IBM: The Soul of a New Consultancy (Part I)

CoverStory: The Soul of a New Co n su lta n c y ( Fi rst of Two Pa r ts )

14 Ja n u a r y / Fe b ru a r y 2 0 0 5 C o n s u l t i n g

The So u l of aNew Co n su ltanc y

IBM, the comp a ny th a tThomas Watson, Jr., is cre d i te dw i th having brought into th ec o mputing a ge, no longe rfancies itself as much ac o mp u ter maker as it does ac o ns u l ta n c y.

A Wrinkle in Time

CoverStory

C o n s u l t i n g Ja n u a r y / Fe b ru a r y 2 0 0 5 15

Inside a Wall Street–wary world,

can IBM put clients first?

The name John L. Bu rns is not one co m mo n lyas s oc iated with the rise of IBM Co rp . N o n e t h e l e s s ,Thomas Watson, Jr. — the man credited with propelling IBMinto the computing age — felt compelled to mention Burnsin his 1990 autobiography, a text penned some 35 years afterthe two men had worked together.

Throwing one last elbow, the then 76-year-old Wa t s o nspelled out how, back in the mid-1950s, Burns — a senior part-ner at Booz Allen Hamilton — had accepted his invitation tohelp IBM’s management team craft one of the company’s mostexpansive reorganizations to date, only to become president ofRCA, an “aspiring” IBM rival, a short time later.

C l e a r l y, one could surmise that Watson intended to settlea sc o r e when he revealedwhat appeared to be something m o r ethan coincidental timing as far as the sudden upward trajec-tory of Burns’ c a r e e r. Given that consultant bashing has longbeen a favorite sport of CEOs, Watson’s musings w o u l d h a r d-ly appear noteworthy, except for the fact that the companyh e ’s credited with having brought into the age of computingno longer fancies itself a computer maker as much as it doesa consultancy.

I t ’s doubtful that Watson and the consultant he skeweredwould have predicted such a development. IBM’s multiprongedclient relationships may have led some to imagine the companybecoming an IT-friendly telco or a financing behemoth.

No matter. Consulting services is where IBM has placed itsbets. And unlike any consulting concern before it, IBM ispoised to bring change to the consulting profession in bothsweeping and complex ways, the most profound being theexposure it brings to its new line of work.

One of the great untold stories of the last century was thecritical role consultants played in A m e r i c a ’s post–World Wa rII economic expansion. But that role has been all but obscuredby a willingness on the part of consultants to yield the spotlightto their client leaders. More often than not, consultants and themanagement insights they sold seldom entered the public’spurview — unless, of course, a CEO believed that his consul-tant was worthy of a comeuppance, à la Burns. Now, at thestart of a new century, Burns’s one-time client is attempting toreveal to the world at large what it deems to be an entirely newmarket — a $500 billion opportunity to which IBM saysstrategy consultants now hold the key.

By Jack Sweeney

The Consultant’s ConsultantIn 1955, IBM Corp. enlisted BoozAllen consultant John L. Burns tohelp with the creation of a new IBMo rganization, one well suited to itsgrowing comp u te r business. Burn s( right) sits beside Booz AllenH a m i l ton fo u n d e rs Edwin Booz (mid-dle) and James Allen (left ) .

1947


now moving to an entirely new space where IT’s competitiveadvantage is not cost cutting but the enablement of new businessmodels, and where technology is embedded in industry-specificsolutions. It’s a space that will enlarge technology spending by$500 billion annually according to IBM, which has alreadychristened the “new” market Business PerformanceTransformation Services (BPTS).

“When the PC was announced in 1981, it was an inventionthat drove a marketplace or, in other words, a market came outof it, whereas this market will be a market driven by capability— a market thatwill grow because of capability — a capabilitythat will make a client do something different,” says GinniR o m e t t y, managing partner of IBM’s Business ConsultingServices (BCS) — the consulting unit IBM formed in 2002when it merged PwC Consulting with IBM BusinessInnovation Services.

“What we see happening today is that if companies aren’tthinking explicitly about some leading-edge technology thatcould open up new business model possibilities or new produ ct


E a r ly Milesto n es :The Rise of A New Consultancy

•A top fe d e ral systems exe c u t i veby the name of Dennie We l s h i s

tapped by George Conrades, pre s i d e n t

of IBM No rth America, to fill a newly

c re a ted top “services” position.

19 9 0

Dennie Welsh, who oversawIBM’s federalsector’s plantsand laborato-ries, emergesas the fi rstch a mpion ofIBM consult-ing serv i c e s .

