CASE STUDY – IBM The nature of management consulting IBM’s new chief executive is betting that the company’s future lies in the acquisition of a consulting arm and on-demand computing By Simon London The future of information technology can be found in central Cincinnati, Ohio, where Procter & Gamble has its headquarters. The 166-year-old maker of soaps and snacks has this year outsourced not only management of its IT infrastructure but also business processes including relocation services and employee benefits administration. From next year, it will also attach tiny microchips to every pallet and carton that leaves its warehouses in order to mesh with a supply chain system being developed by Wal-Mart, its largest customer. Technology is being used to redraw corporate boundaries by building closer links with customers and suppliers. P&G is not alone. If the 1990s were about automating functions and departments, the next decade will be about trying to integrate these ‘islands of automation’ so that information flows more easily through, and between, corporations. For companies selling computers, software and related services, however, this new era raises uncomfortable questions. How do technology companies add value in a world where integration is being made possible by industry standards, rather than their own proprietary technologies? What skills are required now that clients are less interested in bits and bytes than in processes and payback? While every company in the technology sector is facing these questions, none seems more sure of its answers than International Business Machines. Under Sam Palmisano, chairman and chief executive, IBM is investing billions of dollars in research and acquisitions under the banner of ‘e-business on demand’. The scope of Big Blue’s ambition is breathtaking. Executives admit that IBM now sees itself as competing not only for the amount that companies spend each year on IT but also for the billions spent on processes of the kind outsourced by P&G which last month signed a $400m, 10-year contract with IBM. ‘IBM made a big bet on the 360 series [of mainframe computers] in the 1960s and by the end of it people were talking about “IBM and the seven dwarfs”. If they get this right, we could have the same thing all over again,’ says Charles O’Reilly, professor of organizational behavior at Stanford business school. When Palmisano took the top job last year from Lou Gerstner, he wasted no time in putting his stamp on the company he had joined in 1973. He disbanded the 12-strong management committee that had ruled IBM for close to 100 years. He voluntarily surrendered a large slice of his annual bonus so that the money could be used to reward senior managers. His avuncular personal style – a direct contrast to the gruff, combative Gerstner – underlined the change. Early in his tenure, however, it was unclear in which direction the 51-year-old insider would take the company. The answer came a year ago with two high- profile moves. First, Palmisano paid $3.5bn for the management consulting business of PwC, the professional services firm. The deal brought 30,000 consultants on to IBM’s payroll and took it into the nascent market for ‘business process outsourcing’. Second, in a speech given razzmatazz billing as The Sam Palmisano Event, he laid out his vision for computer systems that are self-healing or ‘autonomic’, linked in giant ‘grids’ and available’ on demand’, like water or electric utilities. This, he declared, was IBM’s future. At first blush, the two events seemed barely related. But IBMers say the combination of consulting skills and technology leadership is the essence of Palmisano’s strategy. “On demand” is a statement of flexibility. It doesn’t start with technology, it starts with business model and operations,’ says Steve Mills, head of IBM’s software division. ‘The aim is to achieve smoothness of processing, from demand to delivery.’ IBM is hardly alone in promoting the opportunity for companies to take advantage of the internet, grid computing, and other technologies to rethink the way they do business. Hewlett-Packard, IBM’s biggest competitor in selling computer systems to corporations, calls its strategy ‘the adaptive enterprise’. PeopleSoft, the software group, talks about ‘real time enterprise’.
Consulting firms of all stripes are advising companies to redesign business processes to become more flexible. Paul Horn, head of IBM’s research labs, concedes: ‘We are not unique in having this thought. It is all about giving companies the tools and technologies they need to be responsive and flexible.’ Palmisano, in an e-mail exchange with the Financial Times, argues that even if some of the words are the same, IBM’s ‘understanding of their meaning goes deeper than most’ . The message would matter less if IBM had an undisputed lead in terms of technology. But it does not. Forrester, the market research group, this summer judged HP to have a narrow lead in ‘organic IT’ Forrester’s catch-all for the technologies required to implement the ‘on-demand’ or ‘adaptive enterprise’ agenda. Alan Ganek, vice-president of autonomic computing at IBM, bristles at the suggestion that HP is ahead: ‘In terms of rolling out the product features we are competitive with anyone – and on a trajectory to have a big lead.’ The truth is that many of the technologies required to implement the’ on-demand’ or ‘adaptive enterprise’ agenda are still under development. Examples include software to automate the management of corporate data centers, ‘web services’ standards to enable computers to share data, and software to link computing resources in giant grids. Whether IBM can out-engineer its competitors in the field remains to be seen. There is one dimension, however, in which IBM has without doubt differentiated itself from the competition: its business model. No other technology company has married so many elements within the same corporate entity. IBM now encompasses financial services; software in a multitude of flavors (operating systems, databases, collaboration tools and middleware); hardware, ranging from mainframes to notebook computers; and the design and manufacture of microprocessors. Now Palmisano’s move into management consulting and business process outsourcing has taken IBM into activities that are not one step but two steps removed from the old, core business of building computers. There is more to this than empire-building. Bruce Harreld, the former Boston Chicken executive hired by Gerstner to head IBM’s strategy unit, points out that profits in the IT industry have been migrating away from makers of components – such as disc drives, microchips and operating systems – towards suppliers of software, services and consultancy. The only notable exceptions to this trend are the two manufacturers with tremendous market power: Microsoft and Intel. This analysis explains not only why IBM has moved up the IT value chain into services and consulting but also why it has been shedding component businesses where sustained profits look out of reach. In the latest such move, IBM last year hived off its disc drive business into a joint venture with Hitachi. So far, IBM has executed this port-folio shuft1e with remarkable efficiency. Gerstner proved wrong those who said IBM’s services division would be blighted by suspicions that it was a marketing front for the hardware side. Palmisano is out to repeat the success as he pushes into management consulting and business process outsourcing. He must outflank competitors, convince customers and mobilize IBM’s own resources. As a result of its huge scope, IBM now competes against almost every company of note in the technology sector. In services it competes not only against outsourcers such as Electronic Data Systems and Computer Sciences Corporation but now also against IT consultants Accenture and Cap Gemini Ernst & Young. Rivals argue that trying to compete against everyone will be Big Blue’s undoing in an industry where strategic partnerships remain important. ‘It will be difficult for them to collaborate [with other technology companies] when there are whole groups of people within IBM trying to put their competitors out of business. There is too much baggage,’ says Nora Denzel, head of HP’s software business. IBM’s response is the classic defense of the vertically integrated: operating at every level from microprocessors to management consulting will become a competitive advantage as its products and services converge on the vision of ‘on-demand’ business. ‘A few years ago you could have made the argument that services, software and servers worked independently of each other [within IBM].
