More Outsourcing Pressure on IBM

July 11, 2007 on 4:19 am | In Uncategorized |

John DeFazio won’t miss the 2 a.m. conference calls. Along with colleagues in IBM Corp.’s huge technology services division, DeFazio used to be summoned to the phone whenever a client’s computing center hiccuped in the middle of the night. Because of the way IBM handled trouble reports, sometimes 20 different experts — a server specialist, a database guru, a networking maven, etc. — got paged to join a conference call. Once everyone finally dialed in and the problem was hashed out, those who weren’t needed could go back to sleep.

Not only did that cause bleary-eyed grumbling, it wasted time. So recently DeFazio’s crew switched things around. Now one expert is always on standby. When there’s a glitch, the expert diagnoses it and pages only the necessary people.

Sounds simple? Sounds obvious? Well, changes like this are dramatically reshaping IBM.

A decade ago, this corporate icon survived the implosion of its traditional hardware business by transforming into an all-purpose tech services provider. Now, services account for just over half of IBM’s revenue. But competition, including from less-expensive technology service providers in developing countries, has made that a tougher business than ever.

Although IBM’s combined business-consulting and technology services revenue was a whopping $48 billion last year, that was up less than 2 percent. And pretax profit in tech services — which includes such things as operating computer clusters for companies, designing networks and monitoring their security — fell 19 percent in the most recent quarter.

To fight back, IBM is completely rethinking how it carries out services for customers.

Certainly, that means using a lot more relatively cheap labor in places like India, where IBM’s overall staffing has leaped from 9,000 to 52,000 since 2003.

But not all work can be remotely done from such centers. Even if it could, Robert Moffat, the IBM vice president appointed in 2005 to make the services division more profitable, argues that a cheap-labor shell game isn’t an advantage that can last long.

So Moffat is trying to make IBM’s services organization — packed with 200,000 of IBM’s 355,000 employees — do things differently. That means hunting for ways to automate as much as possible and rooting out bureaucratic tangles that sound like something out of the “Dilbert” comic strip.

At the same time, a significant number of people figure to get laid off. Just how many remains to be seen. But it’s clear that IBM’s challenge will be to ensure employees are receptive to the changes and suggest improvements even as their jobs are threatened.

IBM’s effort to cut its services costs accelerated last fall when the company launched a business-refinement practice known as Lean. Pioneered at Toyota Motor Corp., Lean is all about eliminating waste by analyzing whether every step adds value to the end product. Toyota has even determined an optimum method for how bolts are tightened.