M.I.T. and IBM on Continuous Transformation at IBM MIT Case Study

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    CENTER FOR

    INFORMATION

    SYSTEMS

    RESEARCH

    Massachusetts

    Institute of

    Technology

    Sloan Schoolof Management CambridgeMassachusetts

    Continuous Transformation at IBM:Addressing Disruption from New Technologies

    Martin Mocker, Martin H. Kagan, and Jeanne W. Ross

    November 2014

    CISR WP No. 398

    2014 Massachusetts Institute of Technology. All rights reserved.

    Research Article:a completed research article drawing on one ormore CISR research projects that presents management frameworks,findings and recommendations.

    Research Summary:a summary of a research project withpreliminary findings.

    Research Briefings:a collection of short executive summaries of keyfindings from research projects.

    Case Study:an in-depth description of a firms approach to an ITmanagement issue (intended for MBA and executive education).

    Technical Research Report:a traditional academically rigorousresearch paper with detailed methodology, analysis, findings andreferences.

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    CISR Working Paper No. 398

    Title: Continuous Transformation at IBM:Addressing Disruption from New Technologies

    Authors: Martin Mocker, Martin H. Kagan, and Jeanne W. Ross

    Date: November 2014

    Abstract: Over its more than one hundred years in existence, IBM had reinvented itself multipletimes. The twenty years leading up to 2014, however, were particularly turbulent: IBMhad shifted from country to global brand profit and loss statements; shifted its salesemphasis from individual products to integrated solutions and services; and moved tobecome a globally integrated enterprise with globally standardized business processes.

    In 2014, the rapidly expanding adoption of cloud, analytics, mobile, and socialtechnologies generated a lot of excitement in the industry. IBM management believedthat these technologies presented a huge business growth opportunity. Simultaneously,management viewed cloud, analytics, mobile, and social technologies as a disruptive

    force demanding transformative changes to the way the company worked internally.Earlier transformations had positioned IBM to deal with business changes globally.Nonetheless, introducing new ways of thinking and working to over 400,000 employeesin 175 countries was a daunting task. Management pursued this latest transformationwith the belief that the effort would determine business success in the digital economy.

    Keywords: Transformation, business complexity, cloud, analytics, social, mobile

    13 Pages

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    This case study was prepared by Martin Mocker, Martin H. Kagan, and Jeanne W. Ross of the MIT Sloan Center forInformation Systems Research. This case was written for the purposes of class discussion, rather than to illustrate eithereffective or ineffective handling of a managerial situation. The authors would like to acknowledge and thank the executivesof IBM for their participation in the case study and the IBM Institute for Business Value for its assistance.

    2014 MIT Sloan Center for Information Systems Research. All rights reserved to the authors.

    Massachusetts Institute of TechnologySloan School of Management

    Center for Information Systems Research

    Cont inuou s Transform ation at IBM:

    Addressing Disrupt ion from New Technolog ies

    IBM, a $100 billion computer hardware, software,and services company, was incorporated in 1911as the Computing Tabulating Recording (CTR)Company selling commercial scales, industry re-cording devices, and even meat and cheese slicers.Over its more than one hundred years in existence,IBM had reinvented itself multiple times.

    The twenty years leading up to 2014, however,

    were particularly turbulent. A slow response tomarket changes led to a near-death experience inthe 1990s. In rebounding from that experience,IBM leaders commenced a series of businesstransformations to ensure that the company wouldlead rather than merely respond to the market:

    IBM has built a business model predicatedon a commitment to continuous transfor-mation. In an industry in which there isperpetual tension between innovation andcommoditization, IBM has followed the

    path of innovation and reinvention.Creating a Smarter Enterprise:

    The Science of Transformation,IBM Global Business Services

    Executive Report, 2013

    In 2014, the rapidly expanding adoption of cloud,analytics, mobile, and social technologies gener-ated a lot of excitement in the industry. IBMsmanagement believed that these technologiespresented a huge business growth opportunity.

    Computing advantage will be createdthrough data and analytics, businessmodels will be shaped by cloud, and

    individual engagement will be poweredby mobile and social technologies.Linda Sanford, Senior Vice President,

    Enterprise Transformation

    Simultaneously, management viewed cloud, ana-lytics, mobile, and social technologies as a dis-ruptive force demanding transformative changesto the way IBM worked internally. Earlier trans-formations had positioned IBM to deal withbusiness changes globally. Nonetheless, intro-ducing new ways of thinking and working to

    over 400,000 employees in 175 countries was adaunting task. Management pursued this latesttransformation with the belief that the effortwould determine business success in the digitaleconomy.

