Mario Derba Lecture at General Electric Seminar, Florence, October 2004

1. IBM’s road to become
A Leading Service Company
Mario Derba
Partner, IBM Business Consulting Services
Industrial Sector Leader, South Region
IBM Europe, Middle East, Africa
General Electric’s European Service Leadership Program
Florence - October 5th, 2004
© 2004 IBM Corporation

2. My Background
1983 Electronic Engineering degree – University of Bologna
1984 joined IBM Sales & Services
1993 Italian Automotive Field Business Unit Executive
1996 on international assignment in the office of Ned Lautenbach,
Senior VP & Group Exec, Global Sales and Services, IBM Corporation
1998 GM of Industrial Sector Sales for Latin America
~$400M revenue with ~70 sales professionals
2000 leader of e-business solutions for South Europe
hardware/software/services integration
2001 joined IBM Global Services
head of Operations for ~$3B service business (acquisitions, marketing, resources
management, solutions design, contracts & negotiations)
2003 Partner, Business Consulting Services for Industrial Sector, South Europe
~500+ services professionals: consulting, systems integration and application development
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3. LVG’s N° 7: We grew a business from the ground up
Nothing that grows starts large; it always starts small
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4. We Were on the Verge of Breakup
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5. IBM and the boiled frog similitude
‘60-’70 - the warming up phase
IBM traced the roadmap and outpaced competition.
Undisputed leadership in business model and IT
competences.
‘80-’90 – the boiling crisis
Technologies and customers needs were changed.
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6. IBM Share in the Mainframe Era
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7. IBM Share and Client Server Architecture
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8. IBM, L.Gerstner and the e-business strategy
•Microsoft
•Client/Server
•Sell Mainframes
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9. IBM turning point
200
Change strategy
150
Organization
Processes M arket Value
Management System 100
Measurements and
incentive plans
Leadership 50
Revenue
0
P rofit
-50
1985 1993 1998
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10. IBM’s On Demand Transformation:
Reinventing the Enterprise
© 2004 IBM Corporation

11. IBM undertook a major financial, competitive and
cultural transformation
1993 - 1998 1998 - 2002
Driving common processes Enabling e-business required
across lines of business was end-to-end integration across
critical first step the value net
•Market Planning •Customers
•Product Development •Partners
•Procurement •Suppliers
•CRM •Employees
•Fulfillment
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12. Processes were automated and reengineered
1992 2001
Financial data centers 67 8
Key applications 145 55
Days for accounting close 18 7
Expense $2.1B $1.3B
Expense / revenue % 3.2% 1.5%
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13. Infrastructure and governance were simplified
BEFORE AFTER
CIOs 128 1
Host Data Centers 155 11
Web Hosting Centers 80 7
Network 31 1
Applications 16,000 5,200
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14. Relationships were transformed: Customers and suppliers
e-Commerce
e-Commerce
$26.4B in 2002, up 4% YTY
$26.4B in 2002, up 4% YTY
$11.6B from ibm.com, up 3%
$11.6B from ibm.com, up 3%
Customer Relationship Management
Customer Relationship Management
Cost avoidance from e-Support in 2002: ~$600M, up 17% YTY
Cost avoidance from e-Support in 2002: ~$600M, up 17% YTY
60% of “Call-Me’s” result in sales
60% of “Call-Me’s” result in sales
Fulfillment
Fulfillment
Applications reduced by 42%
Applications reduced by 42%
70% of PC orders “touchless”
70% of PC orders “touchless”
Procurement
Procurement
90% orders “hands-free”
90% orders “hands-free”
Cost avoidance from e-procurement in 2002: ~$450M, up 8% YTY
Cost avoidance from e-procurement in 2002: ~$450M, up 8% YTY
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15. What’s next? The Next Era of Computing
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16. Phases of e-business adoption
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17. IBM’s e-business adoption survey
Companies on the
Cusp of On Demand
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18. What do we mean by “on-demand”
An enterprise whose processes --
integrated end-to-end across the
organisation and with key partners,
suppliers and customers -- can
respond with speed to any stakeholder
demand, market opportunity or external
threat.
We used to call this the
“advanced” phase of e-business
It has four key components
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19. Responsive: Variable:
Capable of sensing changes in Able to adapt cost structures and
the environment and responding processes flexibly, reduce risk
dynamically and drive business performance.
Resilient: Focused:
Prepared for changes and threats -- Committed to concentrating on
be they computer viruses, core competencies and
earthquakes, or sudden spikes in
differentiating tasks and assets.
demand.
