How IBM Used Efficiency and Reengineering for Reinvention

Introduction

After a highly visible fall from the heights of information technology leadership in the early 1990s, IBM is healthy and growing again. The new millennium has brought record revenue and established IBM as the leader in servers, middleware, business transformation and outsourcing services, and momentum continues to build. Of course, a transformation of this magnitude doesn’t happen overnight. It entails nothing less than a reinvention of the company, and it makes for a compelling story—a story that is still unfolding.

This transformation is not an event, but a journey—one that is taking place in the midst of greater turbulence and volatility than businesses have faced in more than half a century.

Although IBM’s story is in many ways unique, it mirrors the aspirations and challenges faced by many leaders of businesses and institutions today. They are grappling with how to manage their organizations through what feels like a very important—perhaps even historic—inflection point.

Once every 40 to 60 years over the past three centuries, society has witnessed a great surge of business innovation, sparked by technological advances, which ushers in a revolution of an era.

There have been five such surges in modern history Each of them follows a predictable pattern with two distinct periods of 20 to 30 years: The first is the period of installation, going from initial exploration, exuberance and speculation; to a bubble, an economic meltdown, its correction and a market adjustment. The second is the period of deployment, during which new ways of doing business are explored and implemented—and broad-based wealth and value are created.

NEW SURGE: RIPPLING EFFECT

As world markets entered the most recent stage of sustained innovation, it’s fair to say that IBM traveled a rough road. It’s no secret: the company began this journey out of necessity—and was struggling to survive. Reengineering efforts at that time were driven by the need to simplify the enormous complexity—and attendant costs—that accompanied IBM’s decentralization in the early 1990s. As did most other companies, IBM leveraged the Internet and global connectivity to simplify access to information and enable simple, Web-based transactions.

The company took steps to integrate processes both within the business and among a group of core clients, partners and suppliers. That was a huge effort—and yet by late 2002 it was clear that the real journey had just begun. While IBM reaped enormous efficiency gains, it had yet to challenge long-accepted practices, processes and organizational structures that limited its—and most other companies’—options in the face of globalization, industry consolidation and disruptive technologies.

A MODIFICATION TO THE NEW WORLD

The answer lay in a new computing model and in a new business architecture. On Demand Business, and IBM committed itself to becoming not simply a case study, but a living laboratory for On Demand Business. The company identified key business characteristics—horizontally integrated, flexible and responsive—and the IT infrastructure needed to produce its enterprise transformation—integrated, open, virtualized and autonomic. IBM focused on tackling the complex issues surrounding significant changes to essential business processes, organizational culture and IT infrastructure, and worked to find new ways to access, deploy and finance solutions. Most importantly, IBM committed to use its own experience to deliver more value to its clients.

Putting IBM’s journey to On Demand Business in perspective

IBM’s shift to On Demand Business is not unique. The company conducts an annual worldwide tracking study with 6,000 organizations (30,000 interviews over the past five years). Through this study, IBM identified three major stages that an organization moves through as it transforms its operations through the use of the Internet and network-based technologies. Each stage has different characteristics, challenges and benefits.

• Access—Businesses have IT-related capabilities that tend to be limited to supporting single business units with little or no integration between them. A simple Web presence or basic e-commerce would qualify a business for this stage of adoption. The challenges? Fears about security. About financial risks. About the quality of vendor support available. About meetinG demand.
• Integration—Businesses have begun to break down barriers by integrating and automating business processes, models and applications, and supporting infrastructure across their business units, moving them in the direction of end-to-end integration, a critical step to becoming an On Demand Business. Eventually such businesses include their ecosystem in their integration efforts, by including their suppliers, customers and other business partners. Those processes are still relatively static and inflexible, however, because they tend to build on and automate existing relationships. The benefit? Increased speed and quality, as much of the manual processing is eliminated. The challenges? Integration of disparate processes and systems built by different teams.
• On Demand Business—The ability to dynamically manage and reconfigure processes and relationships begins to emerge as a company becomes an On Demand Business. Relationships can be formed and dissolved on the fly, according to business need and external conditions. Processes and IT systems become increasingly modular to support reconfiguration, both internally and externally. All of this enhances the flexibility and resilience of a business, while giving it the ability to focus more tightly on its core, differentiating capabilities. For IBM, it also meant moving to financial reporting that is balanced between client and industry as well as products and services. The biggest challenge? Fostering a collaborative culture and breaking

