Big Blue Wields the Knife Again

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Leaner and Leaner

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.

Moffat's Mission

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.

Hamm is a senior writer for BusinessWeek in New York.