IBM's HR chief Randy MacDonald strives to cement Big Blue's perfromance culture by shaking up its leadership development and equipping all 350,000 of the computer giant's employees with the skills they'll need for the future. 6 z" }$ N0 h, B% K8 Y* l# W
By Ed Frauenheim ig Blue is making big moves on the leadership front. For years, IBM has been lauded for smart leadership planning and development. But instead of resting on that reputation, the computer giant recently decided to restructure key executive teams in part to focus more on financial performance. IBM also has shifted away from classroom learning, placing a greater emphasis on experiential training for execs. And it is pushing to spot rising stars early.
. O- [' F" C  s3 W5 j    Key to these efforts is Randy MacDonald, IBM’s senior vice president of human resources. MacDonald came to IBM in 2000 after a 17-year stint at telecommunications company GTE (now Verizon Communications). Under MacDonald’s leadership, Big Blue has continued its tradition of establishing HR standards. Aside from the leadership steps, IBM has done such things as experiment with training in virtual world Second Life and set up a database of tech consultants’ skills, availability and billing rates.
) C+ y) T: o# w: i2 W    Some of IBM’s workforce decisions in recent years have been controversial, especially cutting thousands of jobs in the U.S. and Europe while expanding offshore. And last year, IBM announced it was freezing its pension plans for U.S. workers, offering a generous 401(k) plan instead.
5 g/ [" A5 C" [    MacDonald, 58, defends IBM’s shift away from lifelong employment and defined-benefit pensions for U.S. workers with the hard-nosed language of a businessperson. "Sometimes taking tough action is ultimately in the best interests of the country," he says. Yet this son of a union local president is keenly aware of the importance of honesty and integrity in relations with employees and the broader public.; a: t; R% ?5 }, I' {5 m
    Fred Foulkes, director of the Human Resources Policy Institute at Boston University, says MacDonald has set a high standard of transparency in explaining executives’ compensation, something public companies must do in the wake of anger over runaway CEO pay. For establishing credibility with senior executives, grasping global realities quickly, building an effective HR team and volunteering in professional groups, Foulkes puts MacDonald at the top of the HR field.
3 J3 e6 B- b0 ]/ z8 N    "He and General Electric’s Bill Conaty are really the leaders today," he says.
( [( a7 D$ v& Z$ h$ Y1 k; R+ V8 r    But MacDonald, who reports directly to IBM chief executive Sam Palmisano, doesn’t have much time to bask in praise or worry about criticism. Among other duties, MacDonald is in the midst of a $100 million project dubbed the Workforce Management Initiative. Announced in late 2006, the multiyear project is designed to catalog the talents of all 350,000 IBMers and help them upgrade their skills for the future.
( q1 }- C) x* G/ Z    MacDonald says he sleeps "like a baby" at night. But he’s putting in 75-hour workweeks. "I want to deliver," MacDonald says. "This is a competitive company with a competitive culture. We like to win. And we like to do things right."
7 u/ p) V! `. J5 X1 B) }    MacDonald recently spoke with Workforce Management staff writer Ed Frauenheim about leadership changes, corporate transparency and workforce measurement at IBM.
$ S) c3 s" T- D3 w    Workforce Management: Last year, you abolished two leadership groups—your Worldwide Management Council and your Senior Leadership Team—and replaced them with new teams. What’s the essence of the change, and why did you make it?
$ `* [4 A$ \% e  r% R" w  F5 e; G    Randy MacDonald: It is reflective of a transformation that we launched a couple of years ago. We wanted to drive the message to the broad management team as well as the employee base that we wanted a performance-based culture. And we wanted to run the enterprise on an integrated basis. So we replaced the Worldwide Management Council with the PT, which is the Performance Team, which is totally based on role. You get on that because your role is totally focused on the execution of the IBM strategy. - ?4 n- B& |! ^# {  d, g; k
    WM: How is that different from the previous committee? - o3 Z7 `; `% q3 f8 T9 n& O

MacDonald: The WMC was based in large part on role, but some of it was developmental as well. Some of it was the opportunity for people coming up through the ranks to have exposure to that level of insight.     We found another way of creating development. We replaced the Senior Leadership Team with what we call the Integration & Values Team. Again, role based, but also performance based, but also leadership behavioral based. So three criteria. It’s all about saying that if you’re on this team, you have a role that truly has the ability to integrate IBM on an enterprise-wide basis. And you are a recognized leader—one of the top 300 or 320 who have behavioral characteristics that represent our values. Those are defined as dedication to every client’s success, innovation, and trust and personal responsibility. : [% R( e2 D  U0 q
    WM: What about the results so far? I noticed in your 2006 financial results you had a 4 percent improvement in revenue, and income from continuing operations up 18 percent.
