Building on trust

In an open and connected marketplace, successful companies have to learn to let go and trust their staff, says Sam Palmisano, chairman, president and chief executive of IBM.

by Sam Palmisano, World Business

Little serious doubt remains over whether globalisation is real or will continue. It can, of course, be interrupted, as it was by both world wars and the rise of protectionism during the mid-20th century - but such intervals always prove temporary.

On the inevitability of economic globalisation, the verdict is in (and is topping the best-seller lists, as Tom Friedman's The World Is Flat attests). In addition, most thoughtful people recognise that global integration holds enormous potential for economic and social good. The emergence within just a couple of decades of a middle class in India and China that is as large as the population of Europe is testament to that.

As former US Treasury Secretary Lawrence Summers noted in a recent essay in the Financial Times, living standards have improved in China over the past 30 years at a rate that would lead to a 100-fold gain over a single human lifespan.

This compares favourably with the Industrial Revolution: as Summers says, in the early 19th century, for the first time, the standard of living of one generation was demonstrably better than that of the one before, with real per capita income doubling and then doubling again.

The important debate, thus, no longer centres on the whether of globalisation, and there is growing consensus on the why. The key issue now is the how. How should we deal with the disruptions that this massive shift is causing to established institutions and ways of life?

How should we change existing approaches, or create entirely new ones, to help globalisation occur in the most sustainable, equitable and socially progressive ways? Perhaps most importantly, how can we build trust - indeed, strengthen it - in an open, fluid, interconnected world where traditional approaches to security - such as siloed organisations, border controls and hierarchical management systems - are rapidly becoming obsolete?

In order to think such new approaches into existence, we need to be clear about the kind of institutions for which we'll be designing them. One is the corporation. Globalisation and technology are changing not just the context in which a company operates, but also the fundamental model, even the idea, of the corporation itself. We need to ask ourselves: what is the global corporation? To answer that question, it helps to look at the modern corporation's evolution over the past 150 years. We see three distinct models:

- The international corporation. Most operations were centred in the home country, with overseas sales and distribution. This basic structure of import/export - centralised manufacturing and international distribution - applied across almost every industry from the mid-19th century until the first world war.

- The multinational corporation. The multinational was in many ways a response to the imposition of trade barriers during and following the world wars. To gain access to local markets, companies created smaller versions of themselves around the world and made heavy local investments. My own company, IBM, was a classic multinational. There were 'mini-IBMs' in dozens of countries around the world: IBM Japan, IBM Brazil, IBM UK, IBM Germany, IBM Spain and so on.

This was a very efficient way to grow in local markets. However, what once looked like efficiency is now coming to look like redundancy: every country operation with its own sales force, supply chain, procurement, finance, HR and other 'back-office' functions - and, in many cases, manufacturing, development and even research capabilities. This is not only expensive, but it increasingly gets in the way of speed, responsiveness and innovation.

- The globally integrated enterprise. The corporate model that is emerging today looks very different. It shapes its strategy, management and operations in a truly global way. It locates operations and functions anywhere in the world - based on the right cost, the right skills and the right business environment - and integrates those operations 'horizontally'.

At IBM, we used to have separate supply chains in different markets; now we have one supply chain for the entire company. In our professional services businesses, where we used to think about our human capital in terms of countries, regions and business units, we now deploy and manage our people as one global asset. If you apply that same logic to all the operations of a company - from R&D, to finance, to manufacturing and logistics - you begin to see how profoundly different this globally integrated model is.

IBM is not alone in pursuing this trajectory - we see it happening among our clients across the world. Why is this new model emerging? Very simply, because when everything is connected, work moves. And today, for the first time in history, everything is connected. After just one decade, a billion people and hundreds of millions of businesses are on the web. At the same time, we've seen the advent of free-trade agreements, a shift to a services-based economy and the emergence of highly skilled labour forces in India, China, Latin America, eastern Europe and elsewhere.