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    Mocker, Kagan, and Ross Page 2 CISR Working Paper No. 398

    Background on Recent Transformations

    In 1993, Louis Gerstner, Jr. took on the roles ofchairman and CEO of IBM, which had reporteda net loss of $8 billion for FY 1993 after losingmoney for three years. Gerstner quickly intro-duced two big changes to the company. First, he

    restructured and consolidated what had becomea highly decentralized business; most notably, hemoved IBM from country to global brand profitand loss (P&L) statements. Second, he initiateda shift in IBMs sales emphasis from individualproducts to integrated solutions and services.Both changes represented transformations fromlong-standing company practice. By 1994, IBMsnet earnings had rebounded to $3 billion.

    The company had been steadily growing profits(see appendix 1 for IBM financial performance

    over time) when Samuel (Sam) Palmisano suc-ceeded Gerstner as CEO in 2003. In 2006, Palmi-sano laid out Roadmap 2010, an initiative to raiseearnings per share (EPS) from $6 to $11. Todeliver on that goal, he initiated a transformationthat involved widespread adoption of standardizedglobal business processes and global distributionof labor. These changes delivered significantefficiencies, allowing IBM to post profitableresults in 2008 despite a rapidly contracting globaleconomy. IBM met its Roadmap 2010 EPS targets

    and then announced Roadmap 2015 with an EPStarget of $20 (see appendix 2 for the Roadmap2015 targets).

    Though IBM experienced a drop in revenues in2009, by the time Virginia (Ginni) Rometty suc-ceeded Palmisano as CEO in 2012 gross profitmargin had increased and net income growthremained strong. Between 2010 and 2013, IBMgrew profits at an annual rate of 3.6%, even asrevenues were declining. In IBMs 2013 annualreport, Rometty wrote, While 2013 was an im-portant year of transformation, our performancedid not meet our expectations. As a consequence,she and her executive team turned down annualbonuses.

    In 2014, many investors and nine out of twenty-five analysts tracked by Bloomberg expected IBMto meet its $20 EPS targets from Roadmap 2015.But financial reporters and analysts voiced that the

    companys EPS growth had been based on costreduction and share buybacks.1IBM managementcountered with plans to grow revenue and profitby divesting low-margin commodity technologiesand services while investing in higher-margininnovations, particularly those that IBM couldwrap into integrated solutions. Cloud, analytics,mobile, and social technologies and processeswere key elements of the vision to become anincreasingly integrated and global business.

    Integrating and Extending IBMs Offerings

    In 2014, IBM was organized into three corebusinesses: (1) Systems and Technology (hard-ware) and Global Financing, (2) Software, and(3) Global Services (see appendix 3 for IBMsperformance by segment). Although IBM report-ed financial performance for each business,management was emphasizing integrated solu-tions as its unique value proposition:2

    Integrated solutions are the most valuablething we can provide our clients. We sellmany things, but why do you come toIBM? We dont just sell you a piece ofhardware, and someone else a piece ofsoftware and someone else provides aservice. The power lies in bringing thosethings together. Kari Barbar,

    Vice President, Globally IntegratedEnterprise Enablement

    Integrated solutions combined different offeringsfrom IBMs hardware, software, and services

    1Tiernan Ray, IBM: $20/Sh EPS Goal IncreasinglyIrrelevant, Says Bernstein, Why Stick to It?, Tech TraderDaily(blog),Barrons,February 3, 2014,http://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/;Nick Summers, The Trouble With IBM,BloombergBusinessweek, May 22, 2014,

    http://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challenges;Steve Denning, Why IBM Is In Decline,Forbes, May30, 2014,http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/.2IBM had been working on becoming an integratedsolutions provider instead of operating autonomousbusinesses since the Gerstner era. See Louis V. Gerstner,Jr., Who Says Elephants Can't Dance?: Leading a GreatEnterprise through Dramatic Change(HarperCollinsPublishers, 2002).

    http://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/http://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/http://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/http://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challengeshttp://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challengeshttp://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challengeshttp://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/http://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challengeshttp://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challengeshttp://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/http://blogs.barrons.com/techtraderdaily/2014/02/03/ibm-20sh-eps-goal-increasingly-irrelevant-says-bernstein/
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    businesses to solve specific client problems. Forexample, Indian telecommunications companyBharti Airtel credited IBM with providing thecapability to process 1.5 million new customersper month through an integrated solution combin-ing IBM System p servers with its WebSpheremiddleware software and outsourcing servicesfrom its Global Technology Services unit.3

