On the surface, IBM seems to be cruising. Its stock is trading near a six-year high, at almost $106, and its overall financial performance has been improving steadily for more than a year. On May 29, the company raised this year's per-share earnings forecast after stepping up a stock repurchase plan.
Yet the company is battling a bugbear that keeps it from breaking out and prevents the stock from really soaring. Ironically, its problem is with the $48 billion-a-year business that saved it from ruin in the 1990s: IT services. What was once IBM's (IBM) growth engine seems to be turning into a chronically slow-growing, low-margin drag on the rest of the company.
Fresh evidence of IBM's trouble with services came May 30, when the company revealed that it had just eliminated 1,573 services jobs, mostly in North America, bringing to 3,023 the total jobs cut in the high-cost region this quarter alone. That's a small percentage of the company's total workforce of more than 355,000. Yet when weighed against rapid growth in low-cost India, where the staff topped 53,000 at the beginning of the year, the cuts underscore the biggest challenge facing Big Blue: the Indian tech industry.
Indian Rivals Force Change
IBM remains the No. 1 tech-services company in the world, with 7.2% of the market last year, but its share slipped from 7.5% in 2005, according to Gartner Dataquest (IT). India's tech-services exports grew 32%, to $31 billion last fiscal year, ended in March, and are expected by analysts to top $60 billion by 2010. With a combination of low labor costs, high quality, and efficiency in how it handles jobs, the Indian companies have forced IBM and other Western services giants to fundamentally restructure the way they do business and massively shift work offshore. "The Indians are doing to the world's IT processes what the Japanese did to manufacturing," says analyst John McCarthy of Forrester Research (FORR).
IBM's answer isn't as simple as moving more jobs offshore. The company has developed a system that lets it shift work to the areas with available skills at the lowest-available costs. The goal is to deliver higher-quality services at competitive prices. "Clearly one opportunity associated with globalization is costs," IBM Chief Executive Samuel Palmisano told a gathering of stock analysts on May 17. "You have access to expertise wherever it is in the world?if you have the infrastructure and the relationships to take advantage of it."
Job reductions are nothing new for IBM's huge global-services workforce, which has been under the knife continuously in the past two years. The cuts started when IBM, shocked by very poor results for the first quarter of 2005, began a major restructuring in Europe and the U.S. that eliminated 15,000 jobs in a matter of months. Ever since then, every few months, a new batch of jobs is trimmed from high-cost countries, including 700 in the first quarter of this year.
The trend is likely to continue. In the first quarter, the largest chunk of the services business, called Global Technology Services, grew a relatively healthy 7%, but its operating margin narrowed, shrinking by 2.5 points to just 7.8%. In comparison, the top Indian services outfits have operating profits of between 25% and 30%.
And their quarterly revenues are growing 30% to 40% year over year. IBM "is in a transition," says S. Padmanabhan, an executive vice-president at Tata Consultancy Services, India's largest IT-services firm. "We have been doing this for over 35 years, and it has taken a lot of intellectual capital to fine-tune the process. It's taking these companies time to reach our level of maturity."
Meanwhile, the Indians are taking on larger and larger contracts, and doing ever more sophisticated work. Even IBM's seemingly most solid relationships can become unstuck. For instance, when China's Lenovo Group (LNVGY) bought IBM's personal computer business two years ago, IBM became a major supplier of services for Lenovo's operations. Yet Lenovo is now undertaking a massive cost-cutting campaign, and, according to a source familiar with the situation, the company has opened up bidding on its effort to integrate all of its operations using run-the-business software from SAP (SAP). Neither Lenovo nor IBM would comment on their relationship.
Why are the Indian companies able to underprice IBM and still make a much better profit? Part of the answer is geography. The Indians typically employ about 80% of their staffs in low-cost countries and place the remaining 20% near their clients in the U.S. and Europe.