This combination of technology, demographics, regulatory change and business model evolution has produced something genuinely new. The web is much more than a medium of connectivity: all of us now have at our disposal a truly global platform for work.

On that platform, the work of business and the work of technology increasingly flow to the places where they will be done best. And the forces driving global integration are as irresistible as the force of gravity. I would point to three that may be the most crucial: economics, expertise and openness.

Clearly, cost and profit potential are key determinants of where and how work will move. There's no question that competitiveness has been the initial reason why so much work has moved to places such as India, China and Latin America. For instance, Indian and Chinese labour costs are a 10th of those in the US and much of Western Europe.

By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China. The onrush of commoditisation is powerful, and no business can afford to ignore it. Indeed, for companies with the right business models, commoditisation can be a successful competitive strategy, for a time.

However, cost is not the only factor. If it were, we would see everything commoditising and all work flowing in one direction. And that's not what is happening. Why, for instance, are European biotech and pharmaceutical companies such as Roche and Eppendorf building manufacturing and R&D centres in the US? Why is Indian telecoms company Bharti outsourcing its IT to a US firm (IBM)? Why does IBM's annual survey of foreign direct investment trends in manufacturing, services and R&D indicate that Europe regained its position as number one in 2005 - attracting 39% of all projects against Asia's 31%?

But companies are not moving solely or primarily to low-cost environments. They're obeying the second imperative of global integration - expertise. In a world where the means of production and distribution are increasingly available to anyone, the only way for a company to differentiate itself on a sustainable basis is to have better skills, to have a better idea, to come up with a more innovative solution.

You need to know more than the next fellow and apply that knowledge more consistently and effectively. In other words, innovation depends on expertise, and innovation is increasingly the growth driver that leaders see as most important.

The last of the three determinants of global integration is the presence of an open, stable environment. This is about openness in trade, in technology and in commerce - openness that, in turn, depends on the rule of law, acceptable accounting standards and stable infrastructure. The global economy desires openness because it promotes the sort of integration that creates value in the modern era. The industrial age began with full vertical integration, mostly done locally.

In the age of the Model T, Ford made the glass that went into the windshield and the rubber that went into the tires - even the iron and steel that went into the engine block and the body panels. Today, vertical integration done locally rarely creates economic value. Corporations find that they must integrate production across suppliers, partners, competitors, different industries and different continents. And that job requires openness.

Open commerce allows corporations to integrate our activities with outside partners by forging shared standards. Open trade lets us integrate our supply chains and distribution networks across different geographies. And open technology lets us integrate at even deeper and more profound levels, tying our processes and systems into shared platforms for work.

Most importantly, open, collaborative forms of creation exponentially fuel more innovation. Most observers believe that open, standards-based approaches will win out in the end. They are a superior way to organise markets and enterprises. They provide a level playing field that stimulates competition, innovation and the free flow of goods and ideas.

Put it all together and we have what could be called 'the law of global integration'. When everything is connected, work moves; and where it moves is shaped by the forces of economics, expertise and openness. If you accept this argument, the most pressing question for companies, nations and individuals becomes: what will cause work to move to me? On what basis will I differentiate and compete. Economics? Expertise? Openness? This is a big question, one over which most leaders today are scratching their heads.

After a good deal of soul-searching at IBM, we've decided to compete on the basis of expertise and openness, and we are moving from a multinational to a globally integrated model just as fast as we can. But it's not easy to do. People develop an emotional attachment to businesses and ways of doing business that have been very successful and profitable in the past. However, if you want to differentiate yourself and compete in this globally integrated environment, you have to be willing to change, to re-invent yourself - in other words, to innovate.

Innovation underpins any approach and response to globalisation. This is even the case for a company or country that wishes to compete for work on the basis of economics. Regardless of whether your innovation lies primarily in your products and services, or runs deeper, it is becoming clearer every day that innovation is the secret sauce of the 21st century global economy. What land was to the agrarian age, and capital to the industrial age, innovation is to this age of global integration.

