Rather than stifle innovation and value creation. this new
breed of open standard networked IT infrastructure has
dramatically increased the
range of business building oppot1unitics that can be
pursued, while also dramatically
decreasing the cost and time required to launch them. IBM
executives call this new
era of IT-enabled business advantage "Innovation On
Demand.'' An executive familiar
with the emerging On Demand IT architecture model explained
their impact:
I would argue that the
commoditization of technology is the very thing that enables
innovation in what
many industry leaders now call an "On Demand"' world. An On Demand
enterprise is one that
leverages standards-based componentized technology to support
integrated and
flexible business processes. ln a world where customer needs and global
market forces are more
dynamic than ever, it is these component-based technologies
and flexible business
processes that enable organizations to sense and respond to m:w
opportunities and threats
and to turn on a dime to meet new challenges. While technological
innovation continually
provides us with more powerful and efficient tools that do become
commoditized and
ubiquitous. strategic innovation using the technology-how we put the
hardware and software
together to solve pressing business problems and transform business
models- is very much
alive and well.
Applegate, 2008. pg 103.
As IT infrastructure costs were reduced and operations were centralized, Gerstner
also focused on reengineering back-office business processes: for example, finance,
enterprise resource planning (ERP), and payroll. In late 1993, each member of the corporate
executive committee was assigned responsibility for one of these reengineering
projects. He set two priorities: (1) get cost out as quickly as possible and (2) "clean
sheet" the process and redesign it for global use. By 1996, these process reengineering
efforts had reduced annual costs within newly centralized corporate procurement,
HR, and finance units by another 50 percent, representing an additional $1 billion in
direct savings per year.
Within a few short years of Gerstner's arrival, he had completed Phase I of the
turnaround. The company was back on solid financial footing. After losing $5 billion
on revenues of US$64 billion in 1992, IBM generated $3 billion in net profits on a
slightly smaller revenue base in 1994. Further, the shift of IT infrastructure services
and corporate back-office functions (e.g., finance, ERP, and HR) from decentralized
silos to a centralized shared-services model was the first step in the executive
team's strategic vision to return the company to a position of industry leadership by
bringing the power of IBM's products and services together to solve its large global
customers' most pressing business problems. As such, the centralized, streamlined IT
infrastructure and corporate services functioned as a platform and a testing ground as
the company tackled more complex business process reengineering projects aimed at
streamlining core operating processes (e.g., supply chain, new product development,
and customer-facing sales, marketing, and service) and driving revenue growth.
Applegate, 2008. pg 109.
Returning to the story of IBM's transformation, Phase 2 (during the late 1990s) was
focused on driving profitable growth. Given that the entire industry was entering a
period of rapid growth associated with the build out of Internet-based businesses and
infrastructure upgrades associated with Y2K, IBM focused initially on building capabilities
to meet high demand, customize solutions, and go to market as "One lBM.'' This
required that the company reengineer and centralize its core operating processes (e.g.,
supply chain; new product development; customer acquisition, retention, and service).
The new product development process was among the first revenue-generating
processes targeted for improvement. Benchmark studies had shown that, in over 85
percent of new product launches, IBM's time to market was at least 1.5 times slower
than best-in-class competitors, and IBM's development expense to revenue-generation
ratio was over 2 times higher than best in class. By 1995, IBM executives had streamlined
and integrated the new product development process to reduce time to market
and lower development costs: abandoned project expenses were decreased by over
90 percent, the warranty expense to revenue ratio decreased by 25 percent, and time
to market for new products improved by 67 percent. Overall, product development
expenses were decreased by 50 percent, generating over $1.6 bi1lion per year in cost
savings and, more importantly, yielding increased revenues from the accelerated rate
of successful new products that entered the market.
Having learned from earlier back-office reengineering efforts, in 1995, IBM also
began to reengineer and centralize its global supply chain processes. The goal was to
standardize and streamline core operating processes to enable IBM to go to market as
"One IBM."
