financing and 34% from hardware. Interestingly, software gave a whopping 84.4% in gross profits–about $11 billion. Global services and hardware gave more modest numbers of 26.3% and 27.1% in gross revenues respectively in the same period.

Does that mean that the company will exit the hardware space? That is not likely but clearly it will exit spaces that occupy the lower end of the value chain or those that are very highly commoditized. In fact, all its departments are becoming service oriented. In the server group there are 200 employees who work with customers on developing solutions. The R&D team is designing and producing products for OEMs and other customers and seeks to become a service company. It will design products and sell the designs rather than have IBM manufacture all its designs. Products that IBM feels are not a part of its portfolio are just taken up as consulting assignments. And this business unit has to earn its keep. It has target of $1 billion to reach in a year or two. The R&D continues but the R&D team is being given a coat of business paint–it is being asked, for instance, to see if the design principles that are used to manage networks on computers can be used to solve transportation related problems.

The questions

The questions that remain.One–is it possible for a consulting firm and supplier of goods to co-exist under the same umbrella? Would customers accept the recommendations of the Business Consulting Group for hardware and software in case these were for IBM products? Would it leave an impression of a bias even if there was none. IBM, of course, intends to keep these as completely different units. But is that working in practice?

IBM is actually a dozen-odd businesses rolled into one. Each of its business areas is very different from the other. Semiconductor design and business process consulting are tied by only by three letters–IBM. It is possible that customers at times will ask–will the real IBM please stand up? Under each business, it also has a huge range of options available; for instance, there are four server series with just one of them–the I series–that has 15-odd models. IBM has Unix-based servers, Intel-based servers, the mainframe class of machines and the I series for small and medium businesses. And it runs the OS 400, AIX, Linux and Windows 2000 operating systems on its machines. It is not easy to select the right offering and can confuse customers. IBM’s answer is that it does not believe in the “one size fits all” strategy of competition and has many versions to ensure that the customer gets what he exactly needs. True, but that also removes the focus that the sales and service teams can offer.

The one-stop shop approach of IBM leaves it open to smaller competitors coming in with nimble policies and innovative products. It has happened in the past and could happen again.

In fact, even today the competition to IBM is widespread. In its Business Competing services, it competes with Accenture and EDS; in components with Intel and AMD; in hardware with Dell; and with Microsoft, Sun, HP and Oracle in other areas.

To remain ahead of each competitor in all categories is a tall order. IBM’s answer–it is not important just to build the fastest machine or the best software engine. It is important to able to use them better. IBM is still large but HO has been playing catch up and there exist strong competitors in each operational area.

Will IBM be able to compete in so many areas with best of breed products and services? And will customers prefer to get the best of each breed or composite solutions? IBM is, obviously, betting on being a complete company with diverse products and services under one roof.

SHYAM MALHOTRA in New York The author is Editor-in-Chief of Cyber Media, the publishers of Dataquest.