    Selling integrated products and services was moredifficult than selling individual products becauseof the additional coordination it required acrossvarious parts of the company. This new valueproposition was creating a more complex organ-ization, but IBM believed integrated solutionsprovided greater value to clients:

    Some companies for many years [focusedsolely on] the PC business and were able

    to deliver value to their clients. But nowthose clients have moved on. A single PCor a single x86 server is less interesting tothem. In the last decade, IBM increasedthe integration of products and services,which has been a great benefit, becausewere viewed as an integrated solutionprovider. You have to deliver value toclients to stay in business, and so for methe question is, how much complexity doyou need in order to truly deliver value to

    your clients? Pat Toole,General Manager, System z,

    Systems and Technology Group

    IBM leaders recognized the potential of analytics,mobile, social, and cloud technologies to contri-bute to a strategy focused on increasingly inte-grated solutions. The company had been buildingits product and service portfolio in these areas fora number of years.

    For almost a decade, IBM had been adding analy-

    tics software that addressed a range of clientneeds. Tools included statistics software SPSS(acquired in 2009) and business intelligence

    3For a description of this case study, seehttp://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82.

    software Cognos (acquired in 2008).4 In 2011,IBM showcased the analytical capabilities ofWatsona computer system based on arti-ficial intelligence for cognitive computingon Jeopardy!, a popular TV game show.5 Thetechnology could analyze vast stores of varyingtypes of data to provide better decision-makinginformation for operational tasks. For example, inJuly 2014 USAA, a financial services companyserving the US military, announced a pilot thatallowed its customers to ask Watson questionsabout the financial implications of transitioningout of the military.6 In another example, theMemorial Sloan Kettering Cancer Center wasdeveloping a solution based on the Watsontechnology that was designed to help oncologistsanywhere make the best treatment decisions fortheir individual patients by feeding Watsonwith cancer case history.7

    While IBM was not offering mobile devices, itwas active in all other aspects of deliveringmobility solutions. For example, it provided prod-ucts supporting mobile device management andmobile application development, as well as mobilenetwork infrastructure management services andmobile security. In July 2014, IBM and Appleannounced a global partnership to deliver more

    4In May 2014, IBM employees Brenda L. Dietrich, EmilyC. Plachy, and Maureen F. Norton published the bookAnalytics Across the Enterprise: How IBM RealizesBusiness Value from Big Data and Analytics (IBMPress), showcasing how these capabilities could be usedto do predictive and prescriptive analytics like revenueforecasting and proactive retention.5In a 2011match, IBMs Watson defeatedJeopardy!record holders Ken Jennings and Brad Rutter. See JohnMarkoff, Computer Wins on Jeopardy!: Trivial, ItsNot, The New York Times, February 16, 2011.http://www.nytimes.com/2011/02/17/science/17jeopardy-

    watson.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.html.6Darryl K. Taft, USAA Taps IBM's Watson as MilitaryVeterans Advisor, eWeek, July 23, 2014,http://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.html.7Jennifer Bassett, Memorial Sloan Kettering Trains IBMWatson to Help Doctors Make Better Cancer TreatmentChoices, Memorial Sloan Kettering Cancer Center, April11, 2014,http://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choices.

    http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.htmlhttp://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.htmlhttp://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.htmlhttp://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choiceshttp://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choiceshttp://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choiceshttp://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choiceshttp://www.mskcc.org/blog/msk-trains-ibm-watson-help-doctors-make-better-treatment-choiceshttp://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.htmlhttp://www.eweek.com/database/usaa-taps-ibms-watson-as-military-veterans-advisor.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp:/www.nytimes.com/2011/02/17/science/17jeopardy-watson.htmlhttp://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82http://www-03.ibm.com/software/businesscasestudies/us/en/corp?synkey=K659433O12428G82
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    than 100 end-to-end mobile solutions, including anew category of mobile apps that are enterpriseready.8 These industry-specific enterprise appswere intended to combine IBMs capabilityaround delivering integrated solutions to enter-prise customers with the customer experience ofApples iOS devices.

    IBM had introduced its Connections socialnetworking platform in 2007 to facilitate collab-oration. Various components supported functionssuch as social networking, team spaces, forums,wikis, microblogging, and shared documentstores, which integrated with enterprise applica-tions as well as with email, directories, andcalendars. Within IBMs large corporate custom-ers, Connections offered an extension to enter-prise communications and knowledge-sharing

    capabilities.Social, mobile, and analytics tools and capabil-ities could all be sold as individual products, butthey could also be part of integrated solutionsthat included other IBM hardware, software, andservices. Ongoing innovation within IBM, alongwith acquisitions of innovative technology firms,offered considerable opportunities for revenuegrowth consistent with IBMs existing value proposition.