An executive explained:
In 1995, each of our key brands handled its own procurement, logistics, and fulfillment
activities. As a result, we had silos of these activities all over the company. During 1994 and
1995, we began to reengineer and standardize these activities. If there was someone on the
outside that could perform the activity better, faster, and cheaper than us, we outsourced the
physical activity and kept the strategy, planning, and management. For example, in logistics,
we now handle all of the planning and management centrally, but we outsource all of the
warehousing and distribution to a third-party partner. In addition, we decided to exit many
of our software products that competed with enterprise application software vendors that our
customers used and, instead, we partnered with former competitors, like SAP, PeopleSoft,
and Siebel, so that we could run the same software internally as our customers used.
With in one year, procurement costs were down 20 percent and the time needed to complete
and confirm supply orders had decreased from an average of 48 hours to 2.5 hours.
By 2000, 94 percent of goods and services, representing $4.3 billion, were procured online
from 24,000 worldwide suppliers at a cost savings of over $370 million annually. And
even as year-over-year growth in procurement volume increased by 60 percent between
1999 and 2000, no new staff were added. More importantly, the ability to control supply
chain operations enabled IBM to deliver the complex, customized solutions customers
had begun to demand. Finally, real-time information was available to manufacturing.
sales and marketing. customer service, and consultants who used the information to
make more timely, customer-focused decisions---decisions that drove revenue.
As information became available from streamlined standardized real-time
IT-enabled operating processes. IBM provided tools and IT support to help teams of
employees create their own portals that would provide access to actionable information
to support decision making and the collaboration tools needed to coordinate
work. IBM Global Services consultants were among the first to develop a business
intelligence portal to keep track of dynamically changing technology and customer
requirements. At a cost of only $25,000 invested over several weeks. the consultants
launched the portal and within one year had used the improved information and collaboration
tools to decrease consultant engagement times by 40-80 percent, increase
revenues per consultant by 20 percent, and improve contribution margin per consultant
by 400 percent. In addition, the portal was also used to shift a significant portion
of IBM's eLeaming training programs online, saving $350 million in training costs
per year.
While the initial return to profitability and a positive return on equity were driven
by cost savings, during the late 1990s, IBM turned the corner and began to grow revenues.
At only 5.7 percent average growth per year, however, IBM's revenue growth
lagged the double-digit growth experienced by others in the industry. It was at this
point that IBM began to look for ways to leverage its assets to continue to drive efficiency
while also achieving sustainable proprietary advantage.
Applegate, 2008. pg 110-112.
As IT infrastructure costs were reduced and operations were centralized, Gerstner
also focused on reengineering back-office business processes: for example, finance,
enterprise resource planning (ERP), and payroll. In late 1993, each member of the corporate
executive committee was assigned responsibility for one of these reengineering
projects. He set two priorities: (1) get cost out as quickly as possible and (2) "clean
sheet" the process and redesign it for global use. By 1996, these process reengineering
efforts had reduced annual costs within newly centralized corporate procurement,
HR, and finance units by another 50 percent, representing an additional $1 billion in
direct savings per year.
Within a few short years of Gerstner's arrival, he had completed Phase I of the
turnaround. The company was back on solid financial footing. After losing $5 billion
on revenues of US$64 billion in 1992, IBM generated $3 billion in net profits on a
slightly smaller revenue base in 1994. Further, the shift of IT infrastructure services
and corporate back-office functions (e.g., finance, ERP, and HR) from decentralized
silos to a centralized shared-services model was the first step in the executive
team's strategic vision to return the company to a position of industry leadership by
bringing the power of IBM's products and services together to solve its large global
customers' most pressing business problems. As such, the centralized, streamlined IT
infrastructure and corporate services functioned as a platform and a testing ground as
the company tackled more complex business process reengineering projects aimed at
streamlining core operating processes (e.g., supply chain, new product development,
and customer-facing sales, marketing, and service) and driving revenue growth.
Applegate, 2008. pg 109.