The Inve ntion of New Sp a ce s

I t ’s a market that speaks to a consulting world far removedfrom the one Burns knew. Long gone are the days whenMBAs were a rare breed among corporate managers andmanagement routinely opened their doors to consultantstouting business analytics. As the age of information tech-nology took shape, the doors once again swung open, asmanagement hungry for IT expertise tapped consultantstouting IT acumen. However, in more recent years the valueproposition for leveraging IT has lost some punch as pro-ductivity gains have lagged.

Few would argue that no single company has come tor e present the age of ITmore than IBM, with its big iron, back-o ffice offerings; then, its workgroups and departments; and,f i n a l l y, its individuals or “clients” with personal productivitysolutions. Along the way, the ITindustry grew into a $1.2 trillionmarket driven largely by tech buyers eager to gain a competitiveadvantage from a cost or productivity perspective.

According to IBM management, the application of IT i s

1 9 90 1991 1992

G

•Integrated Systems Services Corp. (ISSC)is formed as a wholly owned subsidiary of IBM

Corp. Rather than as a standalone business, ISSC

operates more as a subunit of IBM’s sales force.

By having ISSC operate as an IBM sub-sidiary, the company is shielded from a1956 consent decree that forbade IBMfrom offering hardware, software, andservices under a single roof.

19 9 2

CoverStory

market. It’s a concession that begs the question, What obsta-cles exist that could potentially prevent IBM from becoming“world-class” in the business strategy space?

Not a PC Ma ke r

The answer arguably lies where Wall Street is least likely tolook for it: inside privately held partnerships. To d a y, the mostrevered and perhaps the best-paid strategic consultants continueto reside in top strategy firms such as McKinsey & Company,Boston Consulting Group, and Bain & Company, wherec o nsultants operate under the dictums of partnership — ac u lture based on collaboration but which at the same timeo ffers senior consultants a good deal of autonomy. It was fromjust such a strategy culture — albeit a low-carb strategy — that35,000 PwC consultants emerged to join IBM in 2002.

The consulting unit IBM bought for the bargain price of$3.5 billion had been spawned by the audit business of PriceWaterhouse, and maintained much of the cultural traditions

or service possibilities, then it’s possible, maybe even likel y,that they’ll miss a business strategy opportunity,” says EricP e l a n d e r, Partner and Global Leader, Strategic ChangeSolutions, IBM Global Services.

To d a y, the capability Rometty and Pelander speak of isdependent largely on the industry expertise that IBM nowclaims resides within its business consulting unit, as well ason the technology expertise of IBM Research. To g e t h e r, IBMmanagement would have us believe, these joint skills andexpertise, along with IBM’s vast scale, create a capabilityunmatched by that of any other consulting firm or technologyc o m p a n y.

H o w e v e r, the headlines IBM has captured as of late aremore often about the company exiting markets rather thanestablishing them. Take recent press clippings, where the saleof IBM’s PC unit to Chinese computer vendor Lenovo becamea lead business article in most major dailies. In the end, IBMmanagement conceded that it was not able to manufacturerPCs in a world-class manner with respect to cost and speed to


•Louis V. Gerst n e r, fo rm e r

ch a i rman and CEO of RJR

Nabisco and one-time

M c K i n s ey & Comp a ny senior

p a rt n e r, is named IBM’s

ch a i rman and CEO.

•S e rvices Reve n u e :$ 16.9 billion

19 9 3

19 94 • After three attempts to remove

controversial Judge David Edels tein

from overseeing IBM’s consent decree,

IBM’s legal team succeeds in having

the 84-year-old Edelstein removed.

Less than a week later, Gerstner names

Welsh ISSC chairman and general

manager of IBM Global Services.

• Adopts Network-Centric Computing

as centerpiece of strategy.

19 9 5

Leading by principles: AllegingIBM’s “Basic Beliefs” were showingsigns of age, Gerstner authors eightnew principles designed to be “theunderpinnings of IBM’s new culture.”

NOT a telco: Unwilling to make the capitalinvestments IBM’s Global Network wouldrequire to compete with the telcos, IBM’sGerstner claims that the company opted toauction its network off to the highest bidder,i.e., AT&T CEO Michael Armstrong.