- J9 F5 b) T' ~+ p    MacDonald: We would describe 2006 as a solid performance. I would argue that the Performance Team last year on several occasions found that by having exchanged information and talking about lessons learned, we enhanced performance. 9 c7 e$ A3 e1 W+ b6 F0 X- \
    WM: Can you give me an example?4 _7 I& a. I# Y+ x1 ~
    MacDonald: A good example is that quite often hardware—the zSeries computer server team, for example—is working with a client, and we talk about how we might attach software or middleware to selling the server. Because the combination of the two, because of the ability to pull things together, gives the client a better cost point and gives us a greater share of their IT spend.& _+ ~5 h  L2 W3 Z: `' {! ~' y( m
    WM: For decades IBM was known for grooming senior leaders from within. What’s the ideal mix of insiders and external recruits at the executive level at IBM today?4 X- Z# T7 y6 V: ^
    MacDonald: We don’t have any particular formula that says for every three people internally we need one from the outside. We evaluate the quality of the internal candidate we have. And I think it is incumbent upon senior-level people today to ensure that there may not be any more capable individuals externally.
, e0 a3 B  a" u6 Y( D% c    We do a great deal of development work over time, and so we really understand what the skill sets are of the vast majority of the senior leaders here. Shame on us if for some reason, at the very end, we may not have somebody who fits that bill. I think those roles are few and far between.9 s7 Y! ]% c! r$ }4 Y5 S
    The vast majority of people who are fulfilling roles at the top 50 level, the vast majority of those line people, come from IBM internally. Several of our functional leaders—myself as an example, our general counsel is another example—came in from the outside. These are transferable skills. There are some places where the blend of the internal and the external is the perfect match because it seeds the organization for innovation, and we think about things differently.
( o! r: }3 P2 s* q  P4 w    WM: Are we talking about 40 or so out of the top 50 are internal IBM folks?6 s2 c& q7 Z9 V  }3 ~# L
    MacDonald: I’d say somewhere between 15 and 20 percent came from the outside.1 n; Y4 K5 H3 d
    WM: What in IBM’s approach to executive leadership differs from other large organizations?
; ]4 n$ T9 v+ x/ Y1 y    MacDonald: We switched about five years ago our view about how we train leaders. We have decided that the vast majority of training has to be experiential. A lot of people still believe in classroom training and sending people to Harvard. They’re good, and we do some of that. What we really are looking for are the practical, differentiating experiences on a day-to-day basis. + G! f- }, m( g, @5 h$ d, I
    For instance, using the IVT [Integration & Values Team], last year we commissioned three different teams of about 30 people each to go look at three defined, practical problems we were facing. One was how do we add client value? The second one was how do we get a greater share of the small and medium business market? The third was how do we create a globally integrated approach to management and executive leadership teams throughout the world?* B( P* e" U, L  Y3 U& C" x0 ^7 d
    We took 90 people out of the IVT, some of whom were subject-matter experts, and some who had no clue as to what they were on that team for. But that’s exactly why they were on that team—to bring a different perspective. ! |" l; r, E' f! |
    The second differentiation is that we are now much more engaged in identifying emerging leaders even earlier. For many years, a lot of companies, including IBM, did a good job of once you became a leader, we really trained you and we built on you and we laid all the foundational pieces. But we’ve come to the conclusion that we need to find you early in your career at IBM and then build that foundational piece around leadership—so that when we thrust you into running a small team, you are ready. You aren’t learning under fire. You have the basics. " \% U# M& u; ?8 _# w/ X
    WM: How early are we talking about, Randy?
