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Chapter 12 / Enterprise and Global Management of Information Technology ●
3
REAL WORLD IBM Corporation: Competing
Globally by Offshoring IT Workers
CASE and Giving Away Technology
I t’s IBM’s nightmare. In a conference room in Bangalore, a
team of retail experts at software company Wipro are re-
designing the consumer experience for a major U.S. retail
chain. They’re methodically evaluating the checkout area.
The client wants state-of-the-art processes, and Srikant
Shankaranarayana, Wipro’s brainy, intense, 44-year-old gen-
eral manager for retail solutions, is pushing his consultants
and engineers to ask tough questions: Should salesclerks
carry handheld transaction devices or stand at cash registers?
Which merchandise should be tracked electronically? How
much information needs to be in the database to ensure that
discount promotions don’t last longer than necessary?
Those are exactly the kinds of questions that IBM wants
to ask its retail customers, and the fact that such companies
as Louis Vuitton and Target are turning to India for answers
is not a good thing for IBM. Almost half of IBM’s revenues
now come from such business/IT services, and only services
promise to provide growth on the massive scale that IBM
needs to make shareholders happy. Luckily for IBM, Wipro
has only 100 retail consultants—so far.
Meanwhile, IBM’s costs remain those of a mature First
World corporation. It has approximately 260,000 expensive
employees in the United States and other developed coun-
tries (the other 60,000 are in lower-cost regions) and 164,000
pensioned retirees, all quarterbacked from a gleaming mod-
ern headquarters on 432 acres of pricey Westchester County
real estate.
Although they don’t put it quite this boldly, CEO Sam
Palmisano and other top IBMers think they’re well on the
way to solving the problem. Interviews with the CEO’s lieu-
tenants reveal their strategy: It will not only challenge upstarts
like Wipro directly by taking the low-cost model right back at
them, but it also includes a dimension that is so original and
so bold that it will either reenergize Big Blue’s profits or un-
dermine its vaunted status as the biggest company in IT.
Simply put, IBM is gambling that it can win by giving
away crown jewels—precious intellectual property in the
form of software, patents, and ideas. Spread enough of those
riches around, the theory goes, and the entire industry will
grow faster, opening new frontiers. That, in turn, should
create opportunities for IBM to sell high-value products and
services that meet the new demand.
IBM’s response to the India threat has been swift. In
April 2005, after first-quarter revenues from services came
in unexpectedly weak and IBM disappointed Wall Street’s
earnings expectations, the company eliminated 14,500 jobs,
mostly in Europe. It was the biggest job cut in three years:
The company shut its European headquarters and moved
most of the surviving employees out to the field, to what
Palmisano calls “client-facing positions.”
Next, The New York Times reported that it obtained an in-
ternal IBM memo that said the company would hire 14,000
people in India this year. IBM calls the figure “exaggerated,”
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541
but newcomers in any number would add to an already surpri-
singly large roster in developing countries. Of the program-
mers who write custom code for IBM’s services group, about
half—26,000 or so—are in India, Brazil, or China. “Strategic
low-cost geographies” is the IBM lingo for such places.
India already accounts for the largest number of IBMers
outside the United States (it recently surpassed Japan). In
2004, Big Blue acquired India’s Daksh eServices, whose
6,000 employees operate call centers for companies like
Amazon.com and Citicorp. Goldman Sachs calculates that
by the end of next year, IBM Services’ head count in India
will top 52,000. That would be more than one-fourth of all
its services personnel and about one-sixth of IBMers world-
wide. It would put IBM in India on a par with Wipro, the
largest local software company, and it would make it bigger
than Infosys and Tata Consultancy Services.
Growth in the developing world is a natural part of imple-
menting a “global delivery model” for services, says senior
vice president Bob Moffat. In July, Palmisano reorganized
services, naming the 49-year-old Moffat as one of three execu-
tives who will run it jointly. Although the other two will over-
see the delivery of services to clients, Moffat’s job is to find
efficiencies. He spent the past three years taking billions of
dollars in costs out of IBM’s physical supply chain—the deliv-
ery of parts and goods to and from factories and then on to
the customer. His mission now is to cut the cost of delivering
services, even high-value ones, by tightening the “services
supply chain.” Mostly, that means people; he must get the
right ones to the right place at the right time. He has to ex-
tract every last penny of value from IBM’s 260,000 developed-
country employees if they’re going to stay on the payroll.
Palmisano certainly sounds confident. In an e-mail to
Fortune, he makes a remarkable claim: that by adopting the
strategy that he calls, simply, “openness,” IBM has tapped a
major new “spur to innovation itself.” The company lavishes
some $5.7 billion a year on R&D. By sharing its discoveries
wisely, Palmisano says, IBM will “make the pie bigger,” and
the entire industry will grow faster.