    Cloud, on the other hand, was a somewhat lessnatural fit. IBMs market strength had histor-ically depended on selling and leasing hardware,particularly mainframes and servers. The marketin 2014, however, was rapidly moving towardcloud computing environments.9Recognizing thisimportant shift, in June 2013 IBM acquiredSoftLayer, an Infrastructure-as-a-Service providerwith clients such as Tumblr and WhatsApp.SoftLayer provided data center services via thecloud in a highly automated, self-service fashion.

    For example, with a few clicks from a remotewebsite, a customer could perform common

    8https://www.ibm.com/mobilefirst/us/en/9Cloud computing enabled on-demand access to sharedcomputing resources (including IT infrastructure likestorage or servers, software applications, and platformsfor developing software) over the internet. Seehttp://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdffor a detailed definition of cloud computing.

    operational services like reboot a server, turn offpower and turn it on again, reload an operatingsystem, or change a configuration setting.

    Automation makes everything so mucheasier for the customer. If it cannot beautomated, we don't do it.

    Francisco Romero,IBM Cloud Services,

    Chief Operating Executive for SoftLayer

    SoftLayers high degree of automation was basedon a strict adherence to standard infrastructurecomponents (e.g., servers, storage, maintenancesoftware) that customers could configure andcombine but never adapt or tweak. FranciscoRomero, SoftLayers chief operating executive,noted that this automated approach allowedSoftLayer to ramp up a data center in thirty to

    forty-five days instead of six months and run100,000 servers with only 750 employees. Suchbenefits were enticing, but fully standardizedservices were not necessarily in-line with IBMslong-standing value proposition based on custom-ization for its enterprise customers.

    SoftLayer had serviced mostly small to mid-sizedcustomers, but IBM believed that cloud serviceswould increasingly appeal to IBMs customerbase of large enterprises. This might sometimesinvolve helping large enterprise customers adoptnew approaches to meeting their computing andbusiness needs:

    The challenge you have to overcome is tohelp customers understand that this verystandardized environment still fulfills theneeds of their specific business and thatthey can do anything they do today intheir own customized environment but ona standardized environment with all thebenefits that that brings.

    Francisco RomeroEven though cloud offerings would cannibalizesome traditional mainframe-related hardware,software, and services, management viewed theSoftLayer acquisition as a critical component ofIBMs future strategy. After the SoftLayer acqui-sition, IBM experienced early success in bringinglarge enterprises on board. InformationWeekreported that revenue from IBMs SoftLayerbusi-

    https://www.ibm.com/mobilefirst/us/en/https://www.ibm.com/mobilefirst/us/en/https://www.ibm.com/mobilefirst/us/en/http://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdfhttp://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdfhttp://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdfhttp://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdfhttp://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdfhttps://www.ibm.com/mobilefirst/us/en/
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    ness was growing at an annual rate of 86% 10and that SoftLayer was growing six to seventimes faster than it had been as an independentcompany.11

    The movement towards cloud, analytics, mobile,and social technologies added value to IBMs

    product portfolio. In addition, given increasedconcerns about security, IBM was building ad-vanced security features into the evolving prod-uct portfolio, both as a differentiator and as avalue-add for customers. But the growing inte-gration of the companys products and servicesdemanded a transformation in how people workedwithin IBM. Not that transformation was new toIBMthe journey to becoming a globally inte-grated enterprise had started a decade earlier.

    Building a Globally Integrated EnterpriseWhen Sam Palmisano became CEO, IBM func-tioned as a collection of mini IBMs. Each majorcountry replicated the functions of the corporation.While allowing IBM to address country-specificrequirements, the mini-IBM model was expensiveand inhibited the coordination across countriesthat global customers demanded. Combined withseparate P&Ls for hardware, software, and ser-vices, this organizational model made it difficultfor IBM to provide integrated solutions.

    To address these limitations, Palmisano intro-duced the term and concept of a globally inte-grated enterprise (GIE).12 The GIE establishedglobal standards for a broad set of basic company

    10Doug Henschen, Microsoft, IBM Gain On AmazonCloud,InformationWeek, July 28, 2014,http://www.informationweek.com/cloud/infrastructure-as-a-service/microsoft-ibm-gain-on-amazon-cloud/d/d-id/1297599.

