Research

IBM's extreme makeover: Big blue adapts to a changing marketplace

Once best known for making computers and selling them to corporations and government entities around the world, IBM refocused on technical support and professional services in the 1990s, in the process becoming the leading edge of a change that has swept manufacturing companies. And fifteen years later, IBM is still evolving. "The marketplace is changing today more dramatically than we've ever seen," said Paul M. Loftus, general manager of maintenance and technical support for IBM Global Technology Services. Loftus was speaking at the 18th annual "Compete Through Services Symposium: Set the Pace" sponsored by the W. P. Carey School's Center for Services Leadership.

2007-11-29

A "near death" experience in the early 1990s led to the transformation of IBM from the hulking giant known as Big Blue into a different, leaner and more agile company. Once best known for making computers and selling them to corporations and government entities around the world, IBM refocused on technical support and professional services, in the process becoming the leading edge of a change that has swept manufacturing companies.

And fifteen years later, IBM is still evolving. "The marketplace is changing today more dramatically than we've ever seen," said Paul M. Loftus, general manager of maintenance and technical support for IBM Global Technology Services. IBM and other technical support providers face an environment where problems have become more expensive to solve, price is a powerful driver in awarding service contracts and the ability to prevent failure rather just respond to it is becoming a key differentiator, Loftus said.

"We have to run as fast as we can to innovate this business in a completely different paradigm — one that will enable us to support the customer 24 by 7, always on, give them what they want when they want it," Loftus said. And do it around the world.

Beyond simply fixing things: helping companies grow

Loftus was speaking at the 18th annual "Compete Through Services Symposium: Set the Pace" sponsored by the W. P. Carey School's Center for Services Leadership. He described an IBM that has positioned itself as a global leader by forming partnerships with clients to provide information technology support and solutions across the enterprise.

A company that makes widgets can hire IBM not only to help service its information technology, but also to use technology to improve its processes — supply chain management, for example. The idea? IBM will help you grow your business, not just fix a software glitch. Global Technology Services is now IBM's largest business.

Through the first three quarters of 2007, the division brought in $23.73 billion in revenue, 36.4 percent of the company's total. Systems and Technology was second with 22.8 percent of the company revenue. IBM provides client companies with service and technical support not only for its own products but for its competitors' technology as well.

"You have to be able to add value across the whole paradigm, the whole installation that exists in a client's business," Loftus said. Value-added business services that require a high degree of expertise offer Western companies an opportunity to survive and thrive in the global economy, said Stephen Brown, executive director of the Center for Services Leadership.

But while a number of U.S. companies can provide a client with technical expertise, few can offer the range of support that IBM offers, Brown said. "You have to be big to do that. Only an IBM or a Hewlett-Packard can offer those complete solutions." Once it would have been heresy for IBM to support a competitor's product, but now IBM sees a need to collaborate with software competitors, Loftus said. "I know my competitors are partners, and more importantly — customers," he said.

Slash and burn

Loftus had a front-row seat for the beginning of IBM's extreme makeover. He was an executive assistant to the chairman from 1992 to 1993. Probably no corporation in post-World War II America enjoyed more stability and prestige than IBM. In the 1950s and 1960s, computers were thought to have almost magical qualities. In those days, computers were mainframes and available only for large companies and government agencies. IBM dominated the market.

IBM introduced its personal computer in 1981, farming out the operating system to Microsoft. But soon a number of companies produced IBM compatibles or PC clones, undercutting IBM's prices and sales. And more companies decided that instead of buying or replacing a mainframe, they would network personal computers. Employment at IBM peaked at 407,000 in the mid-1980s. While the company cut many jobs through attrition, it had a no-layoff policy up until the 1990s.

Every employee was at least offered another position in the company when his or her job was cut. The year 1992 started well. "First quarter of 1992 for some reason we posted really great results," Loftus recalled. But IBM ended the year with more than $4 billion in losses, and in 1993, that doubled to $8 billion. "We did indeed as a corporation come close to a near-death experience," Loftus said.

