Adding value the IBM way

So, most of us know that the challenge for the HR function in the 21st Century is to add value to the business. The days of HR as a cost center, reacting to and implementing business strategies agreed by others are numbered. Administrative tasks can, and perhaps should, be outsourced, and HR professionals need to devote their energy to the high-level strategic thinking that will deliver the HR value proposition to the rest of the business.

It’s easy to write, but perhaps rather more complicated to put into practice. For Randy McDonald, SVP of HR at IBM, it is a challenge that underpins everything he has tried to achieve in his long and illustrious career. “The most important thing I would tell my team is that we have to recognise our responsibility to create rather than just react,” he tells us at the end of an interview in which he’s given us a privileged insight into the heart of one of the world’s biggest companies.

The task of managing the HR function at the company is put into perspective when you look at some of the hard facts. IBM employs over 350,000 regular full-time equivalents – with temps, contractors and third-party employees that number rises to nearer 545,000 staff working globally in 2007. The HR department itself is made up of over 1500 staff [FACT CHECK WITH IBM], and there are 30,000 managers at the firm (defined as having responsibility for at least three direct reports). And with revenues of around $90 billion a year, the annual compensation and benefits budget alone is in the region $34 billion.

The department McDonald heads up runs the full gamut of a typical HR function – everything from talent, to executive resources, and comp and benefits, taking in everything in between. So where do you start in prioritizing the strategic goals of such a large operation? According to McDonald – who believes in keeping things in three or less so that people can remember – he has three current priorities. “The first is anticipating and building skills. The second is leading the transformation of IBM, and the third is helping IBM grow as a business.”

Top three priorities

These are not small priorities, and we ask about each in turn, first what does anticipating and building skills mean in practice? Given the nature of its work, McDonald believes that IBM has the largest professional workforce in the world. And for a business that relies on hundreds of thousands of professional people, he argues, “the ability to understand what you need, when you need it, how you need it and where you need it is absolutely essential.”

For McDonald this means anticipating the needs of the business before they occur. “To me this is one of the unique aspects of the HR function at IBM. We’re trying to get out in front of the business.” In practice this anticipation can mean one of two things: building the skills of existing employees, or sourcing new skills in advance of client need: “We try to anticipate taking the foundation our staff have and build off of that. Or we literally go out and proactively hire, waiting for the next generation of services or technology we deploy and having those available for our clients.”

The second priority is driven from IBM’s CEO Sam Palmisano’s desire to build a globally integrated enterprise. McDonald argues that the old corporate paradigm of international or multi-national corporations lead to the dissection of operations on “either on a geography or country basis.” As he explains, IBM is moving away from that, and is involved in transformation of its business. “We want to have one IBM across the world, having globally integrated staff functions, and globally integrated product lines and service businesses,” he says. Much of the burden of this transformation falls on HR. “We’re tasked with looking at how the cultural aspects of that are necessary, along with all the other things that link to it – compensation, learning, and talent.”

For McDonald the third priority – helping IBM grow – is “real simple”. Like everyone else IBM is trying to grow revenue and grow profit, and from the HR side this entails “recognising that people have to think about compensation and rewards differently”. Speaking in early February, McDonald uses our interview to reveal exclusively to HRM what this means in practice. “We’re about to announce a massive change in how we think about compensation, and we’re announcing what we call a GDP – a growth driven profit sharing plan. What we’ll be saying is as we grow revenue we’ll take a piece of the profits and start filling what you can think of as a thermometer. At the end of the year the thermometer will be divvied up to all our employees globally, based on their job level and their performance.” The scheme was technically effective as of 1 January 2007, but was being rolled out to managers and staff as we spoke.

This initiative is part of McDonald’s vision of a creative HR department; initiatives like this have been common since he took up the HR helm at the Big Blue in 2000. For example, the technology giant has pioneered healthy living rebates to staff; employees are paid $150 cash if they give up smoking for example, on the basis that investing in the health of the staff leads to more productive workers, and lower health care costs.

Value jams

Away from the nuts and bolts of specific programs like this though, IBM has also been using ‘jams’ to help develop its corporate principles and culture. To involve its global staff base, it used intranet based technology to host online discussions among staff over key business issues. Fifty thousand staff participated in the first jam in 2003, while a similar number took part in 2004. The discussions were then analyzed using text analysis software to draw together the main themes from staff.

“The whole concept of the values jam was very simple,” McDonald explains. It’s easy to promulgate or pontificate about what the values of a corporation should be, but what you often find is what the top thinks the bottom doesn’t necessarily connect to.” Because of the collegiate and tech savvy atmosphere at IBM, McDonald’s view was that staff should be involved in the process of identifying the corporate values. “We went out and asked the questions of our colleagues” – McDonald stresses that staff members are colleagues not employees – “what do you think are the rallying points that are dear to our hearts and that we should entrust in each other to live every day?”
And the outcome of the first jam was “was amazingly concise”. In the final analysis three areas were identified. First that IBM should be dedicated to the client’s success. Second was that it should devote time to innovation that matters. And finally trust and personal responsibility was identified as being crucial. These three in turn became the company’s new corporate values.