    11Charles Babcock, SoftLayer Cloud Business ThrivingInside IBM, July 14, 2014,http://www.informationweek.com/cloud/infrastructure-as-a-service/softlayer-cloud-business-thriving-inside-ibm/d/d-id/1297248.12Palmisanos essay, The Globally IntegratedEnterprise, was originally featured in the May/June 2006issue of Foreign Affairs. Also, Palmisano co-authored ane-book on the subjectRe-Think: A Path to theFuturewith Matthew Rees, published in 2014 by thenewly founded Center for Global Enterprise.

    processes, thus ensuring a stable base of trans-actions, operations, and back-office processes:

    A globally integrated enterprise operateswith one set of processes, shared servicesand broadly distributed decision making,carried out by a highly skilled global

    workforce managed by a common set ofvalues. IBM website13

    Starting with Finance and Supply Chain, IBMstandardized and globalized all support functions.Over time, IBM created fifteen global processes aspart of its enterprise process framework (EPF; seeappendix 4 for a visualization). Although businessunits continued to have P&L responsibilities,newly introduced global process owners had thebudget and greater authority to define commonprocesses across businesses.

    Enterprise processes were grouped into threecategories: Operating, Enabling, and Supporting.The six operating processes represented the client-facing processes that were driving revenue forIBM (e.g., generating products/services, bringingthem to the market, generating sales orders). Thefour processes in the enabling category, while notdirectly client-facing, were important enablers ofoperating processes (e.g., strategic planning,procurement). The five supporting processes werefoundational and deemed necessary to run IBM asan enterprise (e.g., HR, IT processes).

    The EPF defined a common language and createda much more standardized process environmentaround the world. However, implementing stand-ard processes in 175 country organizationsoperating in diverse businesses demanded se-nior executive commitment and persistence.While people across IBM believed in the valueof standardized processes, they found adoptionmuch more difficult:

    Take the HR process. I kept hearing, Icant do that in my country because of thelaws, or because of the works council, orbecause thats not our culture. [] Soanytime I heard Theres a law, Id say,

    13http://www-03.ibm.com/ibm/history/ibm100/us/en/icons/globalbiz/transform/

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    Show me. Send me the document. And Ibecame the prove it to me person.

    Kari Barbar,Vice President, Globally Integrated

    Enterprise Enablement

    To facilitate adoption, management solicited

    broad input on the processes. A central team ar-ranged numerous calls with representatives fromall geographic areas and business lines to come toagreement on a process that would be at least 80%standard. Management accepted that specific exe-cution steps at lower levels of a process mightdiffer across business lines or geographies. Butlocal deviations from standards were allowed onlyif value to customers had been demonstrated:

    That unique way of pricing, unique way ofnotifying, whatever it might be in a

    processif you think being unique isimportant to your business or yourcountry, verify that with the client. Hereshow you verify it: not only do you askthem does it have value, but are theywilling to pay for it? Linda S. Sanford,

    Senior Vice President,Enterprise Transformation

    The introduction of global standards created effi-ciencies and facilitated integration across busi-nesses, geographies, and functions. For instance,

    clients were able to access global experts withinIBM much more easily. However, the EPFsmatrix of business/geography verticals on oneaxis and horizontal, global processes on theother also meant that individuals at the customerinterface had to do integration work in somecases: for example, sales people were nolonger limited mostly to business interactionswithin their own countries, and now had to dealwith globally dispersed central contacts forroutines such as contracting, pricing approvals,

    procurement, and updating sales data.

    But employees generally understood that whatmight be a more arduous process at the individuallevel produced company-wide benefits:

    I have an optimistic mind saying to myself,Okay, I understand where IBM is head-ing and I understand that we have to havesome kind of globally integrated processes

    to really enable this kind of strategy. Itsthe price of working in a globally inte-grated enterprise. Martin Gerhardt,

    Senior Client Executive,IBM Sales & Distribution, Germany

    One notable benefit of the standardization of

    processes was the significant reduction in IBMsapplication portfolio. IT leaders estimated thatIBM reduced its total IT applications from ap-proximately 16,000 to about 3,800 applications.This simplification had a direct, positive impacton peoples work:

    It has become easier to get an overviewabout all the opportunities of my accountthan it was in the past. Thats also be-cause the systems are coming together.In the past, we had many different

    sources which sometimes had contra-dictory data. Martin Gerhardt

    Implementation of the enterprise process frame-work created a powerful platform for integrationacross IBM, but it did not ensure effective inte-gration. IBM looked to social media to facilitateinteractions and coordinationand to support thetransformation to a globally integrated enterprise.