Now we are working in concert. We really do get advantages from working with these folks. Growth is being unlocked,’ says Bill Zeitler, head of IBM’s server business. One example is co-operation between IBM’s chip designers and server engineers to produce computers with the kind of security features demanded by their colleagues in services. A further question is how many customers there are for utility-style computing, business process outsourcing and other exotic dishes on IBM’s on-demand menu. While chief executives everywhere would like their companies to be more flexible and responsive, one of the lessons of the 1990s is that technology-driven programs of corporate change can take much longer, and cost much more, than expected. Incremental investment and a measured pace of change are the order of the day. Even companies wanting to push forward quickly are often handicapped by the complexity of modern corporate IT systems. ‘The on-demand concept is going to be very important eventually. The trouble is that I don’t think most companies have [IT] architectures mature enough to take advantage of it,’ says Jeanne Ross, principal research scientist at the Massachusetts Institute of Technology’s Centre for Information Systems Research. Even if a significant proportion of customers are ready to embrace the’ on-demand’ agenda, and Palmisano can compete effectively against everyone from Intel to Accenture, a further challenge remains: how to mobilize IBM’s 315,000 employees in common cause. Gerstner did this by first imposing common processes across Big Blue’s previously semi-autonomous divisions and then by sheer force of personality. As is clear from Who Says Elephants Can’t Dance?, his memoir of the turnaround, the fact that IBM came close to insolvency also helped to instill discipline. Palmisano starts in a more comfortable position. IBM’s revenue and earnings have held up well during the technology recession. Its balance sheet is sound. Yet the sheer scope of his empire – now ranging from consulting, which requires almost no capital investment and has planning horizons measured in months, to semiconductors, in which multi-billion-dollar investment decisions demand a five-to-l0-year view makes his job in some ways more difficult. Herein may be the real significance of ‘e-business on demand’. The initiative gives IBMers a common frame of reference and a reason to co-operate, rather than squabble, across divisional boundaries. In 1993, Gerstner famously declared that the last thing IBM needed at that moment was a vision. In 2003, a vision is precisely what Palmisano is working hard to articulate. Like so much of what passes for technology vision, ‘e-business on demand’ is about organizational change. For customers that means reinventing themselves in more a flexible, less bureaucratic guise. For IBM it means much the same. Sam Palmisano wants to re-engineer your business. While the chairman and chief executive of International Business Machines does not state it so bluntly, his lieutenants are direct. ‘The leap to the next level of productivity won’t come from just making the same business processes more efficient. It will involve another wave of process re-engineering, no question,’ says Doug Elix, who runs IBM’s global services division, including its 60,000-strong management consulting unit. Managers who lived through the last wave of business process re- engineering might be forgiven for thinking: ‘Not again.’ What started in the late 1980s as an attempt to streamline and automate ended in cost cutting and recrimination. But it is important to separate the original idea from the pejorative term that re-engineering became. Looking at companies as collections of business processes (order entry, fulfillment or billing) rather than functional departments (marketing, manufacturing or customer care) makes sense. Breaking down boundaries between departments to ensure smooth operations is also a legitimate goal.
The first re-engineering wave was pioneered in the early 1990s by CSC Index, the consulting arm of Computer Sciences Corporation, the information technology services and outsourcing group. The aim was to enable companies to take full advantage of powerful but enormously complex ‘enterprise resource planning’ (ERP) software suites. The objective now is to use industry standard technologies – such as the internet and XML, a kind of lingua franca that enables computers to understand each other regardless of the software they run – to bring more flexibility and transparency to companies’ operations. But how can technology companies earn decent profits in a world dominated by industry standards? IBM’s answer can be seen partly in its investment in software to enable companies to model the way work flows through their organizations. ‘Information technology is becoming the language in which you describe business. Business design is becoming a computer science problem,’ says Paul Horn, head of IBM research. Once business processes have been described, re-engineered and automated, of course, who better to supply the equipment on which they run than IBM? Big Blue will even operate the processes for you. But are corporations as eager to buy business process re-engineering as IBM is to sell? And if they do take the plunge, will they do so with Big Blue?
Q1 Why does IBM see its future lies in acquiring a consulting firm?
Q2 How might consulting add value to what IBM does?
Q3 What would you look for in a consulting firm that might make a good acquisition for IBM?