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The third question we all have to ask: Are our systems ready for the networked world?
When you put your business on the Net, you have opened a new front door of your business or agency or education institution. At any point in time, you might find that there are millions of people at your new front door. So your Web presence has to be able to handle that volume, and it must do it while remaining open seven days a week, 365 days a year, 24 hours a day.
These are all issues we've had to work through at IBM as we've made decisions about our Web business. And the subject of how IBM is transforming itself to become an e-business leads very naturally to the next part of my talk.
My IBM China colleagues have told me that you are interested in some lessons IBM has learned during the last several years of a major financial, competitive and cultural transformation. Most recently of course, our transformation has centered on our own program to embrace e-business. In fact, we've defined and declared a goal to be the world's leading example of what e-business is all about.
So let me conclude with a few comments on the subject of IBM's transformation. I want to say first that I do this with a very deep sense of humility. I am not suggesting in any way that our experiences are applicable to any situation you might be facing. I will outline the major elements of our transformation in the hope that maybe some small part might be instructive to you.
Now it's no secret that IBM went through as thorough a restructuring as any institution in the world over the past five years. And before I describe the actions we took, I want to make one very fundamental point: Institutional restructuring, successful restructuring can't happen without a commitment at the top of the organization to embark on an effort that will take five years, minimum.
You must have an institutional commitment to stay with the program over multiple years. You must understand that the hard part isn't getting started. The hard part is seeing the changes through until you've achieved whatever objectives you've set.
Restructuring institutions is not just a matter of reassembling companies, and assets, and industries of shuffling around assets. Any truly serious, meaningful restructuring begins with a fundamental examination of everything you do, the processes by which you manage your enterprises.
IBM had to do this.
Of course, we had to address other critical issues -- our cost structure and the competitiveness of our products. These were difficult, but in many ways, they're not the most difficult part of the job. We also had to conduct a tough self assessment. We had to examine our strategic direction, our basic value proposition to our customers.
I believe that all enterprises have to do this kind of self-assessment. When you do it, you find that it leads directly to the core questions about where do you concentrate resources, where do you invest, where do you disinvest, where do you put your energy in order to lead.
The first aspect of restructuring, and a characteristic of every successful enterprise in the world today, is focus. By focus I mean:
* Fact-based, steely-eyed clarity about the markets you believe you can dominate and lead.
* Clarity about where all your resources will be concentrated, what businesses you'll invest in, and what businesses you'll get out of.
Of course, this requires a high degree of sophistication in your ability to segment markets, which in turn requires excellent information systems, how you collect information, and how you analyze it.
It also means a commitment to a corporate culture driven from the marketplace. For us at IBM, that meant we could no longer start everyday with invention, which was the way IBM operated for decades. Today, we start the day with the marketplace, with customer needs, with marketplace changes, and competitive understanding. We continuously ask ourselves: What are we good at? What can we be unique at?
These are very hard questions -- and they lead to directly to the next aspect of restructuring: Competitive benchmarking.
How can you restructure unless you know what you are trying to accomplish? What is the objective of the restructuring? Is the goal to be the best global competitor? To be the best within your nation? The best within your industry?
Once you've answered those questions, how do you quantify what it will take to be the best? You must be able to measure and understand your current position and where you stand relative to your competition on whatever criteria you decide is relevant, such as product quality, customer service, development costs, or cycle time.
So everything we do at IBM is measured against the best of class in our industry and, in some cases, other industries. That begins with our cost structure. I don't think you can be successful in a global economy unless you have best-of-class cost economics.
We went out and benchmarked, and we said to every one of our managers, "You must be equal, or better than the best." No exceptions. The benchmarking process told us we had to take $8 billion out of our cost structure. We decided to get it over quickly, and it's completed.
We also benchmarked quality, cycle time and speed. Cycle time to us is the early indicator of success. In fact, the imperative for speed is greater today than I have ever seen in 30 years.
You can almost argue today, "First is better than being right." Not quite, but almost. So when any of our businesses report their monthly results, we also ask for reports or progress on cycle time. It never ends, and entails the restructuring of the core processes of the enterprise.
The third aspect of restructuring is Re-engineering.
Many companies will take on one or two major re-engineering projects at a time. Rather than approaching it piecemeal, we attacked the entire organization at once. At any given time, we had more than 60 company-wide re-engineering projects underway, and hundreds more among individual units and divisions.
Because our re-engineering depended on global information systems, we discovered very quickly that we were going to have to completely re-engineer our internal information infrastructure. We sought to achieve common worldwide data bases, common marketing systems, common financial systems, fulfillment systems, manufacturing systems, and centralized data centers to avoid excessive cost and duplication.
As a result of this reengineering effort, we achieved our $8 billion in savings and we lowered the cost of our information technology structure expenses by 47 percent. We have cut hardware development time from four years to an average of 16 months, and for some products, to as fast as six months.
We've also improved our on-time shipment rate from 70 percent to 95 percent; we've reduced inventory carrying costs by $220 million and inventory write-offs by $800 million; we've reduced materials costs by close to $300 million; and delivery costs by $270 million.
And we've also seen our customer satisfaction indices rise significantly.
Of course, re-engineering isn't just a matter of cost savings. Our key objective is to move our business to the Net.
We're using the Internet to sell our products, to provide services and support to customers and business partners, to buy goods and services.
We're doing millions of dollars a day in business on the Web --- and we have customized extranet sites with our largest customers and Business Partners.
Finally, all restructuring must address issues of cultural change. This is the aspect of our transformation that I probably spend the most time on right now: How we get the most of our most precious asset: 270,000 IBM men & women.
We are working to build a culture of high-performance based around a few fundamental concepts.
* First, an obsession with the marketplace, focusing our entire efforts on delighting customers and overwhelming competitors.
* Speed of execution: building a culture that encourages and rewards speed, flexibility, risk-taking and continuous learning and adaptation.
* Finally, a culture built on teamwork -- one that puts the good of IBM ahead of any individual, department, unit or division.