    Social Media as a Tool for Global I ntegration

    In 2014, IBM had more than 400,000 employeesdistributed across 175 countries, and most of themworked outside of company offices. Additionally,over 50% had tenure at IBM of five years orless.14 Thus, as IBM emphasized solutions thatintegrated multiple business unit offerings forincreasingly global customers, collaboration hadsimultaneously become more important andmore difficult:

    If we don't do anything to connect peoplebeyond the business unit, they tend to

    work within their business unit and theirworld is the hardware, systems, and tech-nology group; the software group; or oneof our services branches. But our clientsreally want to leverage all of IBM, and sowe need to connect our people so that they

    14E.g., because those employees joined IBM from othercompanies as part of outsourcing contracts or asexperienced hires.

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    can easily have access to expertise acrossall of IBM. That is the challenge.

    Ross Mauri,Vice President,

    Social and Analytics Transformation

    IBM intended to address this challenge by

    becoming a Social Business that would connectemployees with each other and with clients inimproved ways. But becoming a Social Businessmeant introducing new ways of collaborating,communicating, and connectingbehaviors thatrequired a cultural shift as they were expected toflatten what used to be a command andcontrol organization.

    IBM used several tools, such as Connectionsand Sametime, to support collaboration amongits employees. For example, support employees

    from different business units used these tools tosolve a clients problem when it was unclearwhether the problem lay in hardware, software,or elsewhere:

    With social, you can have support teamscollaborate with each other around theclient's problem: the hardware, storage,and software teams are talking behindthe curtains and collaborating to helpclients on their problem without havingthe client go component by component.So we are removing that complexity fromthe client so they wont get frustrated.

    Ross Mauri

    Internal tools such as Faces and Expert Locatorhelped employees find the right contact peoplewithin IBM. For example, Faces could search forany combination of keyword and name; a searchfor Ross social would return Ross Mauri as thetop result out of 600+ matches. Faces could alsodo a visual search, and it offered functions like

    auto-complete when typing.However, just adding more tools to existing com-munication tools like email and phone riskedoverwhelming employees with too many connec-tions and interruptions. IBM mitigated this risk byintegrating the new tools with existing ones andreplacing existing forms of communication whenappropriate:

    What doesn't work for most people iswhen social is just one more thing to do,something else I have to think about. Whatreally worksand we strive to do this forall new products and applications we'rerolling outis to integrate them and theuser experience together. We try to nothave Connections be a separate socialplatform. We try to connect that and inte-grate it into all work applications.

    Ross Mauri

    By using these integrated tools and followingcertain rules (like opting not to reply to all), apilot group within IBM was able to reduce itsemail messages by 90%.

    Adapting to the culture of a Social Business alsorequired different values and generated new

    incentives:

    In the past, people had their diplomas onthe wall of their office and they had theirCV or resume, and their reputation wasbuilt up by things they authored. Todayyour digital presence is built by howactive you are out there digitally. Are youreally answering questions and beingsomeone who is viewed as an expert byhowyoure favorited or liked?

    Ross Mauri

    To help employees learn new tools and adapt to itsnew culture, IBM provided training, and more im-portantly, created new roles such as social coachand social ambassador. More than two hundredsocial coaches were helping executives becomefluent in effectively using social tools. Socialambassadors modeled the use of social tools andhelped other employees with their use in theirrespective units. Ambassadors and coachesaccepted their roles on top of their regular full-

    time duties.Senior management support also helped. CEOGinni Rometty used a video clip accompanied bya blog to address the implications of becoming aSocial Business. Ultimately, the goal of SocialBusiness was to foster greater global integration,which would manifest itself in improved customerexperience and better products and services. Butbeyond feedback from customers about the im-

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    proved ability to get in contact with IBM expertsglobally, management found it difficult to mea-sure the impacts as the use of collaborative toolsslowly permeated the company.

    Analytics as a Tool for Global I ntegration

    The vision of the globally integrated enterprisecalled for distributed decision making, but thiswas no easy task in such a highly distributed anddiverse company. To ensure that decisions weremade consistently across the company and reflect-ed IBMs values and objectives, management hademphasized the use of analytics. Insights gainedfrom analytics could guide revisions to businessprocesses and business rules to better drivedesired outcomes.

    Leaders encouraged widespread use of analytics,

    so that using data to guide decision making wouldbecome part of the companys culture. As a start,management had created a team of eightemployees whose job it was to enable otherpeople to do their own analytics projects.

