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Think (Again)

As IBM marks its centennial, its finance team plays a critical role in driving continuous transformation. CFO Mark Loughridge explains how, and why.

But the proceeds from those divestitures helped us make major investments in R&D. We’ve been averaging a consistent $6 billion per year for the past five years, but what we spend it on has changed a lot, to a much higher mix of software and services development.

And along with this transition, you really embraced the idea of selling “solutions” versus products?

Yes, in the 1990s our gross profit margins were declining about a point to a point-and-a-half per year. To put that in perspective, at our current size of about $100 billion in revenue, a one-point erosion in gross margin requires us to add another billion in revenue in order to drop a nickel of growth to the bottom line. Part of the problem was that a larger percentage of our offerings were becoming commodities, and our customers were buying them as point solutions. We wanted to create partnerships with customers, where the engagement is about solutions. When we do that, we have a better win rate, better margins, and better customer satisfaction. So we saw that we had to get out of commodity content and emphasize higher-value content.

IBM's % of segment profit; its 1st roadmap led beyond its 2010 target; by 2015, growth markets will be 30% of its geographic revenue

Getting back to corporate structure, it’s interesting that the nature of your global expansion proved so troublesome given what a pioneer IBM has been in expanding overseas.

Fifteen years ago, if you had called a general manager in Europe and said, “What are you focused on today?” he might have talked about a supplier problem, or an HR issue, or an import regulation, or how he had a lot of accounting work to do. Today, I guarantee that if you call any one of them they will talk only about client issues — deliverables and execution milestones. They are completely customer-based. We handle finance, not them. And the same is true in terms of HR and other functions.

The interesting thing for finance is that by taking all of that on, we were able to straighten out all of the wiring diagrams and the plumbing, so to speak, so that today we have 70% of our staff doing real value-added work, and only 30% chasing data, a complete reversal of where we were in the mid-1990s. So finance is not just rolling out numbers, but serving as a true co-pilot, a trusted adviser to the business. And in that same period, we’ve cut the overall cost of finance from 3% of revenue to 1%.

This transformation has also affected the kinds of skills we look for in finance staff — for example, the ability to place financial information in a business context. We value line-of-business experience as part of the development of finance talent. And, conversely, we’ve seen more people from finance move into line-of-business roles.

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