Risk & Compliance

IBM Seeks the Solution Within

The computer giant deploys its core technical expertise on its own internal systems.
Russ BanhamJanuary 1, 1999

Category Winner:

* Employee Processing * Vendor Processing

You would think that if any company could figure out a way to deal efficiently with its suppliers, it would be IBM Corp. Yet, until the mid-1990s, the computer giant struggled with tons of paper invoices from small and midsized suppliers.

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“We had this mountain of paper coming in from our smaller suppliers– more than a million invoices each year–making accounts payable look like a post office,” says Robert Hughes, IBM national accounts payable services manager. It was time for the physician–after all, IBM sells electronic commerce strategies–to heal itself. “We needed to figure out a cost-effective way for our smaller trading partners to send us their invoices in an electronic format,” says Hughes.

No surprise that the answer lay within. Early last year, the company formed a team made up of Global Services (IBM’s business service organization), procurement, and accounts payable to develop a customized electronic invoice. A component of the Global Services network, called Forms Exchange, provided the key. Now, IBM’s smaller authorized suppliers (95 percent of its vendors) use a standard Internet connection and a Web browser to access IBM’s Web site, fill out the forms, and submit them electronically.

The Web-based forms are converted into EDI documents and routed through the company’s EDI system to accounts payable, where they are treated just like standard EDI transactions from IBM’s larger vendors. “We now have two electronic systems that converge as one at the back-end,” Hughes notes. “The post office has closed.”

IBM’s reengineering of its vendor processing function, which targets procurement of equipment, supplies, and materials; related accounts payable functions; and the processes each supports, earned it a 1998 REACH Award in the vendor processing category. The venerable computer giant, with 1997 revenues of $78.5 billion, also nabbed a REACH Award for the reengineering of its employee disbursements systems.

The most recent awards, says John Paterson, vice president, global production procurement and process reengineering, recognize pieces of an ongoing process. “Reengineering for its own sake is a waste of time and resources. It is necessary to link change to improvements in business performance in the areas of cost, expense, cycle time, and so on.”

Vendor Processing: Start with Communication

Paper invoices from suppliers weren’t the only problem IBM vendor processing faced. Employees used paper purchase orders for everything from internal catering services to software. There were 12 separate systems for dealing with vendors, and a “total disconnect,” Hughes says, between procurement and accounts payable.

“If someone wanted to buy an office chair, [that person] would go to procurement and say, ‘Here’s my request,’” he explains. “Procurement then went to our suppliers, picked [a chair], issued a paper purchase order, and the chair was shipped. The paper invoice from the supplier later went to accounts payable. Unfortunately, the invoice sometimes didn’t match the purchase order, was coded inaccurately, or arrived late.” So only 66 percent of invoices were paid when first received; the others required more information. Frustrated employees often bypassed procurement altogether to get supplies.

Changing the process first required procurement and accounts payable to try something different–communication. “What we did was form a team of the right people from both organizations in early 1997,” says Ron Kuehne, IBM worldwide manager of accounts payable. “We brought in some suppliers and requesters [employees] to join the team. We then asked: ‘What can we do to make it easier and more cost-effective for all of you to get done what you need to get done?’”

Ultimately, the 12 general procurement and accounts-payable systems were integrated into one system. The paper requisition process was replaced by an online system, which helped reduce errors and improve cycle times. Additional cycle-time improvements were gained by eliminating levels of corporate approval and by increasing expense authorization limits. Finally, a data warehouse of purchase order and payment data was established.

Altogether, the systems enhancements helped procurement realize $1 billion in savings for IBM. Now, 91 percent of invoices are paid when first received, and cost-per-invoice has dropped from $1.50 to $1.02. “We’ve now got a very efficient system with common processes underneath it, allowing huge symmetries of data flows and contacts, says assistant controller Joseph Martin.

One by-product of the change is that IBM can now leverage its purchasing power. That’s because one of the team’s early decisions was to replace paper purchase orders for low-cost (under $200), high-volume orders with employee purchase cards. The cards are used to make purchases without authorization in an online catalog environment.

Automated buying currently represents 80 percent of all IBM procurement transactions. For the remaining 20 percent of IBM’s higher-priced orders, a contract form with preapproved authorization and standard terms and conditions has been developed. This reduces the cycle time for the placement of contracts from nine months to one. By the year 2000, electronic procurement is expected to reduce the cost to process an order by 80 percent. “We estimate that $1 saved in procurement is equivalent to $7 in revenue,” Hughes says. “What we have created is a truly seamless requisition-to-payment process, making it easy and flexible for the requester to procure goods and services, and for the vendor to send us electronic invoices and receive payment.”

charts omitted Employee Disbursements: The HR Connection
The company also took a team-based approach to its REACH Award-winning employee disbursements system. “We teamed employee processing with human resources in 1996 to improve interlinked processes,” says Tony Angelo, IBM project executive for worldwide employee disbursements. It used to be, he explains, that HR would develop a new compensation policy, “and I’d have to figure out how to administer it. But since HR is the front-end of the payroll system–driving employee benefits, salary increases, frequency of increases, and so on–we wanted a more proactive partnership.”

Angelo also wanted a more streamlined approach. “In the United States in the 1980s, I used to have eight different payroll systems and locations,” says Angelo. “Some employees were paid weekly, some biweekly, all depending on where they were. Now we have one system [software bought from San Francisco-based Tesseract and modified by IBM]. All our regular employees are paid on a semimonthly basis, and temporary employees on a weekly basis. We save money by not turning the engine as many times; in other words, by minimizing the number of times we have to run the payroll over the course of the year.” The new system, which is lodged at IBM’s Southbury, Connecticut, facility, has helped cut payroll costs by 95 percent and reduce per-pay-distribution costs from $5.75 to $1.77.

Technology has also been an ally in cutting T&E expenses. In the early 1990s, IBM had 25 U.S. locations processing T&E expense reimbursements. In 1993, it consolidated them into one centralized system (also based in Southbury) using its “homegrown automation,” Angelo says. The result? Processing T&E costs dropped by 83 percent, and the process cost per T&E expense report plunged from $23 to $2.02.

Beyond the cost savings, the overhaul has encouraged employee self-sufficiency. “We put together a customer-service center so that if an employee has a question about the status of an expense account, there’s a centralized place to get that information,” Angelo says. IBM upgraded the system two years ago to include a voice response unit. This year, the data is also available on the company’s intranet.

“There’s a twofold purpose here,” Angelo says. “Employees can obtain status information, but management can also access this information to make sense of the numbers. At the end of each month, we can extrapolate how much was spent on hotels, phones, and rental cars for the period. This way, management can leverage the information on future contracts with the suppliers or put spending controls in place.”

The employee disbursements reengineering involved more than just standardizing payroll cycles and centralizing information workflows, however. Travel authorizations have been discontinued (“the advantage is less cost,” Angelo says). Time clocks and time sheets, which are used primarily to determine overtime pay for hourly workers, are gone, replaced by automated time collection tools. Employee garnishments–typical deductions for annuities and other benefits–also are automated. “The Tesseract system even provides for automated check distribution to third-party agencies, such as the government,” says John Rosato, reengineering and systems manager. Moreover, 95 percent of IBM’s employees now receive their pay via electronic funds transfer, up from 86 percent before the reengineering.

All these changes at IBM’s vendor and employee processing areas are conspiring to create what assistant controller Martin calls a “sleek, fast-moving finance organization that can turn on a dime.”

charts omitted