To improve its efficiency, IBM has adopted the so-called Lean Operations discipline developed by Toyota Motor (TM) for manufacturing cars. It's adapting Lean so it applies to a global service organization, something the top Indian companies began two years ago. The basic principle of Lean Operations is that a company should be making continuous, incremental improvements in its business processes. That's one of the ways IBM figures out where it can eliminate work. The company also keeps a master database, nicknamed "Blue Monster," of all of its services employees. Supervisors use the information to track who is working on what project and when they'll be available for another assignment. In this way, the company hopes to minimize the amount of time people are between assignments.
All of this cost-cutting is the task of Robert Moffat, senior vice-president for integrated operations. His goal is to make the Global Technology Services workforce 10% to 15% more efficient each year. The key for him is to take costs out of the equation through a combination of workforce globalization, process improvements, and replacing manual labor with software. In a little more than six months, Moffat said at the May 17 analysts' meeting, he has rolled out the new formula for 22 of IBM's largest clients in seven countries. In some cases, he said, the clients have seen up to a 50% improvement in productivity. Now, Moffat is extending the new system to 600 more accounts.
All of this huffing and puffing over efficiency won't calm the frazzled nerves of IBM's 155,000-strong services workforce. True, there are still abundant employment opportunities in the company. About 30% of the people whose jobs are eliminated find other jobs within the behemoth, and, in the first four months of this year alone, IBM hired more than 19,000 people. But a lot of those hires were made in India. For the U.S. workforce, there is always fear that jobs will be lost to foreigners.
For investors, the fear is just the opposite?that IBM won't make the shift quickly enough. Only then will its massive services business be healthy again.
Case 1 discussion questions:
1. What is the strategy IBM is monitoring and controlling within its IT Business?
2. What implementation controls (measures) and industry comparison measures does IBM appear to be using to evaluate and control its ongoing implementation and execution?
All eyes are on Boeing as it begins the final assembly of the first 787 Dreamliner.
Even Washington Governor Christine Gregoire joined the official ceremony that kicked off the process on May 21 at the company's sprawling new state-of-the-art aircraft plant in Everett, Wash. A lot is at stake, of course, for all interested parties, including the state. The Dreamliner has notched 568 firm orders from 44 airlines, making it the fastest-selling new airplane in aviation history, and it is partly responsible for reviving the once fading fortunes of Boeing's commercial airplane division.
But now Boeing (BA) actually has to begin building the complicated composite jets and still faces the crucial test: seeing if it can make the plane fly. "If there are going to be problems?and every new airplane program has some?it's going to start appearing now and over the next 9 to 12 months," says Richard Aboulafia, aerospace analyst for the Teal Group. "So far, so good. But you can bet that few senior Boeing executives are going to be sleeping well over the next few months."
Rollout for the first jet is slated for July 8, and the first flight is scheduled for mid-August, provided the airplane is ready to fly. Boeing's first customer, All Nippon Airways, should receive its first Dreamliner in May, 2008. Meeting those deadlines is key, as delivery is when Boeing collects most of its money.
Boeing executives, as expected, put on a brave face May 21 and gushed enthusiastically about progress so far. The large composite fuselage sections, the first set of carbon-fiber wings, and the horizontal stabilizer have all been delivered safely to the staging area at Boeing's stripped-down assembly space. Boeing is transporting the big airplane component parts to Everett on modified 747s, called Dreamlifters, from factories in Japan, Italy, South Carolina, and Kansas.
"Today, we begin assembling the first airplane of a new generation," boasted Scott Strode, 787 vice-president of airplane production. "The 787 not only will revolutionize air travel, it represents a new way of building airplanes."
As final assembly has drawn closer, people inside Boeing say some challenges are emerging. The actual snapping together of enormous composite parts built by different companies in Asia, Europe, and North America is the first test of this new system. Boeing's supplier partners did not install many of the electronic and hydraulic systems into their respective fuselage sections as planned. Boeing is shifting workers?known as "travelers" in airplane production argot?from other airplane programs, such as the 777 Jetliner, to make up for the unfinished work. That is sure to boost overtime pay, push workers harder, and create havoc as employees frantically try to catch up on the unfinished work.