Collaborating with customers, and even rivals, to invent
new technologies is a big part of this sharing plan, and the
first fruits are already apparent. In hardware, IBM, Sony,
and Toshiba have codeveloped a breakthrough chip called
the Cell, which could eventually help transform all of IBM’s
computers. In software, embracing Linux and other open-
source technology has given IBM new platforms on which it
is building almost all of its high-growth applications.
The idea that giving things away makes the pie bigger
for everybody is not IBM’s invention, of course. The open-
source software movement that developed Linux is a good
example. Says Palmisano: “This isn’t theory for us. Collabo-
rative innovation today is crucial to every aspect of our busi-
ness. We’ve learned how to deliver value within this kind of
business system and how to make money.”
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542 ● Module V / Management Challenges
A walking, talking embodiment of that is Jim Stallings,
Palmisano’s vice president for intellectual property and
standards—a job Palmisano invented when he tapped Stall-
ings for it last September. Stallings, 49, used to manage
IBM’s work with the Linux community; now he’s the guy
who figures out what Big Blue should give away and what it
should keep. A buttoned-down former Marine Corps cap-
tain and 14-year IBM veteran, he’s not the most likely high-
tech Santa. Yet he’s almost hypnotically good at explaining
how IBM’s plan works. The giveaways to open-source soft-
ware groups, customer groups, universities, and other IT
companies are surprisingly extensive and diverse.
IBM says there’s no way to attach a precise dollar value
to its giveaways, but Fortune calculates they’re worth at least
$150 million a year. Although sharing is not yet a universal
part of its culture, the company has come a long way from
the arrogant, standoffish, monopolistic IBM of yore.
What’s in it for IBM? Big Blue seldom gives away a tech-
nology unless it has intellectual property and expertise that
will enable it to make money if the technology is widely
adopted. When IBM hands out tools to retailers, it often
sells them additional software and consulting services.
What’s more, freebies themselves can be a potent weapon.
Application-related software from Microsoft can be costly.
An open-source version like Apache Geronimo is free and is
the latest salvo in IBM’s open-source challenge to Microsoft.
It has also embraced the Linux operating system, a formidable
CASE STUDY QUESTIONS
1. Do you agree with IBM’s employment response to
competition from software development contractors in
India, like Wipro, that are expanding into IT consulting
services? Why or why not?
2. Will IBM’s plan to give away some of its IT assets and
intellectual property, as well as increase its support of
open-source software products like Linux, be a success-
ful growth strategy in the “brutally competitive market-
place” in which it operates? Why or why not?
3. Do you agree with IBM researchers’ assumption that
IT will remain “hard to use, expensive, and labor-
intensive, with customers continuing to need help
solving business problems” for a long time to come?
Should IBM bet its business on that assumption?
Defend your answers to both questions.
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rival to Windows, as well as Firefox, a popular challenger to
the Internet Explorer Web browser.
IBM has also found giveaways to be a potent door opener
abroad, where the company derives 63 percent of its reve-
nues. Stallings has been to China four times this year and
plans to go two more times in September. He’s working to
convince policymakers and business leaders that using open-
source software makes more sense than buying Microsoft’s.
This IBMer bearing gifts has found a receptive audience.
Now IBM is helping build a giant network based largely on
Linux to connect all of China’s libraries.
All this sounds well and good, but the outcome is far from
certain. IBM is in a brutally competitive marketplace with a
long list of rivals going after the same customer dollar, but
Palmisano argues that IBM will be able to create products and
services that capitalize on new markets as they emerge.
Yet even his own executives need to be convinced from
time to time. Two years ago, some insiders fretted that IBM
might be “shooting itself in the foot” by giving its ideas away.
In the end, however, company researchers concluded that as
long as IT remains hard to use, expensive, and labor-intensive,
with customers continuing to need help solving business
problems, IBM will have the opportunity to thrive. Any
business computer user would guess that means forever.
Source: Adapted from David Kirkpatrick, “IBM Shares Its Secrets,” Fortune,
September 5, 2005.
REAL WORLD ACTIVITIES
1. Use the Internet to research news on the latest devel-
opments in the competition to provide IT consulting
services to businesses and governments. Check out
IBM’s performance, as well as major players like HP
and Accenture, new entrants like Dell, and inter-
national competitors like Wipro. Who appears to be
winning or losing in this arena? What reasons can you
uncover for the results you find?
2. IBM eliminated 14,500 jobs, mostly in Europe, and
then reportedly hired thousands of additional IT work-
ers in India. Cutting high-cost jobs and then offshoring
jobs to a subsidiary in a lower-cost country is a contro-
versial business strategy being used by other global
companies. Break into small groups with your class-
mates to discuss the implications of this issue for your
current or future career choices and the kinds of com-
panies or organizations you would want to work for.