Returning to the story of IBM's transformation, Phase 2 (during the late 1990s) was
focused on driving profitable growth. Given that the entire industry was entering a
period of rapid growth associated with the build out of Internet-based businesses and
infrastructure upgrades associated with Y2K, IBM focused initially on building capabilities
to meet high demand, customize solutions, and go to market as "One lBM.'' This
required that the company reengineer and centralize its core operating processes (e.g.,
supply chain; new product development; customer acquisition, retention, and service).
The new product development process was among the first revenue-generating
processes targeted for improvement. Benchmark studies had shown that, in over 85
percent of new product launches, IBM's time to market was at least 1.5 times slower
than best-in-class competitors, and IBM's development expense to revenue-generation
ratio was over 2 times higher than best in class. By 1995, IBM executives had streamlined
and integrated the new product development process to reduce time to market
and lower development costs: abandoned project expenses were decreased by over
90 percent, the warranty expense to revenue ratio decreased by 25 percent, and time
to market for new products improved by 67 percent. Overall, product development
expenses were decreased by 50 percent, generating over $1.6 bi1lion per year in cost
savings and, more importantly, yielding increased revenues from the accelerated rate
of successful new products that entered the market.
Having learned from earlier back-office reengineering efforts, in 1995, IBM also
began to reengineer and centralize its global supply chain processes. The goal was to
standardize and streamline core operating processes to enable IBM to go to market as
"One IBM."
An executive explained:
In 1995, each of our key brands handled its own procurement, logistics, and fulfillment
activities. As a result, we had silos of these activities all over the company. During 1994 and
1995, we began to reengineer and standardize these activities. If there was someone on the
outside that could perform the activity better, faster, and cheaper than us, we outsourced the
physical activity and kept the strategy, planning, and management. For example, in logistics,
we now handle all of the planning and management centrally, but we outsource all of the
warehousing and distribution to a third-party partner. In addition, we decided to exit many
of our software products that competed with enterprise application software vendors that our
customers used and, instead, we partnered with former competitors, like SAP, PeopleSoft,
and Siebel, so that we could run the same software internally as our customers used.
With in one year, procurement costs were down 20 percent and the time needed to complete
and confirm supply orders had decreased from an average of 48 hours to 2.5 hours.
By 2000, 94 percent of goods and services, representing $4.3 billion, were procured online
from 24,000 worldwide suppliers at a cost savings of over $370 million annually. And
even as year-over-year growth in procurement volume increased by 60 percent between
1999 and 2000, no new staff were added. More importantly, the ability to control supply
chain operations enabled IBM to deliver the complex, customized solutions customers
had begun to demand. Finally, real-time information was available to manufacturing.
sales and marketing. customer service, and consultants who used the information to
make more timely, customer-focused decisions---decisions that drove revenue.
As information became available from streamlined standardized real-time
IT-enabled operating processes. IBM provided tools and IT support to help teams of
employees create their own portals that would provide access to actionable information
to support decision making and the collaboration tools needed to coordinate
work. IBM Global Services consultants were among the first to develop a business
intelligence portal to keep track of dynamically changing technology and customer
requirements. At a cost of only $25,000 invested over several weeks. the consultants
launched the portal and within one year had used the improved information and collaboration
tools to decrease consultant engagement times by 40-80 percent, increase
revenues per consultant by 20 percent, and improve contribution margin per consultant
by 400 percent. In addition, the portal was also used to shift a significant portion
of IBM's eLeaming training programs online, saving $350 million in training costs
per year.
While the initial return to profitability and a positive return on equity were driven
by cost savings, during the late 1990s, IBM turned the corner and began to grow revenues.
At only 5.7 percent average growth per year, however, IBM's revenue growth
lagged the double-digit growth experienced by others in the industry. It was at this
point that IBM began to look for ways to leverage its assets to continue to drive efficiency
while also achieving sustainable proprietary advantage.
Applegate, 2008. pg 110-112.
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