But on May 21, Strode downplayed some of the production challenges, saying they were typical of a new airplane program. He said suppliers did not integrate the systems in the first fuselage sections as they focused on producing their first composite structures. He said the company has it under control. In the future, however, fuselage sections will come stuffed with the electronics and hydraulic systems, so that Boeing workers will just have to connect the wiring and piping to the other sections and then snap the plane together.
Strode said one challenge is that fuselage sections are currently being held together by temporary fasteners. The cause, he said, is a global shortage of fasteners?the bolts that hold the airplane together?as a result of the boost in jet production at Boeing and Airbus.
Mike Bair, Boeing vice-president of the 787, had said earlier during a conference call with reporters that "the fastener industry is stretched tighter than a rubber band."
The other continuing challenge has been production delays from Italy. Alenia Aeronautica, which builds the 62-foot composite horizontal stabilizer and the center fuselage, had fallen behind on creating its first barrel section. This caused concern for people in the 787 program. Although Alenia Aeronautica delivered its horizontal stablizer early, the quality of the part had many defects that Strode said were caused by the early manufacturing challenges Alenia faced. He says the Italians now have a handle on the production issue and expects to see much improved stabilizers in the near future. But such design and manufacturing fixes cost more money.
In an earlier quarterly financial call with analysts, Boeing executives said the company is spending an additional $1 billion to cover contingencies that could occur as production of the 787 gears up. Some of that money is earmarked for the development of the 747-8 Intercontinental.
Still, the making of the 787 represents a new way to produce commercial jetliners, and the changes could be positive for Boeing, if not the entire industry.
The biggest change is the outsourcing of much of the manufacturing work to global suppliers. The Japanese are making the composite wings and wing box. Dallas-based Vought Aircraft Industries and Spirit AeroSystems (SPR) of Wichita, Kan., are making fuselage and nose sections. Italy's Alenia is making the center fuselage and the horizontal stabilizer.
The 787 production system has been designed using lean manufacturing techniques honed on other Boeing airplane programs, resulting in a simplified final assembly process. A huge advantage of using composites on the airframe is that Boeing and its suppliers build the wing or the nose section in just one unified piece. This means the final assembly workers will only have to fasten together six major items?the forward, center, and aft fuselage sections, the wings, the horizontal stabilizer, and the vertical fin, Boeing officials say. That drastically cuts production time compared to other current programs, where workers have to attach many more component parts to the different aircraft sections.
Portable tools, designed with ergonomics in mind, move the assemblies into place. No overhead cranes are used to move the different airplane structures. Although the first airplane will take about seven weeks to assemble, executives say production flow time will increase to where mechanics in final assembly are producing a Dreamliner in six days. Ultimately, the goal is to roll out a 787 every three days.
Case 2 Discussion Questions:
1. How is Boeing using milestones and other implementation measures to gauge its 787 Dreamliner strategy's successful implementation?
2. How could a dashboard approach help the vice president for Dreamliner production control strategy execution?
3. What complications do so many outsourced partners create for Boeing?
The past decade has been one of America's finest in terms of productivity growth. Yet a crucial 20% of our economy appears to have been left behind: government. Despite numerous attempts at management reform and a panoply of opportunities to transfer best practices between the private and public sectors, government seems to have missed out on the productivity boom seen in the private sector. That's a shame, because while there are important differences between the public and private sectors, government does an abundance of grantmaking, procurement, property management, customer service, and other jobs ripe for productivity improvement.
So just how far behind is government? We can't say with any certainty because the Bureau of Labor Statistics, which used to measure its productivity, stopped in 1996. Our analysis shows that government kept up with the private sector until 1987, when a gap emerged. It went on widening until 1994, when the data ran out. We believe it has widened further still.
This public productivity deficit couldn't come at a worse moment. Americans today say they want to limit the cost of government, but they also want more homeland security, better-managed borders, more disaster readiness, extra help in the face of global trade, cheaper health care, and better public schools. These demands sit uncomfortably with our budget deficit and our natural desire not to pay more taxes. In short, we are stuck in a productivity bind: We want more output but no more input.