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20. IBM’s on demand goals
Enable organizational productivity and collaboration
throughout the enterprise
Enhance customer experience by improving responsiveness
and delivering more innovation
Become the premier on demand business
Improve financial performance
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21. A transformation framework to enable on demand capabilities
Collaboration
& Teaming
Business
Culture Assembly of Products
Transformation
and Services
IT Enablement Sense and Respond
with Velocity
Core Competency
Focus
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22. On demand measurement system
Capabilities Enterprise Measures On Demand Value
Solutions Revenue Growth
Assembly of
Products and Win % by Solution Area Market share
Services
Brand attach rates
Revenue Growth
IBM Revenue / PY ($K)
Sales Productivity
Collaboration Workplace Effectiveness
and Teaming
Satisfaction
SG&A E/R
Customer
Profit Growth
Unit Specific Productivity
Productivity
Reuse (HW)
Sense and Fulfillment Quality
Respond with
Cost Takeout Return on
Velocity
Invested Capital
Transform IT/Total IT
Core Variable Labor/Total Labor
Competency Variability
Focus % Cost/Exp Procured
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23. IBM’s on demand governance model
Operating Team
Investment Review Board
on demand Executive Team
Employee Advisory Boards
Customer, Supplier &
& Champions
On Demand Innovation
Team
CIO Transformation
Management System
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24. Reinventing key processes
Total Buyer On Demand
Experience Supply Chain
IT Enablement
Identify value
Portfolio
Total Buyer
Experience
Development
Realize Invest in Environment
value value
Operating
On Demand Environment
Workplace
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25. IBM’s evolution to on demand
Customer Coverage Model
Relationship Project Simplify Total Buyer Experience
Management Routes-to-market
Integrated Product
Development Direct Model
Integrated Supply Chain On Demand Supply Chain
Fulfillment
On-line Order Mgmt
Procurement
Communications
w3 Portal
HR On Demand Workplace
HR Self-service
Finance
IT Consolidation IT Integration IT Enablement
Internally Focused Hierarchy Market Driven Matrix Horizontally Integrated Teaming
Access Integration On Demand
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26. Evolution to on demand: IBM IT environment
Focus: simplification, Focus: Federated Focus: full integration
common standards model -- value chain across extended
optimization enterprise, leverage
new technologies
31 IBM Networks to 1 Established BT/CIO
Outsourced Global Network organization and 1 CIO
Internal grid
Common hosting environment: Global Web
155 to 12 host data centers Infrastructure
Drive to efficiency: WebSphere integration
Hundreds of configurations
Improved HC productivity
to 4 standard platforms
16,000 applications to Transferred IT service NextGen Utility Offering
5,300 applications to IBM Global Services -
$500M in savings
IT Consolidation IT Integration IT Enablement
Access Integration On Demand
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27. Evolution to On Demand: Financial Drivers
Velocity (doing more, faster)
Revenue growth
Variability of cost/expense
Return on invested capital
Market share growth Market share growth
Productivity Productivity
Cost/expense Cost/expense Cost/expense
Resource allocation Resource allocation Resource allocation
Cash generation Cash generation Cash generation
Access Integration On Demand
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28. Evolution to On Demand: Culture
Horizontally
integrated team
Market-driven
matrix
Internally focused
hierarchy
Access Integration On Demand
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29. Integrated supply chain
Sense and respond to customer demand
End-to-end integration of processes and systems
33,000 connected suppliers
$39B of IBM’s cost and expense Center for On Demand
Client satisfaction doubled Supply Chain Research
Improved supply chain management in 2002:
Improved supply chain management in 2002:
$2.5B in hardware costs
$2.5B in hardware costs
$1.5B in customer solutions procurement
$1.5B in customer solutions procurement
in support of IGS
in support of IGS
$1.1B in general procurement
$1.1B in general procurement
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30. 300mm Semiconductor Facility
World’s most advanced chip-making facility
Development and manufacturing combined
First chip-making plant to run on Linux
Sense and respond touchless
Customers can track manufacturing process
Customers can track manufacturing process
Suppliers can access remotely to diagnose
Suppliers can access remotely to diagnose
problems and make repairs
problems and make repairs
On demand manufacturing:
On demand manufacturing:
Cycle time improved by 35%
Cycle time improved by 35%
Process yields up to 2 points higher
Process yields up to 2 points higher
Direct labor spending 50% lower than
Direct labor spending 50% lower than
previous 200mm facility
previous 200mm facility
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31. On demand workplace
w3.ibm.com
Knowledge Management
Content Collaboration
e-Learning
Employee self-service
Employees #1 source of information
Employees #1 source of information
68% view w3 as critical to doing job
68% view w3 as critical to doing job
Over 7,000 Web conferences with over
Over 7,000 Web conferences with over
42,000 participants each month
42,000 participants each month
48% of employee training
48% of employee training
Cost avoidance from e-learning: $750M
Cost avoidance from e-learning: $750M