Down the business and cultural barriers between internal and external teams, and then reaching out seamlessly to embrace customers, suppliers and business partners, and differentiate value.

Reengineering: the making of a healthy business:

In 1993, under the guidance of then IBM Chairman and CEO Lou Gerstner, the company began its turnaround from a near-death experience. And a big part of that was the strategic initiative to reengineer IBM’ score processes. A loose confederation of independent business units had created an unwieldy management structure, redundant operations and disconnected information systems. In 1993, the company experienced a US$8.1 billion loss, and the stock price was at a 20-year low. Although he was under pressure to break up the company, Gerstner decided that the sum of IBM was more valuable than its parts, and he recognized that IBM had to change to meet its clients’ needs or the company would cease to be relevant. To realize this value, however, IBM’s leadership team had to tackle some very tough issues. They started by focusing on a few core functions—customer relationship management (CRM), product development, procurement and logistics. Between 1996 and 1998, IBM reduced redundant costs associated with decentralization and, as a result, achieved US$5billion in cost avoidance and savings. Between 1999 and 2002, IBM’s priority shifted to integrating elements of these processes to create a more horizontal flow of work across the business. So rather than optimizing processes by business unit or within functional domains—like billing—the company focused on creating processes that would make working with IBM a better experience for its clients, IBM Business Partners and suppliers. During this phase, IBM gained more than US$7 billion in new efficiencies.

Reinvention: the making of an On Demand Business

By 2002, with a solid foundation in place, recognising that the IT industry was splitting between commodity- like and high-value businesses, focus IBM on high value: innovation, creating unique value, new technology and new business insights and models.” Early on, we focused on reducing cost and expense,” says Sanford. “We had to in order to survive. But today, our focus has shifted from reengineering to reinventing ourselves. We continue to deliver cost and expense improvements, but now we’re tackling a more complex agenda—focusing on growth and innovation as powerful ways to manage and measure our progress.”

To realize this agenda, IBM has shifted its focus to integrated, unique client solutions supported by business and technology innovation; identified business processes that would require radical transformation; and analyzed technologies and business practices that would foster improvement to business performance. Based on insights from clients and a wide range of internal and external experts, the company identified and nurtured more than 20 emerging business opportunities that had the potential to become multibillion dollar businesses in three to five years. Of these, life sciences, digital media, business transformation outsourcing and pervasive computing have already become over US$1 billion businesses for IBM, and the rest are growing by an average of 40 percent, year over year. The acquisition of PricewaterhouseCoopers Consulting was aligned with a US$1 billion investment, through IBM Research, to deepen On Demand Business insights for clients, and it served to launch new business capabilities.

Transforming the way business is done

IBM’s first priority was to improve the way it sells to and serves clients. Second was the company’s supply chain. Third was the way work gets done inside IBM. Improvements within each of these areas were—and still are—fueled by operational innovation and advances in technology that not only can be leveraged by IBM, but also delivered to clients. Reinventing the way IBM sells to and serves clients and partners First and foremost, IBM listened to the needs of its clients and Business Partners. They said it was difficult to do business with IBM. For example, clients said that they wanted to be able to find information quickly and easily so they could make informed purchasing decisions and get the appropriate support from IBM with a minimal investment of time. Business Partners told the company that it needed to be more

Efficient in processing their orders—so they could, in turn, better serve their clients. The resulting objective was very straightforward: fast, easy access to IBM’s products and business expertise. This makes it simple for clients and partners to engage with IBM in every way, from finding product and pricing information to IBM’s contracts, terms and conditions, to ordering, reconciliation of invoices and ongoing support, to providing and supporting solutions that meet clients’ needs. IBM has a number of major initiatives under way in this arena, including:

• Using ibm.com to transform the way client interactions are managed
• Working with partners to drive On Demand Business solutions and to increase IBM’s presence in the small and medium business (SMB) marketplace
• Streamlining the process of development, sales support, proposal and delivery.