Making values real

As any HR executive probably knows, agreeing corporate values is just the start of the journey – the real challenge is embedding the values throughout the organization to guide people’s behavior. McDonald explains how IBM tackled this challenge. “You make your values a reality by recognising that they are nothing more than a decision making process that you need to go through each day,” he argues. “So you ask yourself the question ‘is what I’m doing today adding to the success of the client?’” For McDonald if the client succeeds, the business succeeds, so the challenge to staff is to start evaluating their own work “on the basis of the difference you’re making in that work.”

McDonald outlines how his department is trying to make a difference in its own work by encouraging innovation in its business units. “We’ve spent several million dollars developing an innovation tool called Think Place, if you will it’s the contemporary version of the old suggestion system,” he says. The system is virtually shared and McDonald describes it as “pyramid” off which a good idea can be built: “People say here’s a good idea, and here’s how we could build off it, and here’s an offshoot to it.” As he explains it’s not just a virtual talking shop though. “There are individuals around the world who are catalysts; they monitor the site for ideas, and it is their responsibility to move that idea to the appropriate senior level person when they see it is has a level of merit that’s worth considering”. And in November IBM announced it would invest $100 million in the 10 best ideas from this process.

McDonald also has a great example of how IBM is driving the final value of trust and personal responsibility in its business. “The number one idea that came out of our 2004 jam [which asked staff how IBM could live its new values] was that employees felt overwhelmingly that they needed to help groom and develop managers by giving them a level of 360 feedback,” he says. This has lead to a new feedback process for managers in the last two years: “We share the information on an individual basis with the manager, and they’re required to show it and share it with their colleagues, their team mates, as well as their supervisor.” This, McDonald argues, encourages IBM leaders to really take responsibility for their own performance.

Leading from the front

Another example that McDonald points to of senior level executives living the company’s values is in the company’s executive stock ownership guidelines. “If you personally are an owner of IBM who is risking your own money, you would like to think that someone like me or my colleagues have some level of risk too,” he argues. The executive stock ownership guidelines mandate that a multiple of senior management’s base and bonus must be held in IBM stock “so we have to own x, in most cases millions of dollars, in shares,” he says. And, according to McDonald if you add up the entire SVP and Chairman’s stock holding, “it’s going to be about $170 million dollars of ownership to the corporation.” So, as he dryly notes, “there’s a lot of ways you can live the values.”

In talking to McDonald it is clear that he is focused on all staff members taking responsibility and owning quality. And in his terms part of that process is being transparent in your behavior and communication. “We work hard about having a level of transparency to our communications,” he says. “Even as we participate in this interview it is part of this process. If you are clear, forthright, and trust staff with a level of candour, we’ve found people trust us when we do that. Even thought the message isn’t always the best message to give.”

It is also clear that he sees HR as really being a leader in the businesses operations, as responsible for adding value to the company as sales or research. “As opposed to being a staff function, we’re viewed more as an operational partner,” he says. “I think that our chairman and my line counterparts, hold me totally responsible for the concept of resource development. They see me as the holder and the keeper of the human resources if you will for this global enterprise.”

There are practical ways that HR can add value to the business – with a comp and benefits budget of around $34 billion, it’s clear that if HR can price benefits to be competitive in terms of what they can buy from the market, then the bottom line will benefit. And in slightly more intangible areas like leadership development HR can also add value to the bottom line: “We build enormous talent here, and it tends to be recognised globally – IBM is usually in the top ten, if not the top three, a couple of years we’ve been number one – in developing leaders. So it seems to me if we look back on it, developing leaders, focusing on cost competitiveness, and management of resources are the three ways we almost run our business as a P&L center.”

In our conversation, we asked McDonald what he thought were the main challenges facing the HR industry? His response might be seen as challenging by some. “Being a little bit provocative – this is not IBM, but talking about HR in general – HR has to be more operationally focused,” he argued. Explaining what this implied, McDonald didn’t mince his words: “In doing that, the quality of the HR leaders has to improve dramatically as a function globally in most corporations.

“I think we have to have the ability to speak out, and we have to have the ability to take risks. If you sit around and wait to ‘support the line’ you’re going to be left in the dust, you have to be running right along the line, and in some ways I would argue you have to be out in front of it.” McDonald claims IBM is already up to this challenge – “we’re exceeding that goal and establishing new bars going forward.” Others though have work to do. “I’m not quite sure that the functions everywhere else in the world are ready to accept that challenge,” he states.

On the positive side though he sees the HR function as a work in progress, and one that has been improving over time. “From what I’ve seen in my 35 years in HR, I think HR is a function that has finally matured as a business force. I dismiss the concept of a business partner, I find that rhetorical and almost fad like. I think we’ve matured in that we bring a level of competency and a level of advice, council and creativity that a finance or legal function has historically. I’m not sure it existed that way 35 years ago.”