Video
Another Case of the Big Blues
Yet when history judges Mr Palmisano's time at the helm, IBM's Indian strategy may prove far more important than what the firm does elsewhere in the developing world. Becoming a globally integrated enterprise is necessary for its success, but not sufficient. Cutting costs is crucial — and globalising the supply chain has saved IBM about $8 billion a year. But to grow in the newly integrated world, as Mr Palmisano puts it, the burning question becomes "what will cause work to move to me? On what basis will I differentiate and compete?"
So as well as realising "global integration" — no easy task in a mature company with 330,000 staff in 170 countries — IBM will also need the right products. It is here that India poses a special threat, not least because of its prowling, hungry home-grown tiger companies.
When Mr Palmisano became IBM's boss in 2002, the firm seemed to have a perfectly good strategy. It was the legacy of the famous turnaround of IBM engineered by the previous boss, Lou Gerstner, and described in his book, "Who Says Elephants Can't Dance?".
When Mr Gerstner took the helm in 1993, IBM was in deep trouble, on the verge of selling itself off in pieces. In particular, the legendary mainframe business was perceived to be in terminal decline, while the firm's hardware (personal computers and the like) were rapidly becoming commodities. Mr Gerstner stabilised the mainframe business, which today is expected to see modest growth thanks to greater openness to independent software vendors, clever pricing and demand from emerging economies, including India. More fundamentally, he shifted IBM's focus from selling hardware to the fast-growing IT-services market, including outsourcing. In 1992 hardware generated around 55% of IBM's revenues, and services 25%. By 2001 hardware was down to about 30% and services up to 42%.
Meanwhile, IBM's share price rose from $11 in March 1993 to $125 in December 2001 — a price it has never since matched. Last July it fell below $74, although it rallied after that — perhaps as the message that the firm is taking India seriously started to get through. Having briefly touched $100, it slipped back to $93 during the recent market wobbles. That is not the sort of performance to make a boss feel secure in his job, especially in this era of trigger-happy boards. (Though, if rumours are to be believed, a record-breaking bid from private equity may yet rescue Mr Palmisano's reputation.)
When IBM bought the consulting arm of PricewaterhouseCoopers in 2002, it seemed like the final piece of the jigsaw needed to complete the services strategy. The consultants' industrial expertise and their relationships at the top of all manner of industries would help IBM move upmarket and lead to the more lucrative work of solving complex business problems. Rapid growth seemingly beckoned. In fact, IBM's services business suffered at the lower end of the market, owing not least to unexpectedly strong competition from Indian IT firms, many of which first got started in the IT business thanks to the vacuum created when IBM quit the country.
Even now, the Indian firms are a limited form of competition. The biggest, Infosys, has a stockmarket value of only $28 billion, compared with IBM's $144 billion. IBM also has lucrative businesses the Indian firms can only dream of. These include the lease-like revenues from licences relating to its mainframe computers and its pioneering "multi-core" semiconductors, which feature in (among other things) the three leading video-games consoles.
Yet corporate IT departments are continually being pressed to cut costs. The Indian suppliers' credibility with international firms was boosted by their sterling work in inoculating networks against the Y2K computer bug. Indian firms have started to win big outsourcing contracts, some of which IBM had counted on as its own. Just as troubling for IBM has been the effect on contracts that the company managed to win, many of which were at far lower prices than they would have been without an Indian alternative. The prospect of falling margins on services contracts prompted IBM — and the other big multinational suppliers — to pledge a large amount of money to India. Even IBM's Indian rivals concede that so far, despite teething troubles, the American giant has done well — certainly better than Accenture and EDS. If nothing else, the company has proved that you do not have to be Indian to manage a low-cost outsourcing business in India. Under IBM's ownership, the Indian workforce of Daksh, which runs call centres and does other basic "business process outsourcing", has grown from 6,000 in April 2004 to over 20,000.
Cheap and Cheerful
According to Pavan Vaish, its boss, IBM has largely allowed Daksh to carry on as it was, rather than imposing on it the IBM way, as might have happened in the past. "They studied the way we did business and said we don't have to do everything here the way we run our other businesses. Certain core functions were added, such as finance, but the rest was left alone." Indeed, IBM is now trying to export the Daksh way to other parts of the empire, such as its call centre in Okinawa.
At first IBM paid too much for Indian workers, adding heat to an already sizzling labour market. Now it is trying to attract and retain talent by offering training and a career path that leads up the corporate ladder. (IBM's Indian rivals counter by telling potential recruits that they offer better training and quicker career progression than an American company run out of Armonk, New York.)
Reader Comments» Post a comment