IBM committed itself to becoming a living laboratory for On Demand Business— horizontally integrated, flexible and responsive—and focused on tackling the complex issues surrounding significant changes to essential business processes, organizational culture and IT infrastructure.

In November 2004, IBM launched a complete redesign of its public Web site. The One IBM Web Experience provides a unified Web environment that delivers relevant information to a variety of constituents. The ibm.com team is piloting innovative technologies to continue to improve the quality of client interactions—from simple features, like Call Me or Text Chat capabilities, to an instant messaging feature that alerts clients when their inside sales representatives are online. Is it working? Fifty-seven percent of clients worldwide say they prefer to do business via the TeleWeb channel. More than 65 percent of all client interactions are now Web-based, leaving more than 4,000 specialists in 39 sales centers free to respond to more complex queries.

At the other end of the client experience lifecycle, providing technical after-sales support, is My Support Portal, which provides clients with a unified view of up-to-date technical information tailored to their individual needs. When clients log on to My Support Portal, the system automatically pulls their profile from a registration database and instantly presents them with a page of relevant information based on their last session and/or previously identified interests. Clients can obtain answers on their own, empowering them to solve problems and enhancing their productivity. By streamlining support processes, My Support Portal contributed to a US$757 million 2004 cost avoidance associated with IBM’s technical e Support initiatives, while increasing overall client satisfaction.

Another important dimension of IBM’s reinvention of the way it sells and serves clients is the IBM Business Partner program. To improve its flexibility and coverage of key markets like SMB, IBM relies on Business Partners as the primary channel for bringing IBM technology solutions to small and midmarket clients. In return, IBM delivers support and incentives to better enable Business Partners to profit from all aspects of the small and medium business opportunity.

IBM Business Partners also bring value-added solutions and services to IBM’s largest clients. In order to enable Business Partners to deliver the integrated solutions its clients need, IBM developed a seamless, extensive suite of collaborative tools that enables the company and its Business Partners to work securely across time and distance to coordinate tasks, discuss issues, track actions and make better decisions—faster.

In addition, IBM has initiated a set of business to business (B2B) capabilities to enable automation of sales transaction processes between Business Partner and IBM systems. IBM may receive Business Partner orders/requests, directly pass them to the appropriate internal applications to be fulfilled and return the appropriate response information back to the Business Partner—completely touch less. A single solution architecture supports IBM’s XML-based B2B customer and Business Partner connections, based on E2open’s multi company process management solution. The XML messages are implemented using the Rosetta Net open standards. IBM and its Business Partners can now be seamlessly integrated, handling transactions 24×7. Each of these initiatives is designed to enable IBM and its Business Partners to provide better solutions and to be more responsive to clients.

IBM also has demonstrated success in developing industry specific solutions that help clients solve their business and IT problems, large and small. To provide high-value business benefits, IBM fuses services with industry and technology expertise to craft solutions that meet particular business needs and help companies to achieve their objectives. Recently, IBM enhanced its solutions capability, with its continuing technology investments and acquisitions of consulting expertise, furthering its trusted advisor relationships with clients. By teaming with leading independent software vendors (ISVs) to supply integrated solutions, providing differentiated insights through research and by integrating its hardware, software and services, IBM has the breadth of capabilities to support a client through business process and model redesign application/infrastructure design and solution implementation.