1993 1994 1 9 9 5 1 9 96

job of holding on to partner-level PwC consultants, who,according to their PwC partner compensation packages, wouldhave become vested at about age 50. IBM has not been ass u ccessful in holding on to below-partner-level talent, formerPwC consultants say. W h a t ’s more, as the consulting marketrebounds, young partners will likely find greater incentives tomove beyond IBM rather than wait for vesting, consultants said.

Among those PwC consultants disenchanted with IBM’sculture, the most common grumbles are perhaps the company’sbureaucratic structure and a growing shortage of mentors — arole PwC partners actively played.

PwC Consulting is only one of many companies IBM hasrecently devoured (since 1995, it has acquired more than 30software companies). Still, no one acquisition has come toplay a more central role in the company’s future vision.

It is just such a distinction that has put a spotlight on IBMstrategy consulting capabilities, and obligated its leadership toarticulate the value consulting brings industry. It’s a platformunlike any the consulting profession has ever had, and oneIBM now routinely uses to cultivate its vision as demonstratedby Palmisano’s remarks at last year’s analyst meeting:

“In short, what we did is that we took some people out ofIBM Research and some of the process experts inPricewaterhouseCoopers and we locked them in a room to

and processes Big Five accounting houses were known for.Here partners held sway, as young consultants eagerly pursuedopportunities that would permit them access to the experienceand respect partners carried forth.

Despite stark differences between the two businesses, IBMmanagement is fond of comparing its leap into strategyc o n s u l t i ng to its earlier leap into outsourcing.

“BPTS, quite honestly, for me is déjà vu,” Sam Palmisano,IBM Corp. chairman and CEO, told a roomful of Wall Streetanalysts in New York last year, while seeking to build confi-dence in IBM’s credentials for climbing ever higher in thes e r v i c e s continuum. “If you go back 12 years to when Ireturned from Japan to go as the third employee into services... strategic outsourcing — i t ’s a whole different category, awhole different value proposition.”

Not unlike other purchasers of “human assets,” IBM hasbeen routinely quizzed as to how many of PwC’s 35,000c o n s u l t a n t s are still with the company.

While IBM management won’t disclose such numbers, itremains adamant that the acquisition has been a success, andcontinues to cast doubt on reports that the company coulds u ffer an exodus of PwC talent on October 1, when growingnumbers of PwC partners become vested.

Former PwC partners say that IBM has to date done a good



• Sam Palmisano is named head

of IBM Global Services, as Dennie

Welsh retires due to illness.

• Sells IBM Global Networkto AT&T for $5 billion.

19 9 8

• Restructures consulting

workforce to go to market

by industry.• Exits the software applications market.

• Exits DRAM market.

• Sells network hardware business

to Cisco for $2 billion.

19 9 9

2 0 01• Buys e-strategy firm Mainspr

Inc. for $83 million.

NOT an apps developer.

NOT a DRAM maker.

NOT a network vendor.

1997 1998 1999 2 0 0 0 2001

•S e rvices Reve n u e :$28.9 billion

study 15 industries, reconceptualize the business models,c r e a t e it from scratch, create a new blueprint ...”

No doubt Palmisano’s shorthand description was intendedfor the ears of his Wall Street audience — one with a laserfocus on operating numbers but known to be somewhat deafwhen it comes to the fine points of culture.

“I would say that the one thing Wall Street investors don’tunderstand about these businesses — and it’s what they sort ofh a v e n ’t quite figured out — is the value of culture in knowl-edge-based businesses,” says Mel Bergstein, chairman andchief executive of DiamondCluster International, a firm he hasled since it was a 20-person, privately held boutique. (To d a y,it is a $500 million publicly held consulting company.) “Weh a v e n ’t quite been able to explain it to them in a way that theyget it yet, and that’s probably our fault. At the end of the day,i t ’s the culture of the people-based business that really is thebig value piece, and the culture in these kinds of businesseshas everything to do with institutional loyalty. ”

David Maister, author of the highly acclaimed M a n a g i n gthe Professional S e rvice Firm, says culture will ultimately

determine the quality of services IBM offers its clients.“Every firm says that they are committed to client service,

but the real question IBM needs to ask itself is how do they gettheir people to be great at client service, and in a business likeconsulting this is not achieved through fixed processes orc o ntrol systems or resource allocation methods, it is achievedby turning your people on and by managing the culture andestablishing real values.”

The Unb e a rable Lig htness of Value s

Even if IBM succeeded in removing certain layers ofb u r e a u c r a c y and was able to offer senior consultants theautonomy partners enjoy within the top strategic partnerships,it would still be set apart by its shareholders.