New sheriff

IBM looked outside for help. Louis Gerstnerwas chosen as IBM's chairman and CEO in 1993, the first time IBM had elevated an executive from outside the company to its top leadership position. Gerstner had been chairman and CEO of RJR Nabisco for four years. "Under Lou Gerstner's leadership, a different kind of innovation [began to] take hold — fortunately for all of us at all of our business units," Loftus said.

"And it was an innovation that was led by a global marketplace, global support functions and introducing a global culture into our organization." By 1994 Big Blue was back in the black. The company has not had a money-losing year since. Loftus said today IBM Global Technology Services benefits from streamlined support services that came about under Gerstner, "through a series of very, very gut-wrenching changes," Loftus said.

At one time, Loftus said, IBM operated more than 300 local procurements centers throughout the world led by "some of the most fiercely independent 300 people that you would ever run into." Today IBM has three. And, IBM had some 128 CIOs. "I know that number was more than 128, being in development," Loftus said. "Those were just the ones who had the guts to put the title CIO in their title." Today IBM has one.

Complex problems

IBM Global Technology Services faces challenges that will, because of their complexity, "make the 1990s, relative to innovation, look like a walk in the park," Loftus said. "The easiest definition of a simple problem is it's somebody else's," Loftus said. "'Simple' [means that] it tends to isolate itself in one particular area or one particular platform and you can bring one particular skill set to the problem and have a good chance of solving it. "'Complex' is where [the problem] requires significant diagnostic capability. 'Complex' is no single person has a chance at solving it."

Loftus' division handles about 7 million requests a year. In the past, complex problems have made up about 1 to 3 percent of the workload. They're now approaching 5 percent. The complex problems take about 10 times as much time to solve as simple ones, Loftus said. That means it takes 10 times as much high-priced labor to solve those problems.

"The changes in the complexities of the problems we are seeing across the board are driving significant changes in the way we … address a customer's needs," he said. This involves a labor cost factor, but the shift will dictate another culture change, too. The 25,000 technical support people are each an expert at solving a particular problem. They will need new skill sets, Loftus said.

New relationships

Not so long ago, people in IBM and other technical support service companies had long-standing relationships with all the big customers and the decision-makers at those companies. "An increased number of clients that we have, growing to be a majority of clients, don't know us, never dealt with us, and frankly aren't awed by the three letters I-B-M," Loftus said.

"All they're interested in is 'fix my problem, do it now, my way. If you can't, we'll find somebody who can.'" Some of these companies are headed up by younger decision-makers. But the company also faces challenges in growth markets such as China and Central Europe, where the IBM brand carries little weight.

IBM has changed its approach to allocating resources to a particular country. In the past, a technical provider would have tried to deploy every skill necessary to support a particular country-customer in that country, Loftus said. No longer. "Today, we'd die if we tried to do that." There is not enough IT talent to staff at that level, he said. More importantly, the customers are no longer tied to one geographic area.

Price is king

Another change on the competitive landscape is the identity of the decision maker. The CIO no longer stands alone. Procurement officers are now involved, and that means price reigns. Loftus said that around the world IBM has engaged in several "eBay-like approaches" to bid on jobs.

Unfortunately, he said, in some cases a service provider bids on a job and later finds out the bidding process was merely a means of gathering intelligence for procurement. In addition to price, technical support maintenance providers have had to adjust to a change in customer expectations. In the past, companies competed to show their effectiveness in responding to technical failure.

But the paradigm is changing here, too. Loftus reported that predictive analysis and the ability to prevent failure will be a driver. "If you can't provide value up front and prevent that failure in the first place you may not get a chance to be back in," Loftus said. "And that is probably one of the most significant advances going forward."

Bottom Line:

• Since the early 1990s, IBM has evolved from a business that centered on business-to-business computer sales and manufacturing into a global leader in providing information technology support and solutions across a business.
• Market forces pushed the staid and stable pillar of corporate America to remake its business processes and company culture in the early 1990s.
• IBM and other technical support providers face an environment in which contracts are awarded on price and preventive maintenance abilities rather than the strength of long relationships with key decision makers.

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