The results have been significant. By working closely with clients and moving toward seamless and timely access to arrange of insights and hands-on capabilities through its consulting services and Business Partners, IBM has been able to offer solutions that are both responsive and flexible to meet the needs of its clients.

The ibm.com Web site has long been recognized as a leading e-commerce environment. It is the focal point of IBM’s sales interaction with enterprise and small business clients, partners ,original equipment manufacturer (OEM) partners and consumers. To maximize responsiveness, IBM combines a rich online environment with global sales center operations to create a fully integrated Tele Web sales, service and support channel. In 2004, ibm.com recorded 284.4 million net Web visits and more than 15.2 million sales calls.

The ibm.com site provides this capability in 83 countries and manages online transactions in 31 currencies. In November 2004, IBM launched a complete redesign of its public Web site. The One IBM Web Experience provides a unified Web environment that delivers relevant information to a variety of constituents. The ibm.com team is piloting innovative technologies to continue to improve the quality of client interactions—from simple features, like Call Me or Text Chat capabilities, to an instant messaging feature that alerts clients when their inside sales representatives are online. Is it working? Fifty-seven percent of clients worldwide say they prefer to do business via the Tele Web channel. More than 65 percent of all client interactions are now Web-based, leaving more than 4,000 specialists in 39 sales centers free to respond to more complex queries.

Although far from done, IBM is making solid progress. Client and Business Partner satisfaction numbers continue to rise. For example, according to a recent North American study from VAR Business, IBM’s commitment to business partners took center stage in the VAR Business Annual Report Card (ARC). The study ranked IBM as the overall winner or tied in business partner satisfaction in eight major categories that included software, systems, personal computing and network storage.

Information Technology Enabled Fundamental Transformation

The way IBM sells to and serves clients, the way it manages its supply chain and the way the company works internally have all seen profound improvements, made possible by technology.

But far from promoting technology for technology’s sake, IBM’s IT strategy is built around a view of using technology to achieve business objectives—as a way to support and accelerate the On Demand Business transformation. IBM looks at IT through two different lenses—how IT can be used to run the business and how IT can be used to transform the business. By making more effective use of the dollars spent to operate the business, IBM frees up money to invest in transforming it.

IBM’s spending on what might be termed “maintenance IT” has declined steadily since 1999, while its spending on transformation- enabling IT has increased by 54 percent. In addition to devoting a higher percent of its IT budget to transformation and keeping flat or lowering its overall costs, IBM is satisfying a growing internal demand for services. For example, since 2003 network usage has risen by 38 percent, client seats by six percent and audio conference volume by 16 percent.

Worldwide threats have heightened security requirements and risks to IBM information. Its strategic direction here is clear: continue to increase security and enhance the resilience of its operating environment. This is a problem shared by all businesses. IBM knows this, because it monitors network security for businesses and governments in 134 countries. A 2004 IBM report shows that attacks on networks surged 17 percent—in one month. And stopping these attacks takes more than rigorous security policies alone.

The IBM Global Services account team collaborates with their client, the IBM CIO organization, to ensure service integrity and infrastructure availability, in part by automating and monitoring processes and using network security analysis software to detect and close security vulnerabilities on more than 1,800 Internet servers and 17,000 internal network servers in real time. IBM is migrating to a comprehensive identity-management solution and a single sign-on access authorization solution for employees to access a wide range of internal business.

Fundamental to IBM’s own On Demand Business strategy is a deep and abiding commitment to open industry standards. Its internal deployment of open industry standards-based technologies not only reflects its principles, but also provides proof of the value that standards bring. As of year-end 2004, there were more than 2,900 servers running on the Linux® platform within IBM’s corporate infrastructure, up from nearly 1,300 in 2002.

With Linux technology, IBM has more flexibility, better system performance, lower costs and a secure operating environment for many mission-critical applications on its infrastructure, spanning customer order support, chip manufacturing, sponsorship Web events and antivirus and anti spam solutions. Integration is made easier, and new capabilities are deployed faster.IBM also has moved more than 100,000 users to Voice over IP (VoIP) telecommunications.

