IBM's HR Takes a Risk
With a $100 million restructuring effort, HR at IBM has a lot to prove—and it relishes the challenge.

By Robert J. Grossman
SHRM- Society for Human Resource Management

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When Sam Palmisano took over as IBM's chairman and CEO in 2003, the worst was over. His predecessor, Lou Gerstner, handed over a company in much better financial shape than it was in 1993 when Gerstner took the helm and the company was nearing bankruptcy.
With solid financial footing, Palmisano was able to focus on his vision for IBM, the company where he spent his entire career. Palmisano set out to re-create IBM as a globally integrated enterprise that broke away from the pack on the strength of its human capital—not solely on its portfolio of products. ›
When Palmisano announced his signature Business Transformation initiative, he called for IBM to establish an "on demand" global supply chain that provides customers with IBM products and services—software, hardware, business processing, consulting and more—wherever and whenever they need it. He then eliminated layers of management bureaucracy and moved the workforce closer to its global clients so that the company could compete on service delivery.
Today, under Palmisano, the IT giant generates more than $90 billion in revenues. With 330,000 employees, it is among the 15 largest publicly traded companies in the world.
Central to its resurgence is IBM's recognition that human capital is its most distinctive and manageable asset. Companies that rely on technological or manufacturing innovation alone cannot expect to dominate their markets indefinitely. Competitors can and do catch up. The quality and strategic deployment of talent is what separates winners from the also-rans.
That's why Palmisano chose to center IBM's business strategy on the belief that its people are, and will continue to be, IBM's key market differentiator. HR and talent management—not computers—are IBM's core

MacDonald's Influence
Before taking the senior vice president of HR position at IBM in 2000, Randy MacDonald was executive vice president of HR and administration at GTE (now Verizon Communications). Today, he oversees a globally integrated HR operation with 3,200 HR staff. His budget tops out at $1.3 billion. He reports directly to Sam Palmisano, IBM's chairman and CEO, and is a vocal member of the 13-person Operating Team that meets regularly with Palmisano.
MacDonald also created and co-leads with CFO Mark Loughridge a 62-member Performance Team made up of the managers from all IBM major business units. The team meets for two days after the company issues its quarterly financial reports to discuss the performance of business units, examine successes and dissect failures, and look for human capital solutions.
Early in his career, MacDonald realized that the door to the executive suite opens for people who have meaningful metrics at their fingertips. CFOs get in to see the CEO faster than HR because of data. "HR has to do the same," MacDonald says. "We have to offer quantitative metrics to the CEO and line people as to what's going on in their businesses," such as time-to-fill metrics, the conversion rate of summer interns to full-time employees and the attrition statistics for high-potential workers. When MacDonald needed $100 million to restructure HR operations, he had to persuade the C-suite that it was a good investment. "Do you think I can walk into the [office of the] CEO or CFO and ask for $100 million because I went to St. Francis College and I'm a good guy? I told them, 'I'm going to deliver talent to you that's skilled and on time and ready to be deployed. I will be able to measure these skills, tell you what skills we have, what [skills] we don't have [and] then show you how to fill the gaps or enhance our training.' " He is equally demanding of his HR team. MacDonald signs off on activities and projects only if they're embedded with metrics and ways to measure success. "It's all about execution and accountability; you have to deliver," he says. "And you demonstrate your success with metrics that businesspeople can understand." MacDonald prizes teamwork and requires all managers to be skilled at sharing ideas and working cooperatively. But that's not to say he's an easy boss. He's hard-driving and no-nonsense, and people who have worked with him concede he can be "explosive." "He's a demanding leader," says Pat Wright, professor and director of the Center for Advanced Human Resources Study at Cornell University in Ithaca, N.Y. "I've had a lot of dealings with Randy, and I could see how the timid would be afraid of him. It's more their problem than his. He is a bright guy who asks hard questions."
— Robert J. Grossman


