Ibm: The Soul Of A New Consultancy (part Ii)

SpecialFeature: The Soul of a New Consultancy (Second of Two Parts)

By Jack Sweeney

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SpecialFeature

The Soul of a New Consultancy How IBM Is Making Innovation Matter

Last November,

within the walls of The Rockefeller University — a thinking institution that bears the name of one of the world’s best-known industrialists — IBM Chairman and CEO Sam Palmisano delivered a short lecture intended in part to put an end to Industrial Age thinking. “The old industrial model is in rapid decline. Innovation is no longer the domain of the individual inventor laboring for years. Instead, innovation is happening much faster and defuses much more rapidly into our everyday lives,” said Palmisano, as he began a fine-tuned discussion before 300 invitationonly guests. According to IBM’s chairman, intellectual property (IP) should be treated more like capital — “something to be invested, spread, even shared, to reap a return.” And those returns will only happen, Palmisano says, through greater collaboration across disciplines and specialties. “Think of eBay,” said IBM’s leader, as he sought to better C o n s u l t i n g M a r c h / A p ri l 2 0 0 5

clarify how the concept of innovation has changed. “It came about not because of a single invention — the Internet — but through the intersection of the Internet, secure online transaction and processing systems, reliable overnight delivery services, and the emergence of virtual communities. It was all these intersections that made this concept called eBay a success.”

The Dual Role: Adviser and Innovator It was a unique gathering for IBM — not only because of who was in attendance, but also because of who wasn’t. Known as Global Innovation Outlook (GIO), the two-day event brought together a broad mix of CEOs, academics, and senior government officials. Not present were the all-toofamiliar show booths of IBM technology or the alert sales representatives who normally haunt them. IBM’s GIO successfully brought forth a discussion normally confined to 33

Travel SpecialFeature: The Soul of a New Consultancy (Second of Two Parts)

the pages of McKinsey Quarterly or The Har vard Business Review, and arguably helped IBM better certify its thought leadership credentials — a necessary passport for its intended passage into the ranks of strategy consulting firms. It was a gathering designed to raise the level of discussion around innovation, or perhaps infuse it with insights from IBM’s maturing innovation vision. At its conclusion, GIO had more than likely accomplished both. “It doesn’t make a lot of sense to think of innovation as a competitive race, because no individual country, corporation, or university will ever have a lock on innovation. It’s a race that never ends,” explained Palmisano. And so it is in the world of consulting, where IBM’s growing consulting ambitions have led it to cultivate a dual identity of both adviser and innovator. IBM is not alone. Today, Accenture — perhaps IBM’s fiercest services rival — uses the slogan “Committed to delivering innovation,” while numerous smaller rivals have in one way or another incorporated the promise of business innovation into their marketing. However, the desire to be cast as an “innovator” is nothing new in consulting. More than 30 years ago, Marvin Bower, the modern founder of McKinsey & Company, was reported to have posed the following questions to his partners: “What firm is better qualified than McKinsey to bring together for our clients in one critical country or in a number of countries the best relevant management practices of all countries? And what firm is better qualified to innovate by combining the management practices of several countries into new and more effective practices?”

Clearly, you could assume that consultants have long played a significant role in innovation. “Consultants are the means by which knowledge gets around the world faster, and it’s because of this knowledge dissemination that people make progress faster and economies grow,” explains Chris Meyer, who founded and led Ernst & Young’s Center for Business Innovation in the late 1990s.

IP + Collaboration = Innovation Still, some argue from a historical point of view that consultants are poorly suited for the practice of innovation. “All you have to do is read the Harvard Business Review, particularly the articles written by the partners of leading consulting firms, to see that — my goodness! — they really provide misleading guidance on how to manage innovation,” says Clayton Christensen, the noted Harvard Business School professor and consultant, who is today recognized by many as the pre-eminent thought leader on the subject of industry innovation and the obstacles that curtail it. According to Christensen, the reason the advice consultants give is often flawed is due largely to the fact that the data they base their guidance on illuminates only the past. “If you really look at how consulting firms — especially the big consulting firms — generate billings, it’s by putting armies of consultants on the ground and giving them reams of data and asking them to find meaning or trends in the data,” he says. “The problem is that data is only available about the past, and most consultants don’t have good models or theories that allow them to look into the future with accuracy.”

