Master Plan for a Big Blue World

By Steve Hamm Over the past 50 years, IBM (IBM) built up the prototypical multinational corporation. It established smaller IBM clones in more than 100 countries, each with many of the larger corporate functions, including headquarters, manufacturing, support, and R&D. Plus, it built regional organizations to coordinate the local ones.Now IBM is dismantling the structure that served it so well for so long. "Today we are evolving into a new model -- the globally integrated company," Chief Executive Samuel J. Palmisano told Wall Street analysts at the company's annual investors meeting on May 20.

Palmisano's explanation of this global reorganization was the one new theme he introduced at the gathering in New York City. He also reiterated his belief in the company's core strategy of leading with services, integrating hardware and software into "solutions" for clients, and adding value with scientific research. He lauded the company's move into consulting services to help clients transform the way they do business. And he and other executives offered up mea culpas for the company's poor showing in the first quarter, when revenues rose just 3%.

They blamed poor execution for the shortfall, but Palmisano asked Wall Street to bear with him (see BW, 5/30/05,"A Big Step Back For Big Blue"). "It's a potentially confusing time for investors. It's easy to intermix near-term issues with longer-term shifts, cyclical effects with more fundamental change."

CUTTING AND CENTRALIZING. For now, analysts appear to support Palmisano's services push. "They're not in the business anymore of selling you a computer or a piece of software or a services contract. They want to solve your business problems," says Richard Petersen, an analyst with Pacific Crest. "For them it's really the only way to go. They're so big at this point they can't find growth any other way."

Big Blue's global reorganization certainly qualifies as a fundamental change. Part of the idea is to strip out regional management bureaucracies and give local sales and marketing teams more freedom to make decisions and move quickly. That's one element of its plans to cut 7,000 jobs -- and eliminate its regional management staff -- in Western Europe.

But, at the same time, IBM is centralizing core functions, for example: locating its customer support operations in four so-called shared services centers in Malaysia, Slovakia, Spain, and Brazil. Meanwhile, it's expanding its research operations in China and India -- to tap into inexpensive brain power in hot markets. "These moves are not just about lowering labor costs," says Palmisano. "They're about doing the right tasks, with the right skills, in the right places."

Still, IBM expects a significant financial payoff from the global shifts. They free up resources that the company can invest in higher-growth areas such as China, India, Brazil, and Russia, where revenues grew more than 25% last year, to $4.2 billion.

GREAT EXPECTATIONS. IBM expects all of its strategic moves to improve net profit margins, though it wasn't specific about how much. In his presentation, immediately after Palmisano's, Chief Financial Officer Mark Loughridge told analysts that the outfit remains committed to its goals of consistently delivering double-digit earnings-per-share growth.

IBM expects to grow 1.5 to 2 times faster than GDP, and, additionally, generate another 1% to 2% of revenue growth through acquisitions -- producing annual revenue growth of 5% to 8%. IBM grew 8% in 2004. The company expects to reap productivity gains to deliver $300 million to $400 million of net cost savings per year.

IBM did provide some details on its job cuts and facilities consolidations. It's shutting down 10 data centers, including eight in Europe, and 59 service offices, 50 of them in Europe. In addition to those big job cuts in Europe, it's eliminating about 1,000 people in slow-growth Japan. Hamm is a senior writer for BusinessWeek in New York

with Elizabeth Woyke

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