    This team had worked with other teams on somenotable successes. For example, one initiativehelped to develop a recommendation engine forCoverage Optimization with Profitability. Basedon the history of IBMs relationship with a clientover three years, the profitability of that relation-

    ship, and an estimate of future opportunity, thetool made recommendations to sales managers asto whether salespeople should increase or decreasethe intensity of contacts with a particular client.The result was increased total revenues and reve-nues per salesperson in the areas where the toolwas applied.

    Analytics tools were also used to help reduce attri-tion in countries with traditionally high attritionrates like India and China. The tool identified em-

    ployees who were at risk of leaving the companyeither due to manager turnover, compensationissues, promotion history, education, or otherfactors. Managers used the tools suggestion forappropriate actions to retain key employees.

    But widespread use of analytics involved chang-ing all kinds of habits. For a variety of reasons,adoption was difficult. For example, some

    people did not value additional insight into theirdecisions:

    The challenge is that successful business-people have been successful because theyhave good judgment and they have goodintuition, but now were asking them to

    hold that in abeyance while they get someadditional insight through the use of theanalytics tools. Martin Fleming,

    Vice President, Business PerformanceServices and Chief Economist

    Some people were concerned about data qualityissues:

    Many people want to start talking to meabout how their data is imperfect, and Itell them: Yes. Everybodys data is im-perfect. And if they tell me that weve gotto make their data perfect before startingto use analytics, my answer will be: Thenyou won't get the significant value thatanalytics can provide. Doug Dow,

    Vice President,Business Analytics Transformation

    Adoption often depended on a lot of very carefuland close work at a relatively low level in theorganization. Martin Fleming described the effortassociated with rolling out the coverage optimi-

    zation tool:We organized a set of workshops acrossthe various geographies, and spent aweek country-by-country, region-by-region working with the sales managersand the various sales leaders in the organ-ization taking them through the capability,demonstrating to them what therecommendations look like, and providingthem whatever insight we can, based onthe tools. Martin Fleming

    The analytics team found that the success ofnew analytics-based decision-making initiativesdepended on integrating analytics tools into abusiness process and application, rather than intro-ducing a new step with a new tool:

    Dont make it an extra step; dontmakeit something thats off to the side. Embed

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    it in the business process, so that peopleknow where to use it and how to use it.

    Emily Plachy,Distinguished Engineer, Analytics

    Process owners were among many IBM leaderswho looked for opportunities to insert analytics

    into operational level decision-making tasks.But the companys ability to operate as a globallyintegrated enterprise required that individualsthroughout all of IBM embrace a culture ofdistributed, data-driven decision making.

    Institutionalizing Continuous

    Transformation Management

    Beginning with Louis Gerstners introduction ofglobal brand P&L statements, followed by SamPalmisanos creation of the concept of the

    globally integrated enterprise, and then GinniRomettys focus on cloud, analytics, mobile, andsocial,15 IBM had been transforming for almosttwenty years. Viewing transformation as an endur-ing feature of its corporate DNA, IBM hadestablished an Enterprise Transformation unit aspart of its organizational structure. Led by SeniorVice President Linda Sanford, the EnterpriseTransformation unit encompassed both the ITorganization and a business transformation team:

    My team is a permanent team. It is not a

    task force. Its not a special project. Thisis because we have seen the rapid pace ofchange occurring in more and moreunpredictable ways. This building andcontinuously reinventing yourself andtransforming is the only way to get aheadof and stay ahead of the changes in themarketplace. Linda Sanford,

    Senior Vice President,Enterprise Transformation

    Teams governed by the Enterprise Transformationunit were responsible for specific transformationareas including Enterprise Process Simplification,Sales Transformation, Global Workforce Trans-formation, Business Analytics Transformation,and Social Transformation. IBM as a whole, and

    15IBM referred to cloud, analytics, mobile, and social asCAMSS, adding security as an important pervasiveingredient.

    the Enterprise Transformation unit in particular,recognized that rapidly changing technologyintroduced constant disruptions into the business.The Enterprise Transformation unit ensured thatIBM was alert to the needed changes.

    Given its desire to rapidly introduce new tech-

    nologies, IBM was aggressively pursuing acqui-sitions that would allow the company to enter anew market segment, fill a gap in the prod-uct/service offering, or expand the scale of anacquired product or service.16

    Counting itself as among the most acquisitiveorganizations in the world, IBMs CorporateDevelopment and M&A Integration teams haddeveloped a standard risk assessment model thatwas applied to every M&A transaction and thenupdated to incorporate new data to facilitate inte-

    gration risk assessment on future acquisitions evenin new business areas. The model was part of aprocess covering the whole M&A lifecycle, sup-ported by a workflow management tool (the M&AAccelerator) that included checklists, templates,and social tools such as a wiki for retaining bestpractices and disseminating lessons learned.