To Be Not Just an Ad v i s e r, but an Innova to r IBM is not the first consultant to don a dual identity

“What firm is better qualified than McKinsey

“A few years ago, we made a fundamental decision

… to innovate by combining the management practices of several countries into new and more effective practices?”

that IBM would lead the high-value innovation spaces of our industry and to focus on businesses and institutions of all sizes, in every industry, in all parts of the world.”

—Marvin Bower, Modern Founder, McKinsey & Company (1970) 34

—Sam Palmisano, Chairman & CEO, IBM Corp. (2004) M a r c h / A p ri l 2 0 0 5 C o n s u l t i n g

SpecialFeature: The Soul of a New Consultancy (Second of Two Parts)

“… it’s not just an issue of research.

For instance, at Boeing we are bringing IBM’s own engineering design skills in, so this involves not just industry process experts. These are IBM’s own engineering

design skills right out of our microelectronic business.” — IBM’s Rometty While IBM has announced no plans to curtail the growth of its billable army of consultants (now numbering close to 60,000), it has made no secret of the fact that it plans to arm them with more than just data. In an earlier interview with Consulting Magazine, IBM Research senior vice president and director Paul Horn said that IBM was now remedying the limitations of the billable consulting model. “If you look at the size of Global Services or any big services organization and you assume that it is going to have some significant compound growth, you just extrapolate out a few years and you’ll have an absurdly large number of people,” said Horn, who heads his own army of 3,000-plus IBM researchers and has overseen the task of arming IBM’s consultants with what he routinely refers to as innovation. “People have historically been the only way you’re going to differentiate yourself. So there is now a huge pull on the consultants’ part for innovation that will allow them to provide higher value and become more value priced and more an asset channel for the market, rather than just an organization that sells time and enjoys a little added margin on top of it.” The types of higher-value consulting opportunities Horn describes are expected by IBM to come forth, as the company freely spreads its intellectual property and research in return for greater levels of collaboration with its partners. “But it’s not just an issue of research,” says Ginni Rometty, managing partner of IBM’s Business Consulting Services (BCS). According to Rometty, IBM is now supplying a growing menu of skills to its billable clients. “For instance, at Boeing we are bringing IBM’s own engineering design skills in, so this involves not just industry process experts. These are IBM’s own engineering design skills right out of our microelectronic business,” she explains. Similarly, IBM frequently points to the success of its product divisions when asked how it will price the assets it is now housing within its services offerings. “It’s a concept that a product division is familiar with, where a division has a software asset and they expand it. Look at Websphere and the technology that’s been added to it — every year it gets more 36

function,” Horn explained. To Horn’s point, IBM’s software margins have climbed from 70 percent in the mid-1990s to more than 80 percent today.

When Collaboration Trumps IP To date, Accenture, IBM’s largest services rival, is not impressed by its competitor’s innovation land grab. Robert Suh, chief technology strategist for Accenture, believes that IBM’s “research carrot” is being overhyped, and that greater levels of collaboration between companies are achieved by the actual execution of technologies. “In some ways, you can view us as one of the biggest technology solutions firms that doesn't invest in R&D. And so our R&D is in execution,” explains Suh, who emphasizes that Accenture does in fact invest in R&D, but not at IBM’s level. (IBM expects its 2005 R&D budget to grow to $7 billion.) “Innovation is how you use something as much as what it is you're using. We think that companies strategically can leverage existing technologies and drive huge earnings growth. … And we don't need 5,000 scientists to do that,” explains Suh. Last year, at an analyst briefing, IBM’s chairman elicited laughs when he reminded the analysts that the company’s new chief of IBM Global Services was none other than former IBM CFO John Joyce, who only a month earlier had predicted that gross margin dollars for services would improve quarter to quarter. Amid the chuckles, Palmisano quipped: “That was a wonderful statement, John, and congratulations on now being an operating guy. ... Now, John gets to fulfill his dream.” Beneath the laughs sits an ever more alert Wall Street determined to track not only IBM’s billable hours, but also its newly asset-enriched margins. Certainly, Joyce’s journey from CFO to services chief has helped fuel Wall Street’s intrigue with the services sector as of late. However, as for whether Joyce’s dream will come true, most analysts agree, only time will tell. C

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