over past two years
over past two years
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32. Next Generation Infrastructure
IT service provided on demand to IBM and customers
Application processing
Application processing
Storage
Storage
Consumption-based billing
Advanced systems management
Provision, allocate and deallocate resources dynamically
Provision, allocate and deallocate resources dynamically
Maximize sharing and utilization of resources
Maximize sharing and utilization of resources
Autonomically manage resources as a pool
Autonomically manage resources as a pool
Handle workload surges
Handle workload surges
Potentially significant reduction in cost
Potentially significant reduction in cost
of operations is expected:
of operations is expected:
target of 10 to 40 percent improved
target of 10 to 40 percent improved
productivity
productivity
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33. Lessons Learned
10. Create a “sense of urgency” that the company can rally around
9. Create a revisionist history – you’ll be surprised at how far you’ve come
8. While you’re creating – define short term projects with near-term results
7. Review business processes to see if changes are needed before you
deploy technology
6. Technology enables and hastens transformation
5. Set your milestones and metrics with an end-to-end life cycle view
4. Sunset legacy systems/applications/tools as new ones are deployed
3. Can NOT overemphasize the importance of culture – this will make you
or break you
2. Transform constantly or risk extinction – there is no other option
1. Always, always, always, listen to your customers
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34. Becoming a services-led company:
Lessons Learned
© 2004 IBM Corporation

35. Agenda
IBM services evolution
Strategic considerations
Business models
Go to market
Delivery
People
Cross line of business considerations
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36. Evolution of IBM Global Services – a high level view
2003
1990s
160,000 staff
Competitive Maintenance Product
Affinity Infrastructure
maintainers Business Transformation
Services
Services
Business
Global
Competitive IT IT Transformation
outsourcers Outsourcing Outsourcing Transformation
Outsourcing
Product Fee to free Consulting, System Transformation
profit erosion Exploit internal IT Integration, Consulting
Development
Shift to Consulting PwC
business value services Consulting
& solutions
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37. Global Services revenue
Global Services as a % of IBM revenue Global Services as a % of IBM Employees
1996 1996
29% IBM 35% IBM
Global Global
Services 65% Services
71%
2002 2002
IBM IBM
45% 45%
55% Global Global
55%
Services Services
Global Services as a % of IBM Pre-tax Income
1996
30% IBM
Global
70% Services
2002
IBM
49%
51% Global
Services
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38. Building a Services-Led Enterprise
$42+B*
$35.0B
$33.2B
$32.2B
Services
$28.9B
Maintenance
$25.2B
$22.3B
$20.1B
$17B $16.9B
$15B
$13B
5.6
7.4
1989 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
First
1st $1 billion deal w/ Created IBM embraces Sold Global Brand e-business
outsourcing
Formed McDonnell Douglas IGS e-business Network Expansion Hosting
deal with
Kodak ISSC
CEO calls IBM a Launched
Formed IBM Became World's Largest Backlog Tops
services-led Co. BCS
Consulting Group IT Services Provider $50 Billion
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39. IBM Global Services Value Framework
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40. IGS strategic intent
…materially improve our clients' business effectiveness through expert application
of technology...by delivering services that help clients to reduce operating costs,
transform the way they run their business, and expand into new markets.
SO
BCS
Business Infrastructure
Value Value Utility &
Application
EBOs Services
ITS
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41. IT Industry Services:
the new frontiers
Business
Value
• Business Performance
Transformation Services
Infrastructure
Enhanced Value
Value
Services • Full Equation
Software • Rationale SW acquisition
Hardware
Component • “Commodity” Technologies out
Value • “Innovative” Technologies R&D
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42. To succeed in the Services business you need to
couple with several strategic dilemmas
Portfolio management – “product” cycle time
Accommodating investments
One of a kind or mass customised services
Looking at your capabilities in a new light (eg research in IBM)
Margin or growth
Enter from bottom (installed product) or top of value chain
Market polarization: business vs commodity value
Cultural readiness
Annuity or project based services
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43. Overall lessons
Strategy
Start with what you know (build on the installed base)
Move into commitment business very, very carefully
Avoid consulting until your culture is ready for it – and it will drive end to end business
Client management
Client satisfaction – eg implicit brand commitments
Change management
Profit dynamic changes – profit skew changes
Culture and people
From strategy to engagement and delivery
Key leaders, rainmakers, can make enormous impacts
The transition to services for sales, leaders, etc takes time and mistakes are costly
Process is key
Portfolio, sales, bidding, delivery
Eg Workdirect
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44. Thank you
business on demand
Mario Derba
mario_derba@it.ibm.com
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45. Discussion
© 2004 IBM Corporation