HR at Center Stage
As a result of Palmisano's initiative, HR finds itself in the spotlight. No need to fight for a seat at the table. No struggle to convince line executives that HR should be their business partner. HR's job is to deliver the people, to establish a ready supply chain of talent that will outperform the competition from top to bottom, from the executive suite to the factory floor. Palmisano has made it clear that if the company begins to lose revenue or market share, HR's piece of the responsibility will come from not delivering the right people to the right jobs at the right time.
The game is not for the faint of heart. When IBM wins, HR gets to share the champagne; if the company loses, HR's head is on the block.
In this case, the head belongs to Randy MacDonald, senior vice president of HR. A seasoned HR executive, MacDonald has Palmisano's ear and the respect of his fellow executives in the C-suite. His fingerprints are all over the key strategic and operational decisions of the corporation. "They know Randy can cut costs, fire people, call a spade a spade. He has a history in the way" he has stood up to union drives and taken criticism for IBM's cuts in pensions and other benefits for retirees, says Fred Foulkes, professor and director of the Human Resources Policy Institute at Boston University School of Management.
His success has earned him the confidence at the top level. "The more success you have, the more license you're granted," Foulkes explains.
MacDonald has taken that license and run with it. Foulkes says IBM's HR operation and MacDonald's business orientation are cutting-edge. "Clearly a leader like Randy has enormous impact," he says. "He is among this generation's top HR leaders." (For more information on MacDonald, see " MacDonald's Influence".)
Now, MacDonald is taking a big risk. He's gambling on a radical HR restructuring that must pan out for IBM to continue as a market leader. "I don't mean to be arrogant about it, but this is leading-edge," he claims. "My team is doing things in the 21st century that nobody else has done. It's the wave of the future."
HR's Strategic Gamble
Keeping the human capital supply flowing wherever it's needed is a daunting undertaking, one that MacDonald says is discussed in general HR circles but until now has not been done. The challenge led him to rethink the way HR delivers services. He says typical HR organizations operate out of silos—talent, learning, employee relations, benefits, diversity—a structure that's ineffective and inefficient. "Blow it all up is my attitude. Don't think about silos; think about end-to-end process."
True to his word, in December, MacDonald announced a worldwide, $100 million reorganization of HR, the Workplace Management Initiative (WMI), which segmented the 330,000 employees into a layer cake of three customer sets. One layer consists of executive and technical resources, another holds managerial talent, and the third is rank-and-file employees.
Separate cross-functional HR teams serve each layer. By the end of this year, MacDonald says, "We'll manage each person within each group as an asset and develop them accordingly. You'll have talent, learning and compensation people all managing people within their assigned levels."
MacDonald says it's his responsibility to challenge the business plans of each unit in IBM. "If I look at a three-year plan and it says we're going to enter new markets, I have to decide what skills we'll need three years from now to compete in these markets. I have to look at what existing skills I have that will become obsolete."
Using metrics, MacDonald already knows his workforce breakdown. "In three years, 22 percent of our workforce will have obsolete skills. Of the 22 percent, 85 percent have fundamental competencies that we can build on to get them ready for skills we'll need years from now." The remaining 15 percent will either self-select out of IBM or be let go.
Roles and Skill Sets
No one at IBM is safe from being in that obsolete category. Everyone from top to bottom will be assessed and reassessed on their competency levels and placed where IBM needs them—whether it be in the United States, India or anywhere else IBM expands in the future. Those who are lacking necessary competencies will have the opportunity to be trained if they can and want to be.
Under WMI, every role that workers, managers and executives play—490 in all—has been identified and defined. All IBM employees play at least one role, sometimes two, maybe even three. (For example, Ted Hoff, vice president for learning, is a learning leader and a manager.) Internal analysts studied what people do in each role and determined the functional expertise or skill sets that the roles require in each job. There are 4,000 skill sets, all closely defined and measurable, and monitored by MacDonald and his HR team.
By the end of this year, each employee will have conducted a self-assessment and reviewed it with his or her manager to discuss the level of mastery the worker has achieved in each skill set. "The manager will be sitting with a checklist of skills that you'll need for your job," Hoff explains. "This will provide precision about performance and also will offer a road map as to how we've developed each person. We're not measuring how well you perform on a written test. We're measuring how you've demonstrated mastery in each skill set through your performance."
Ratings are made on a continuum from zero to three:

* Zero—You have not demonstrated a significant mastery of the skill set.
* One—You have demonstrated acquired knowledge, understand what's needed in the role and understand the bottom-line results that are being sought. But you have not yet applied it in a demonstrated way.
* Two—You have done something around the skill set that shows you have a level of mastery that has been applied.
* Three—You have achieved a mastery level demonstrated by the fact that you're not only proficient, but that you're developing others around it.

Assessments in hand, employees will be told where they stand. "We'll tell you where we see your skill sets, which skills you have that will become obsolete and what jobs we anticipate will become available down the road," MacDonald says. "We'll direct you to training programs that will prepare you for the future."
MacDonald says that the early warning system should be a morale booster. "People will sit back and say, 'I get this, you notified me. Now I've got time to do something about it.' "
Yet some people won't. "There's a segment that will choose to opt out; there's nothing I can do about it," he says. "There's a segment that can't get re-skilled; they don't have the intellectual capability or the drive to do it. But whatever happens, people will be able to decide for themselves. Three years from now, I can look people in the eye and say, 'We told you, but you didn't do it.' "
The purpose of the ratings is so that MacDonald can easily locate who at IBM has the skill set needed for an open position anywhere in the world and fill it quickly. It will mean employees will have less security about what their job will be and where it will be in the future. But, because the overall IBM business strategy is to meet customers' demands wherever they are, the HR strategy has to follow.