“When you’re publicly traded, your priorities have to beyour shareholders first, and then your customers and youremployees. In the advice business, what’s critical over time isto put your clients’ interests first,” explains John Donahoe,Worldwide Managing Director of Bain & Company.


CoverStory

• IBM acquires PwC Consulting for $3.5 billion.

• Palmisano is named IBM chief executive of ficer.

Gerstner remains IBM chairman through the end of

2002, at which time Palmisano is named chairman.

• Ginni Rometty is named general manager of

Business Consulting Services (BCS), a newly minted

unit formed by PwC Consulting and IBM’s Business

Innovation Services unit within IBM Global Services.

• Exits hard disk drive business

through agreement with Hitachi.

2 0 0 2

• Uses grassroots consensus building

via IBM intranet to help author a set of

three values that echo the values

shared by the preeminent consulting

firms of the last century.

2 0 0 3

• Palmisano bri e fs Wa l lSt reet analyst s on a marke t

o p p o rtunity IBM calls Business

Pe rfo rmance Tra n s fo rm a t i o n

S e rvices (BPTS). The comp a ny

e st i m a tes BPTS to be a $500

billion market opport u n i t y.

• IBM CFO John Joyce is

named new head of IBM Global

Services.

• Bulks up its thought leader-ship credentials by convening IBM’s

first annual Global Innovation Outlook

(GIO), a series of discussions involv-

ing thought leaders from hundreds of

companies and institutions from

around the world.

2 0 04

The PwC Acquisition:Rometty says that the “integrationculture” of IBM Global Services willbecome the cradle for PwC’s35,000-member consulting arm.

Palmisano and Samuel A. DiPiazza, Jr.(left), chief executive officer ofPricewaterhouseCoopers, congratulateeach other on $3.5 billion agreement.

• Sells PC business to Lenovo for

$1.75 billion and an 18 percent

stake in the company.

N OT a PCma ke r : A fte rIBM fails toga rner a lead-e rship positionin PCs afte rselling tens ofbillions of dollars’ wo rth, IBM’s John Joyc eand Lenovo CEO Liu Chuanzhi announce a dealunder which Lenovo buys IBM’s PC unit fo r$ 1.75 billion.

2002 2003 2004

•S e rvices Revenue re a ch $42.6 billion

I t ’s a quandary, but one IBM management appears sensitiveto, having recently reworked its values — three finely crafteddictums that appear to echo the sentiments not of Wall Street,but of IBM’s strategy firm rivals. First authored by Tom Wa t s o n ,J r. ’s father Tom, Sr., IBM’s Basic Beliefs stood untouched fornearly 60 years. The act of rewriting such codes should not b eshrugged off given the role they played in establishing IBM’sculture in the last century. Behind the formidable culture thatfor so many defined the post–World War II c o rp o r a t eworld, were three core beliefs: excellence in everything we do,superior customer service, and respect for the individual.

Given the fact that IBM was a product company, it’s nos u rprise that its values differed from those of the top consultingfirms of the day, such as McKinsey & Company, whose firstvalue (authored about the same time as IBM’s) remainsunchanged — “ To put client interests ahead of firm interests”— or the blunt admonition of James Allen (of Booz A l l e nHamilton): “The best way to sell business is to do goodwork for our clients.” The d i fferences are no longer as apparentwhen compared to IBM’s newly minted first value: “Dedicationto every client’s s u c c e s s . ” Followed by: “Innovation that mat-ters for our company and the world,” and “Trust and pers o n a lresponsibility in all relationships.”

If IBM can be accused of cribbing somewhat from theconsulting leaders of the last century, its approach to constructingand instilling values is unlike anything the consulting profes-sion has seen before. While men like Marvin Bower andEdwin Booz have been described in the past as havingtaken a priestlike approach or a one-to-one approach toinstilling values, Palmisano — given the maturity and scaleof the IBM workforce — has a far more formidable chal-lenge. In short, IBM’s CEO is tasked with making IBM’sworkforce born again.

“Given the realities of a smart, global, independent-minded,21st-century workforce like ours, I don’t believe that some-thing as vital and personal as values can be dictated from thetop,” Palmisano wrote in a companywide message thatannounced IBM’s newly minted values. According to his letter,those values surfaced and became affirmed across IBM’s glob-al intranet when, back in 2003, IBM management invited all ofits 319,000 employees to engage in a 72-hour open discussionabout IBM’s values. The “Jam,” as such online gabfests havebecome known within IBM, was one of several that IBM hasheld in recent years as it seeks to build grassroots consensusand validate ideas.