Better Use Of IT Resources

For IBM, performance improvements initially require moving workloads to fewer, higher performing servers and storage devices. IBM is continuing to consolidate and therefore simplify its server and storage infrastructure, especially in its deployment of IBM Lotus® Workplace™ Messaging™ (IBM Lotus Sametime®) and IBM Lotus Notes® software, the backbone of its employee communications and collaboration environment. Since 2000, the company has reduced the number of IBM Lotus Domino® mail servers from 1,200 to 240. Not only has this consolidation reduced its costs, it has also resulted in higher availability and performance.

By year-end 2004, more than 320,000 Lotus Notes users were on clustered servers— ensuring systems are available when employees need them. In fact, availability for Notes users on clustered servers averaged 99.97 percent in 2004. IBM also is consolidating storage and processing power to enable efficient sharing and rapid scaling, and has already

consolidated 31 separate internal networks to a single internal network. But consolidation is only one piece of the utilization equation. Virtualization is another.

Virtualization improves the utilization of human resources, IT and information assets by allowing IBM to pool resources, accessing and managing them by effect and need, rather than by physical location. IBM is leveraging the virtualization capabilities built into IBM servers and storage systems, and its expertise in managing those capabilities, to dramatically increase the flexibility and utilization of its infrastructure, reduce costs and improve availability and scalability. IBM is moving toward eliminating application-specific dedicated servers and storage. Instead, applications will acquire resources on demand from a virtualized infrastructure pool.

SIGNIFICANT CHANGES

More than 65 percent of all client interactions are now Web-based, leaving more than 4,000 specialists in 39 sales centres free to respond to more complex queries.

On Demand Workplace boosts employee satisfaction and cost savings:

• 81% of IBM employees access the On Demand Workplace daily.
• 50% of IBM’s employee training is delivered through On Demand Workplace.
• 9 out of 10 employees enroll for health benefits via On Demand Workplace.
• An estimated 30 minutes per employee are saved each month as a result of the ability to quickly locate and engage colleagues who have the needed expertise
• Since 2003, IBM has realized more than US$680 million in savings as a result of Web-enabling processes to the On Demand Workplace.

In late 2004, the first global, role-based port let on the On Demand Workplace was launched. The new port let, called Learning@IBM, provides employees with personalized learning recommendations based on the roles and interests they specify in their On Demand Workplace profile using IBM’s Blue Pages, employees have searchable access to a vast array of information about their colleagues—everything from skills and expertise to interests to client relationships.

ENVIRONMENTAL ISSUES

The environmentally safe disposal of computing assets has become a very real issue in today’s world. Servers, desktops, laptops, printers—every day, thousands of reusable assets hit Solectron’s docks around the world. And the clock is ticking. For many of these recovered assets, there’s already demand—another organization that is willing to buy them, extending their useful life dramatically. Asset recovery is one of Solectron’s core businesses, and it’s a critical service that IBM is committed to providing to its clients. IBM Global Asset Recovery Services has worked with companies like Solectron to deliver the IT industry’s first seamless, worldwide, end-to-end solution encompassing the acquisition, remanufacturing and final disposition of used equipment.

ENDING NOTE

The ability to offer fresh insights and to prove that the impact of change will far outweigh the investment—these are two big reasons this journey is so important to IBM. IBM is passionate about tackling the tough business, cultural and IT issues critical to business success in the 21st century. The company is using its hands-on expertise and insights to shape its products, offerings and solutions. IBM is committed to sharing what it has learned, so that others can benefit from its experience. And it is devoted to collaborating across its extended ecosystem to develop new insights, disciplines and methodologies that deliver outstanding business value to its clients.

The journey continues…

About the author:

Ayan Saha is pursuing an MBA from the Institute Of Finance And International Management in Bangalore,India.