IBM Global Business Services Strategy and Change Executive Report IBM Institute for Business Value IBM – Delivering performance through continuous transformation IBM Institute for Business Value IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive report is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to [email protected] for more information. Delivering performance through continuous transformation By Jim Bramante, Ron Frank and Jim Dolan “I would argue that the first decade of the 21st century has been a series of wake-up calls, with a single subject: the reality of global integration. In business, global integration has changed the corporate model and the nature of work itself…Over the next couple of years, there will be winners, and there will be losers. And though it may not be easy to see now, I believe we will see new leaders emerge who win not by surviving the storm, but by changing the game.” – Sam Palmisano, IBM chairman, president and chief executive officer1 Introduction of 30 percent of their market values evaporate since January 2008, it has continued to perform and resisted the broader In 2008, much of the industrialized world entered a deep market trends, actually increasing its share value by roughly 15 recession sparked by the global financial crisis. By March 2009, percent over the same time period.3 This recent market share values in American firms were 57 percent off their performance is the result of a transformation journey on which October 2007 peak.2 In this environment, many chief executive IBM embarked nearly a decade ago. and chief financial officers have focused on weathering the slump as capital continues to disappear and credit markets Entering the decade and influenced by the dot-com collapse remain tight. Though the crisis has been hugely disruptive, and attendant declines in margins and earnings, IBM began a firms will ultimately emerge leaner and stronger – those that holistic assessment of its strategic environment and concluded survive, that is. that fundamental shifts – in technology, client requirements and global business – would soon reshape the economic and The issues facing many mature companies are not new: stiffer technological landscape. Essentially, it concluded that the cost competition, commoditization of products and slower world was about to change fundamentally and the company growth in their traditional markets. The current economic and needed to adapt to excel in the new environment. This insight business environment makes addressing these issues increas­ set in motion a number of strategic shifts – from investing ingly urgent. Agile companies, however, will persevere and – in billions of U.S. dollars in strategic acquisitions and new the end – use this economic cycle to their advantage. markets, such as India, China and Brazil, to aggressively driving costs out of selling, general and administrative expense How can large companies effectively respond to and take (SG&A) – to create a stronger portfolio of offerings and a advantage of the current business environment? IBM offers a more efficient operating model. compelling story. While some of its peers have seen in excess 2 Delivering performance through continuous transformation In the midst of yet another seismic change in the global Pre-tax income Earnings economy and business ecosystem, the success of this transfor­ margin percentage per share mation raises a number of salient questions for today’s business 25% $11 leaders to consider: $10 20% $9 • How can senior leaders embrace globalization and the need $8 for flexible enterprise design? 15% $7 • How can senior leaders and managers of large multinationals $6 benefit from understanding and applying the portfolio of 10% $5 initiatives that compose the transformation example? $4 • How can other companies utilize, adapt and establish key 5% elements of the operating model, management system and $3 cultural elements that have enabled IBM to simultaneously 0% $2 00 01 02 03 04 05 06 07 08 transform and perform over the past years? Divested revenue (PC, HDD, Pre-tax income printers, displays, EDI, margin percentage Mark Loughridge, IBM senior vice president and chief interconnectivity products) Earnings per share Revenue financial officer, has explained how the company’s transforma­ tion has driven consistently strong profit and cash flow. He Figure 1: IBM transformation. noted that “…we have been executing our strategy: shifting to higher value segments; globally integrating the company; [and] driving efficiency and productivity….”4 The leverage IBM achieved this success by executing toward four strategic generated by the IBM operating model has delivered consider­ goals: able shareholder value (see Figure 1).5 • Capture higher value: Migrate to more attractive customer segments as well as higher-value products and service offerings. • Invest for growth: Take advantage of the global footprint to “…over the last decade, IBM has transformed benefit from global growth, as well as invest in new market its portfolio and boosted gross margins by an offerings. impressive 790 [basis points], which represents • Shift the operating model to drive productivity: Improve the largest gross margin improvement of any operating performance by globally integrating, while pushing decisions further down into the organization. company in our universe. Moreover, this has • Apply shared values and performance management: Drive helped to drive an increase in [pre-tax income] change throughout the organization based on a common set margins of nearly 500 [basis points] over the of values and an aligned performance management system. same time frame.” Bernstein Research6 IBM Global Business Services 3 IBM continues to execute against these strategic objectives recognizing the potential impact of Web technology after the because it has built flexibility into its operating model – flex­ dot-com bubble burst (see Figure 3). ibility to shift resources and deploy investments in unique ways to take advantage of select opportunities (see Figure 2). Since 2000, IBM has divested a number of low-margin units.7 In fact, a Business Week article following the firm’s 2009 Capturing higher value second-quarter earnings release noted that “…IBM is Shifting the business mix operating very well under miserable business conditions, and [Sam Palmisano’s] decision to jettison less-profitable divisions Many multinational organizations have recently faced chal­ 8 lenges associated with competition from lower-cost geogra­ in the past half-decade…is paying off.” phies, product commoditization and margin erosion. The ability to exit areas with shrinking margins and, at the same For example, the early part of the twenty-first century time, quickly acquire, launch and grow offerings that provide witnessed the commoditization of the personal computer (PC) comparative advantage is critical to the survival of many of due to events such as the entry of low-cost domestic competi­ these companies. The shift toward higher-margin products and tors in countries like China. Recognizing the resulting margin services has been a central component of its strategy since erosion, IBM sold its PC division to Lenovo in 2005 – despite Capture higher value Invest for growth Shift the operating model • Changing the business mix • Growth Markets Unit • Globally integrated enterprise - Shift business portfolio to higher value - Invest resources into Brazil, Russia, India - Consolidate indirect functions and (from components to infrastructure to and China (BRIC) and other high- growth optimize critical horizontal processes business value, e.g. exiting commodity countries - Implement global resource management businesses – PC, printers, storage) - Organize growth market teams to • Client value - Employ aggressive acquisition strategy recognize opportunities and respond - Segment advisory support from for high- margin businesses (e.g., Rational, • General business transactional activity Daksh, Cognos, Telelogic, Filenet) - Increase focus on whitespace - Create client- facing units oriented by how - Develop post- merger integration opportunities and sales model clients purchase (by industry, product) capability • New solutions • Lower center of gravity - Divest outside of core strategy - Invest to invent growth solutions (e.g., - De- layer by centralizing and creating • Developing higher value Smarter Planet solutions) cross- country management teams - Infuse IBM Research into business - Delegate to client facing leadership Shared values and performance management • IBM values • Cross- enterprise collaboration • Innovation - Infuse values throughout the corporation - Create enterprise leadership program to - Employ “jams ” to get feedback and ideas - Design systems to unify employees focus on transformation opportunities from employees at all levels worldwide - Design topic- driven governance (e.g., • Burning platform • Global IBMer strategy/technology/performance) - Execute earnings- per -share roadmap - Foster diverse workforce and leadership (growth, share buyback, increased productivity) Figure 2: IBM strategic goals. 4 Delivering performance through continuous transformation To realize the value