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IBM Cuts Costs, Reduces Layoffs as It Readies Workers for an On Demand World

May 10, 2005
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Related Topics: Human Resources Management Systems (HRMS/HRIS), Downsizing, Workforce Planning, Featured Article
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C hris Behonick had been in the same job at IBM for more than seven years. As a member of the services support center, he came in every day and supplied price quotes to various clients of IBM’s Global Services business. He worked with the same clients on the same types of transactions. Understandably, he was ready for a new challenge.

    Behonick occasionally looked for another job, but not aggressively. That’s why he was so surprised when his manager approached him late last year about an opening in a different IBM business unit as a relationship manager for IBM’s telecommunications clients. He would be able to work with different types of suppliers and clients.

    Within a week, Behonick had started at the new job, but was still available to train his replacement.

    After three months, he says there is still a lot to learn, but he is grateful for the opportunity. "You can’t grow if you stand still," he says.

    Behonick’s move, and the reasons behind it, are an example of how IBM is instituting its well-advertised "on demand" business strategy within its own ranks. The plan also illustrates a crossroads that many businesses face: Will they respond to a changing business environment by fundamentally transforming themselves, or will they just do what they’ve always done but at a faster clip? IBM chief executive Sam Palmisano is opting for transformation.

    He first used "on demand" to describe the company’s future at a 2002 meeting of IBM clients. Palmisano talked about how the company had to become a business that could immediately respond to its customers’ needs and help them do the same for their clients.

    During his speech, which was webcast nationwide to IBM employees, Palmisano pointed to the banking industry as an area in need of this kind of transformation. Banks, he said, have a huge array of information about their customers, but it is all separated into silos.

    If they could integrate their business process and technology so that a mortgage processor could view the customer’s entire financial picture, loan applications could be processed online within minutes and costs could be halved by reducing the use of paper.

    While it all sounded nice in theory, Ted Hoff, IBM’s vice president of learning, remembers wondering at the time whether this was "a warmed-up version of e-business." Over the next few months, Palmisano held a series of internal meetings to explain his idea, and it became clear that what Palmisano had in mind was not 1990s e-hype.

    And to convince customers that IBM could transform their businesses, the company would have to transform itself, says Donna Riley, vice president of talent.

Changing times
    For a company as big as IBM, becoming more flexible is no small task. But in an environment where clients want services immediately, companies must adapt, says Susan Wehrley, president of Susan K. Wehrley & Associates, a consultancy in Brookfield, Wisconsin, that specializes in workforce planning.

    Many firms are responding to this need for faster services by adopting new technology. Instead, says Frank Gillett, principal analyst at Forrester Research, companies first should identify how their industry is changing, then figure out how their workforce has to transform to accommodate the change.

    In 2002, the stakes were high for IBM. Not only would it have to act as a role model for the "on demand" concept, it would have to convince potential clients that its technologies would actually make their businesses more successful.

    "In 2002, we were deep in a recession in the IT business, and customers just weren’t going to buy technology for technology’s sake," says Pierre Fricke, vice president of applications and integration infrastructure at Ideas International, a Port Chester, New York-based research firm. To be a technology leader, IBM had to give its clients a reason to care about technology again.

    The company has allotted a $700 million annual budget to revamp its workforce capabilities. Of that, it allocated $40 million to training its 10,000 executives and managers on the new business model and how to implement it. The rest of the budget was dedicated to training the lower-tier managers and rank-and-file employees.

    To be more flexible and responsive to clients’ demands, IBM had to create a system to quickly identify needed skills, spot areas in which those skills were in short supply, and put the right people into place to fill them. This would involve teaching workers new skill sets and getting them to work with other divisions. If there are always employees willing to take vacant positions within the company, the delays associated with being short-staffed become a nonissue.

    The new structure also would reduce layoffs, which are a waste of resources, Riley says.

    "It is the smart business thing to do to let employees grow rather than having to pay to replace them," she says.

    IBM’s performance last year may be a sign that its work has started to pay off. The company reported that net earnings for 2004 increased 11 percent to $8.4 billion. During that year, 56 percent of employees whose jobs were in danger of being eliminated were retrained and given new positions, according to Hoff.

    The company says it has reduced layoffs by half from 2003, though it would not disclose actual numbers. Riley estimates that has saved IBM "tens of millions of dollars" in the past two years.

Focusing on the top
    For the executive training, Riley first had to figure out what kind of leadership skills managers would need. Reassessing the goals of its top people was not a new concept for the firm. In 1995, under former CEO Lou Gerstner, IBM was getting ready to sell off various divisions as part of its turnaround strategy.

    Gerstner, however, realized that if the company put all its parts together, it could provide a service that its competitors could not. He decided that a new type of leader would be needed to help create a more integrated approach. He turned to the Hay Group, a human resources consulting firm in Philadelphia, to conduct a series of interviews with company executives to define what kind of leaders it would need.

    The Hay Group’s research indicated that an effective leader would be a decisive straight talker, among other things, says Mary Fontaine, vice president and general manager at the Hay Group.

    When IBM selected the Hay Group again in 2003, Fontaine and her team found the need for a completely different skill set. After conducting 31/2-hour interviews with 31 executives who were handpicked by top management, the Hay Group identified 10 competencies that a new executive at IBM needed.

    These included the ability to think across the organization and a knack for influencing people in other areas of the company. To be a true on-demand provider, the heads of IBM’s various business divisions would have to work more closely together than ever before, Fontaine says. The old days of executives just taking ownership over their own units were over.

    Today about 10,000 IBM employees, including the company’s top executives and those on the executive path, are assessed annually on these 10 traits. Salaries and bonuses are based on performance and results, but only those candidates who demonstrate these qualities will be considered for promotion—a key incentive since the majority of executives at IBM are promoted from within. In 2004, only 60 of 5,000 of the top executives at IBM were hired from outside, according to Hoff.

    When Riley unveiled the new competencies to its executives in 2004, she let them know they’d have a year before they would be evaluated on them as part of their annual reviews.

The rank and file
    IBM has changed the review process for rank-and-file employees as well. In addition to a detailed development plan employees devise for themselves, the company is offering online courses on how the on-demand strategy can apply to different industries.

    Sales units that implemented these online learning modules saw a 12 percent higher quota attainment in 2004 than those that did not. IBM does not attribute that jump solely to the new focus, but the improved performance does lend credibility to the use of the modules, Hoff says.

    The latest test of IBM’s strategy began last month, when the company reported its first-quarter net income. It rose 3 percent to $1.4 billion, or 84 cents per share, from $1.36 billion, or 79 cents per share a year ago, failing to meet analyst expectations. As a result, the company says there may be layoffs in Europe in the coming months. Whether IBM will be able to reduce some of those layoffs as a result of its training initiatives remains to be seen.

    Analysts agree that the changes IBM is making are good ones, but some remain skeptical about whether the company is actually creating a business where employees and their talents are instantly available to clients.

    "All of these things prove that IBM understands workforce management," says David Smith, an analyst at Gartner Group. "Does it mean they are ‘on-demand?’ I think it depends on who you talk to."

Workforce Management, May 2005, pp. 84-85 -- Subscribe Now!

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