In a white paper our firm, McKinsey & Co., published this week, ``How Can American Government Meet Its Productivity Challenge?'', we map out an agenda inspired by lessons from the private sector. Having studied productivity growth around the world for over 15 years, the McKinsey Global Institute has shown that competitive intensity at the industry sector level is the prime catalyst for productivity growth. It forces managers to improve performance and allows innovation to diffuse quickly across the sector.
Make no mistake, government is a sector - structured and regulated in ways that can foster or stunt productivity growth at its ``firms'' (agencies). And while it may not be possible to use competition in government to exert pressure to perform, Congress and the White House or state legislators and governors have plenty of tools to improve public agencies.
The most natural tool is the budget process, but the reality in Washington and many state capitals is that performance remains a secondary factor in budget decision-making. Congressmen fight for their district or their passions, and accordingly, agencies privately admit that you budget for what you can get, not what you need or deserve. Yet when government performance, or the lack thereof, is highly visible (witness the response after Katrina), everyone takes action.
That's why we think a radical new approach to transparency of how government programs are performing is required. Only this will push Congress to exert performance pressure on government agencies. First, government should measure public productivity again and set national targets for productivity growth against which everyone can be held accountable. Next, political leaders should create a body we call ``Gov-Star,'' modeled after fund-rating agency Morningstar Ic., to provide completely independent measurement of government program performance; to develop comparable program data over time - between programs, between governments, and with the private sector; and to make the data and their implications clear to appropriators and citizens.
But in government, pressure without support can yield demoralization and underperformance. So we also need to adopt key transformation initiatives: incentives that allow agencies to reinvest savings to the top line of programs; the introduction of chief operating officers at public agencies, to be appointed based on management experience in government or leading corporations; and a SWAT team of management experts at the Office of Management & Budget to help lagging agencies.
It's a long list. But if we want our government to do more and do better, we must take public management and productivity more seriously. Otherwise, citizen demands for effective government in the future will go unheeded.
Case 3 discussion questions:
1. How might strategic and operational controls help increase implementation effectiveness among government programs?
2. Is it realistic to expect that doing so is feasible?
3. How would you apply strategic control or operational control to a specific government program?
Strategy that IBM is monitoring and controlling within its IT business:
The strategy that IBM is monitoring and controlling within its IT business is a low cost strategy seeking to reduce its costs of operation and improving the quality of its products. In this strategy IBM is developing a system that allows it to shift work from high labor cost regions to areas with highly skilled personnel working at a lower. This would allow them to produce higher quality products at competitive prices thereby ensuring their competitive positioning and advantage in the ever changing competitive markets. With some of its strong bond customers such as Lenovo seeking to cut costs, IBM has restructured its strategy to low cost leadership that will allow them to offer high quality products it their clients at reduced rates than they do now. In specific the company has been cutting the amount of jobs in high cost markets such as US and Europe and shifting their labor force in cheaper and skilled markets such India. In pursuing its low cost strategy it has also adopted lean operations for its IT business to ensure that they make continuous incremental improvements in its business processes. It is through this lean operations disciple that the company is able to ensure that its employees are all occupied and ensure increased productivity of each employee and reduce employee deficiencies in its business operations. Another cost cutting strategy that the company is employing is replacing the business' manual labor with software in order to improve productivity and cut costs (Case one, n.d.).
Implementation controls and industry comparison measures use to evaluate and control its ongoing implementation and execution:
The implementation controls and industry measures that IBM is using to evaluate and control its ongoing implementation and implementation include the percentage market share, financial performance metrics such as the operating margin and quarterly revenues, customer relationship management, competitive prices, milestones, the "Blue Monster" which controls the efficiency IBM's workforce, and the efficiency of employees by 10% to 15% per annum. The industry measure enables IBM to understand where it is positioned in the industry in terms of profitability and growth. For instance, while it grew in the first quarter of the year by 7%, its operating margin declined by 2.5 to 7.8% unlike other competing Indian firms which has between 25% to 30% operating profits. This measures help track the effects of its implementation. The control measures such as "Blue industry" which monitors the ...
IBM's IT business, Boeing's dreamliner and growth in governments are examined.