. D% [) m1 A; q: Z3 A; h3 o+ j    MacDonald: You’re probably being identified within the first five years of your career within IBM. . Q- ^. j2 u/ r; M9 ^) A( b" v2 n" a
    WM: That gets at an issue that Fred Foulkes at Boston University suggested I ask you about. He said that one blind spot at IBM historically has been the difficulty of getting younger people—say in their mid-30s—opportunities to run a division with profit-and-loss responsibility. He said the way IBM has been structured, people had a better chance to do that at Hewlett-Packard or Johnson & Johnson, whereas you had to wait until you were in your 40s or 50s at IBM. How would you respond?3 Q: C$ _& T! c) {9 v% n
    MacDonald: Well, Fred is a personal friend. So I will be dropping him from that category. No, seriously, I have two reactions. What Fred described is indeed something that did occur. I will stay away from age for obvious reasons. But I will argue that our people who are 10 to 15 years into their career at IBM are having greater opportunity to run geographic businesses. For example, I can think of a woman who is running all of Spain who would fit my 15-year approach. I can think of another couple people who are in the 15- to 20-year category who are running enormous businesses now.
* ]# ^& p' W( X2 H! F; M    We are not going to be paramilitary. That is, you have to be a private, then a corporal, then a sergeant, then a master sergeant. I think we are willing to jump people to take opportunities and stretch them. Take a chance. If you’re going to build a risk culture—a strategic or prudent risk culture—into the organization, one of the ways you’re going to do that is through taking chances with up-and-coming leaders.

WM: Your executive "Compensation Discussion and Analysis" disclosure with the U.S. Securities and Exchange Commission lays out IBM’s process in great detail. Some people have seen the new disclosure rules as a burden. What’s your take?    MacDonald: I’ve always—in everything I’ve done in HR—been an advocate of transparency. The employee base demands that. They expect it. Because of some of the debacles that we as a country experienced with some large corporations, that transparency is appropriate and necessary. We were comfortable in trying to write in plain English. One of my advantages is that I don’t have a "comp" background per se. So when drafts were given to me, my revisions were more about, "Let’s use terms that people can understand." We need to be accurate, but using terms of art in comp doesn’t necessarily allow my 83-year-old mother to understand what the proxy is. And knowing that her son has responsibility for the proxy, she tends to read it.! a, f0 c' S% M- f! C3 |$ a/ h
    WM: You guys have talked a lot about measuring the workforce—quantifying or classifying the skills of all IBMers. Have you seen any positive results of that effort? And does it ever risk going too far in dehumanizing the employee base? Or failing to capture the soft skills or the human qualities that can’t really be measured?8 v. O# ^! u! ^1 G3 V6 C
    MacDonald: As a shareholder, I have an expectation that if I’m going to make an investment in people, I ought to be able to measure that level of investment. I don’t think there’s any depersonalization at all. In fact, I would argue that employees have a better feel about the measurement of their personal career or the development of their personal career because the company is indeed making a statement that it is important for us to make that investment and it is important to measure that investment to make sure we’re getting our return.   S9 p$ T9 y5 o6 ?7 Q
    So I think if anything, it humanizes the element of human resources. It takes the measure of financial performance—that everybody is comfortable with in running the business—and creates a human metric about that same performance. I’ve got to feel good if I’m meeting the criteria and I’m considered above average and you’re spending money in developing me. I don’t feel that is dehumanizing. * U+ B1 ~' i* U2 i
    WM: Have you had any results that say the employees are appreciating this push? Or have concerns? ( N6 M* b* g" q
    MacDonald: We have seen marked improvement in our employee satisfaction index, which measures three or four specific things. Job challenge and job opportunity are two examples. In both cases, our index in the last couple of years has gone up by an amount that is statistically significant.
" W4 A5 _0 @" h& \    WM: Do you worry at all that you’re deterring from IBM some of the creative types who maybe head to Google?
1 p# T7 j2 m2 k; Z3 t0 E; p' P2 h    MacDonald: One of the things I’m most proud of is that for the 13th or 14th year in a row, IBM has led the world in new patents. That tells me we have an extremely innovative workforce. I think our brand is powerful. When we go on college campuses, when we go out in the marketplace to recruit for more experienced professionals, I think we are attracting some of the best and brightest. / W5 O$ P0 m1 o2 @9 R' }5 q! q
    Do people go to other companies? Yes. The other question is, do people come from other companies to us? The answer is yes.
" _$ x2 h6 |0 w, H# l   WM: Do you have any regrets about taking the HR hot seat at IBM? : k; o4 G* F2 W6 `8 X5 e) J' i
    MacDonald: Leaving GTE was the toughest decision I ever made in my entire life. I was emotionally attached to the organization and to the people. I kind of grew up there. If that was the most emotional decision I ever made in my career, coming to IBM was the best decision I ever made in my career.