    The combination of integration analytics,workflow, and best practices helps ensureappropriate acquisition choices and ef-

    fective integration processes. Early identi-fication of potential pain points withappropriate action planning helps to alignfast start integration execution withachieving business results, thus rein-forcing positive morale with sustainedmomentum. Paul Price,

    Director, M&A Integration

    Every new deal meant that IBM was acquiring notjust new technologies, but also new processes,capabilities, and cultures. In some cases, the

    acquisition needed to absorb IBMs way of doingthings. But in other cases, the acquisition could actmore independently, and in still others, IBMwould benefit from adopting processes fromthe acquired company.

    16IBM was involved in more than one hundred merger andacquisition (M&A) transactions since 2005 with a totaltransaction value of over $30 billion. Source: 20052013IBM Annual Reports, Note C.

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    The SoftLayer acquisition exhibited the deepimpact acquisitions could have on IBM. AlthoughSoftLayer was acquired to provide important newservices for IBM customers, company leadersrecognized the need to increase its own use ofcloud services. SoftLayers standardized and high-ly automated approach to data center managementpresented opportunities to simplify IT infrastruc-ture service delivery within IBM. However, tofully benefit from SoftLayer, IBM needed toreplace some of its existing business processeswith ones better suited to a cloud environment:

    [We are] trying to a certain extent toreverse-integrate [SoftLayers way ofdoing things] into IBM. And hopefullysome of the things that we do right per-meate into the broader IBM company as

    well as what they do right permeates intoSoftLayer. Francisco Romero,IBM Cloud Services,

    Chief Operating Executive for SoftLayer

    Some of these changes would have far-reachingimplications:

    We're updating some of those fifteen [EPFprocesses] to operate in the cloud world.Usually, the time it takes you to close atraditional sales opportunity is going to bemeasured in two, three, six, nine months.In the cloud world, transactions are closed

    in hours or minutes. In traditional infra-structure deployments it took you 90, 120days, six months to deploy infrastruc-ture for the customer. In the cloud worldit takes hours or minutes.

    Francisco Romero

    Leaders throughout IBM recognized that its suc-cess depended on its ability to deliver new tech-nologies as part of integrated solutions that ad-dressed the constantly changing technology needsof its enterprise customers. This meant thatbusiness transformation within IBM had to be acore competency. In 2014, IBM had adoptedCAMSS (cloud, analytics, mobile, social withpervasive security) as both the product set thatwould support revenue growth and the toolset thatwould support the transformation needed to deli-

    ver the growth.While many investor services debated whetherIBM would be able to transform in ways that ledto sustained growth and profitability, IBM wasreported to be the only technology stock that starinvestor Warren Buffett had invested in and con-tinued to buy in 2014.17IBM was counting on theopportunities created by CAMSSand the com-panys ability to transform in order to addressthose opportunitiesto prove that Buffetts in-stincts were right.

    17Berkshire Makes Secret Trades and Opens ExpressScripts Stake, WarrenBuffet.com, November 18, 2014http://www.warrenbuffett.com/tag/ibm/.

    http://www.warrenbuffett.com/tag/ibm/http://www.warrenbuffett.com/tag/ibm/http://www.warrenbuffett.com/tag/ibm/
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    Appendix 1

    IBMs Financial Performance over Time

    2005 2006 2007 2008 2009 2010 2011 2012 2013

    Revenue

    ($ in millions) 91,134 91,424 98,786 103,630 95,758 99,870 106,916 104,507 99,751

    Net Income($ in millions)

    7,970 9,492 10,418 12,334 13,425 14,833 15,855 16,604 16,483

    Gross ProfitMargin

    40.10% 41.90% 42.20% 44.10% 45.70% 46.10% 46.90% 48.10% 48.60%

    Net ProfitMargin

    8.75% 10.40% 10.55% 11.90% 14.00% 14.90% 14.80% 15.90% 16.50%

    Operating EPS($)

    5.32 6.06 7.18 8.93 10.01 11.67 13.44 15.25 16.28

    Employees 329,373 355,766 386,558 398,455 399,409 426,751 433,362 434,246 431,212

    Appendix 2

    IBMs Roadmap 2015 targets

    Source: IBM annual reports and Non-GAAP Supplementals

    Source: Adapted from 2013 IBM Annual Report

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    Appendix 3

    IBMs Financial Performance by Segment

    Source: 2013 IBM Annual Report

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    Appendix 4

    IBMs Enterprise Process Framework (EPF)

    Source: IBM document, used with permission