Performance Metrics
IBM's Vice President of Learning Ted Hoff points out that developing training metrics is a difficult intellectual exercise but worth the effort. "If you can figure out how to do them, they'll give you guidance about what's working and, equally important, they'll help you demonstrate your value. There are two challenges: 1) getting the goals clear and figuring out what metrics you can set against the goal, and 2) getting the data reasonably attainable and clean so you can do the measurements."
The most reliable method is to have a participant group and a control group. But business units, eager to cash in on training, usually aren't interested in holding one group back as a control. Hoff cites a case, however, where a controlled study helped him prove his value when training IBM client executives. The training was offered through the Internet. Some leaders encouraged their client execs to tap into it; some did not. "We looked at the bottom-line performance of clusters of sales executives who took advantage of 15 online modules or more, vs. the clusters of executives who, on average, took advantage of five or less.
"The results showed the executives who took 15 or more modules achieved a quota attainment of 107 percent over the quarter; those in the cluster with five or less achieved a quota of 94 percent. The quota attainment difference was worth over $500 million in revenue. Gross margin was 30 percent. The e-learning investment was $12 million. That's $150 million in gross margin against a learning investment of $12 million," says Hoff.
—Robert J. Grossman

Assembling the Team
To fulfill this strategy throughout the global company, MacDonald had to assemble an HR team that is truly business-oriented. Karen Calo, vice president for global talent in Armonk, N.Y., supervises team talent directors who are assigned to work with the managing directors of IBM's line units such as Global Technology Services (GTS) and Global Business Services.
"The talent directors report to me but work directly with the business leader they're assigned to support," she says. "They do a lot of similar activities, helping to develop strategic and operations plans but in different contexts. If you're [a talent director] in Hardware, you may deal with issues relative to product life cycle; in a service business, you may be working on integrating solutions."
The tie that binds all talent directors is knowledge of the individual business sectors. "If you are an HR person who doesn't understand the business you're supporting, you can't be successful," says Calo. "You don't necessarily need an HR degree; you can always learn HR. Deep subject-matter expertise is important in some areas like compensation. But from a generalist standpoint, some of our most interesting hires come from outside HR."
In recruiting for HR, Calo says she's "intrigued by the business professional who really has been out there on the line who really understands the business, has good judgment and good common sense."
Kari Barbar, vice president of learning, is an example. An experienced hardware engineer, Barbar, who is based in Research Triangle Park, N.C., recently transferred into HR to work directly with Mike Daniels, senior vice president of GTS in Somers, N.Y. "Five years ago, I would not have considered leaving hardware development to move to HR," she says. "But now, I see that our ability to develop expertise is what distinguishes IBM from its competitors. In HR, I'm involved in driving the transition of the company."
Barbar's job is to determine the professional and technical skills that her client, Daniels, requires to grow GTS. She must provide both the selection of talent and training of existing talent and demonstrate to Daniels' satisfaction that she has delivered value.
To help develop those skill sets across the board, last year, IBM spent more than $700 million training its workforce. Ninety-five percent of the funding came not from HR's budget, but from line managers' budgets. Putting the training line item on managers' budgets ensures that the training is connected to their business goals. At the end of the day, HR and MacDonald will have to produce evidence to the line managers who funded the training that it has helped to keep the pipeline flowing. (For more on how HR proves training's impact on the bottom line, see " Performance Metrics".)
The pipeline also includes senior-level positions. Succession planning is a standing agenda item at Palmisano's monthly executive team meetings. Calo, Palmisano and his direct reports discuss the merits of candidates for any open senior-level position. "We present a diverse slate of candidates who can fill the role, describe the competencies they have and those that are required for the position," Calo says. "After discussion and consensus within the Operating Team members, the position is filled."
Going for Broke
At this point, the rollout of WMI is just beginning and the jury is out on whether the new silo-less, integrated HR will make HR more effective. Even the usually confident MacDonald is uncertain. "This is the first time in my life I'm afraid," he says. "The restructuring is so radical." Still, he relishes his opportunity to run with the innovation. "I'm here to lead, not follow," he says.
And he urges other HR executives to follow his example and step up. "I don't care if you're sitting on top at IBM or you're at a Fortune 1000 company. You are entrusted by the shareholders to protect the assets of the corporation that are human in nature. Don't worry about jargon like 'business partner.' You should be just like any other senior executive making a difference to your company.