Albert's Analysis

IBM Minds Costs Ps & Qs with IPD

Few can question IBM's aggressive decision to reduce its operational costs. Has anyone forgotten the company's $16 billion loss in 1993? That same year IBM was spending about double what its competitors spent to maintain a comparable revenue stream.

But no one needs to tell Lou Gerstner (widely credited with restoring IBM's financial health) that indiscriminate cost cutting can be dangerous, and a quick route to the loss of valuable talent and expertise. So I'm not surprised to see the success of a new business process at IBM called Integrated Product Development (IPD), Big Blue's own strategic spin on reducing costs and building stakeholder value across the board.

To accompany the explosive growth of e-business revenue, IBM is striving to improve internal operational efficiencies. I believe that IPD is indeed, IBM's long sought after answer to a streamlined and reengineered management style.

Essentially, IPD creates a "best of breed" benchmark for strategic decisions. It covers key areas such as how to identify profitable market segments, when to invest or divest in a product, and ways to develop new, competitive offerings by meeting unrecognized or untapped customer needs. IPD also works to reduce cycle time to market, maximize the value of IBM's product portfolio, maximize efficiencies of scale, and reduce operational and manufacturing costs.

A tall order, but doable. And no question the need for such a move is warranted.

Today we see competitors such as Dell, which is staking its position as THE number one direct seller of personal computers. Because IBM uses distributors and dealers (in addition to selling "direct") to sell PCs, it can't--and shouldn't--model its cost structure exactly like this competitor. Yet success stories of key industry players need to be watched closely.

In the early 1990s, IBM spent fully one-fourth of its development costs on products that were abandoned or never made it to market. These numbers suggest a sobering disconnect between activities in the research and development labs and the conversations sales and marketing folks have on the front lines talking with end users.

As part of IPD, IBM is creating cross-functional product development teams designed to address and correct that disconnect. This is certainly consistent with Lou Gerstner's mantra of reducing or eliminating bureaucracy and speeding management consensus. (He calls it TEAM IBM.) And these new teams represent marketing, design, manufacturing and engineering--or "participation from all over the organization," says Johnny Barnes, an IBM director who heads the new development program.

An example of IPD dollar savings: During 1998, IBM's ratio of development expenses to gross revenue dropped by two-thirds. Before IPD, Big Blue spent a quarter of its development expenses on projects that were cut or abandoned. Today, that percentage has dropped to less than two percent.

In manufacturing, IBM and its business partners are starting to more effectively price compare for key components. Just last year that practice alone--renegotiating costs with contract suppliers--saved them $78 million.

And this past September, IBM announced plans to save hundreds of millions more by reusing designs for computer parts--making equipment in which half the parts designs can also be used in other products.

A computer library--created in 1995 so development groups can share designs for parts to be used across product lines--saved IBM an estimated $250 million in just three years.

So, has IBM created the best cost structure among its competitors? I don't believe so. Not yet, anyway. We see evidence that it still trails its rivals in cost cutting. But the bigger picture is just as significant. IPD represents IBM's focus on internal efficiencies, clearly a move in the right direction. Sometimes it's those first steps that make the biggest difference. And Big Blue is focused on becoming "New (and improved) Blue."