As much as any company in the world, IBM is acutely conscious of the dangers of stasis. In the early 1990s we nearly died of it, and we have been driven to embrace openness and global integration precisely because we know the danger of believing you've secured the high ground, the seductive fantasy of 'barriers to entry'. We know from experience that work will move to us only if we keep innovating through expertise and openness - and it will move away from us if others do it better than we do.

Having said that, there's much more work to do: we need to analyse the emerging global movement of work, understand its dynamics and components, and optimise them for the creation of value, wealth and social progress. We need to develop new systems of security, trust, organisational culture and skills, and to develop governance structures to improve our management of global movement and global integration.

Fortunately, we have some instructive precedents. Understanding the flow of information, goods, money, conveyances and people over the past half century can help us construct a picture of key linkages and commonalities that affect global integration.

That picture would include common business functions, control points such as national borders and physical infrastructure, data sources, transactions and information flows, and relationships among key system stakeholders. At IBM, working with our clients, we have begun to develop a model of the interaction of these components of global movement, which holds much promise.

A globally integrated enterprise is radically different from the multinational corporation it will replace. As I've suggested here, its success will depend not just on its economic logic, but on the development of new ways to access and develop expertise; new approaches to policy, ownership and collaboration; and a global economic and societal environment that strengthens trust. Of all the issues facing leaders in business, government, academia and beyond, I believe this last to be the most fundamental.

This isn't just about issues such as ethics and legal compliance. What I'm talking about goes far beyond that. You may choose to leverage the expertise and scale of partners; indeed, there are compelling reasons to do so. But, ultimately, you cannot outsource trust and responsibility.

How do you sustain trust in enterprises that are based on increasingly distributed models? How do you ensure trust when your company's operations, customer and employee relationships and brand may be shaped - or even managed - by companies that are part of your 'virtual' enterprise?

One thing is clear: simply strengthening the old methods of ensuring trust and security is no longer enough. Anyone leading an enterprise or institution today realises that they cannot effectively manage by top-down hierarchy, organisational structure or the 'rule book'.

At IBM, we've set off down the path of empowering and enabling our people to make decisions and to act based on their own judgment. We have been working to lower the centre of gravity of the company, as I like to put it - that is, to trust IBMers and to push decision-making authority out and down.

We've eliminated layers of management, starting in Europe, and moved more resources closer to clients. We've innovated in our policies - such as establishing blogging guidelines, which encourage IBMers to engage with the blogosphere, but in a responsible, transparent way. We've also innovated in our management practices; for example, our global online 'jams', where the entire IBM workforce comes together as equals to shape everything from new business ideas to our processes and operations - all the way to our core values.

Indeed, I believe it is shared values that must form the foundation for a trust-based enterprise in a radically more fluid and democratised world. Being much more open, collaborative and trusting is, at times, messy, uncontrollable and uncertain.

You have to accept a measure of that. But we've found that treating our people as grown-ups - and being confident that they will behave in a manner consistent with our values - is itself a demonstration of trust and, ultimately, the most pragmatic approach. It's how we are building a values-based culture and a values-based management system.

This transition to a new model hasn't been easy for IBM. Like most large enterprises - perhaps more than most - we had become accustomed to being in control. Indeed, IBM was for many years the world's most visible icon of pre-eminence through platform ownership. We were the model everyone in our industry sought to copy - or to supplant. IBM seemed to demonstrate that global scale demanded sophisticated hierarchy, vertical integration and proprietary control.

We learned the hard way that that was not the case - and it has proved to be a crucial lesson, not only in helping us foresee the evolution of our own industry toward open standards and innovation-based models, but also in preparing us to live and thrive in a globally integrated enterprise future. It's a lesson we work hard to keep relearning every day.

Sam Palmisiano is chairman, president and chief executive of IBM

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