2 0 Ja n u a r y / Fe b ru a r y 2 0 0 5 C o n s u l t i n g


In his book titled Who Says Elephants Can’t Dance? ( 2 0 0 2 ) ,

IBM’s th e n - ch a i rman Lou Gerstner fre qu e n t ly emp h asized how

the comp a ny’s st ra tegic bet on consulting s e rvices subsequ e n t-

ly raised the bar for the comp a ny’s mana gement perfo rm a n c e .

“I have worked in services companies (McKinsey and

American Express) and product companies (RJR Nabisco and

IBM). I will state unequivocally that services businesses are

much more dif ficult to manage,” Gerstner wrote.

Of the four companies that Gerstner mentions, th e re is litt l e

doubt that McKinsey & Comp a ny — arg u a b ly the most

e steemed consulting fi rm of the 20th century — enlighte n e d

him most about the unique inner wo rkings of knowl e d ge - b a s e d

c o mpanies. It was here where Gerstner wo rked beside Marv i n

B owe r, McKinsey’s modern founder and someone w i d e ly cre d i te d

as a pioneer of corporate culture in professional serv i c e s .

“I learned fro m

M a rvin the imp o r-

tance of art i c u l a t i n g

a set of pri n c i p l e s

that dri ve people’s

b e h avior and actions.

And that’s a much

m o re powe rful lead-

e rship tool than a

b u n ch of pro c e d u re s

and guidelines —

part i c u l a rly in a knowl-

e d ge-based ente rp ri s e

l i ke consulting,” Gerstner told Consulting Maga z i n e d u ring an

i n te rv i ew about Bower’s influence on the indust ry.

He continued: “I learned this from Marvin, and I’ve carried

it forward to every company I’ve operated in. IBM has been

the most impor tant place for me to follow that, because IBM

in a sense is a knowledge company just as McKinsey is.”

Within six months of his arrival at IBM in April 1993,

Gerstner says in his book, he authored the eight principles

he describes as the underpinnings of IBM’s new culture at

that time. Not short on verbiage or elegant in composition,

the eight wordy dictums were in stark contrast to the compa-

ny’s Basic Beliefs — three sparingly worded values handed

down by the Watson tribe (IBM’s founders).

The eight we re intended to pre s c ribe some st rong medicine

for an ailing wo rk fo rce, and we re arg u a b ly the corre c t

p rescription for IBM in 1993. A dozen years later, Gerstner’s

successor has sought to lessen his own professional services

leadership burden by better defining those values that could

help accomplish IBM’s 21st-century mission.

IBM Values: An Ongoing StoryBack in 1993, Ge rst ner autho red eig ht of his own.

Leading with values: Palmisano (left), Gerstner (right)

To that end, Burns participated in one of IBM’s historicalr e o rganizations — a reshuffling of resources that facilitatedthe adoption of the computer maker’s infamous staff and linestructures. These are the same lines that today burden theworkforce not of a computer maker, but of a consultancy.

CoverStory

“ When you’re pu b l ic ly trade d, your prior i t i es have to be yo u rs h a r e hol ders first, and then your customers and your emp l oy e es. In thea d vice bu s i n es s, w h at’s critical over time is to put your clients’ interests first.”

— Ba i n ’s Do na hoe

B e tween the Lines

Some 50 years earlier, when Thomas Watson, Jr., struggled tobuild similar consensus concerning the need of IBM to adopta new organizational model, he convened what would becomea momentous meeting within the annals of IBM history.

Just what contribution consultant John L. Burns made tothis gathering is not known, but according to a published his-tory of Booz Allen Hamilton, Burns was one of the firm’s topo rganizational consultants, having cultivated a résumé rich inclient studies, including a number completed for RCA.

To his credit, Watson does mention that Burns had revealedto him that he was a consultant to RCA. Moreover, the BoozAllen consultant informed Watson that he would need to getR C A’s permission before accepting any assignment from IBM.

C

Next issue: The Soul of a New Consultancy — Part II" I n n ovation that matte rs, for our comp a ny and for th ewo rld." It’s a lofty goal, but one that IBM leadership isu n a b a s h e d ly pursuing as it seeks to cre a te a consult-ing culture in which its people can ach i eve gre a t n e s s .H e re’s a look at the obstacles still to be ove rcome —as well as the ch a l l e n ges IBM has already met.

Documents

IBM: The Soul of a New Consultancy (Part I)