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Global Operations Essay

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Globalization is a way taken by corporations having a sufficient growth rate. It is considered the next step of evolution for successful companies. Nevertheless, engaging on overseas operations, corporations will have to face new risks that might endanger their profits and growth level. IBM Corp. is one of those corporations. It is one of the largest and most well known multinational companies in its industry and among other industries as well. In this paper I am observing a portion of IBM’s global operations, which is IBM India, and how the company deals with problems associated with overseas operations.

It is discovered that IBM is significantly influenced by its overseas operations and therefore, exposed to significant risks of overseas operation also. The company uses many kinds of derivative instruments to minimize losses associated with currency exchange risks. Global Operations I. Introduction Global operations have been a part of everyday lives for people in the top ladder of our manufacturing and services industries for quite some time now.

Some companies however, have been around for longer than any other companies.

International Business Machines Corporation, or abbreviated as IBM, is a multinational computer technology and consulting corporations which existed along with the first players of the industry. A significant percentage of the company’s revenues are generated from overseas operations. In this paper, I am observing a part of IBM’s operations in order to understand how the company deals with risks associated with global operations II. Managing Global Operations IBM manages a set of global operations which has been contributing significantly to the company’s growth and development.

These operations are managed by corporate management within a segment called IBM Global Services. In 2007 alone, these global operations are the source of 63% of IBM’s total revenue. In 2010, IBM’s total revenue is expected to grow to $ 120 billion in which about $86 million come from IBM’s Global Services Alone. The company has currently established business presence in 170 countries around the globe and received a distribution of revenue from wide geographical regions all over the world (Campbell Kelly, 2004).

In India, the company also has a powerful presence in the form of manufacturing as well as services business like call centers, accounting for half of its global operations in terms of investments and revenues. The company has tripled the amount of its investment in India from 2006, which is from $ 2 billion to $ 6 billion. Currently IBM has the largest amount of foreign-established employees in India and IBM India is expected to have approximately 90,000 employees and to contribute $35 million of IBM’s revenues in 2010 (‘1 to 5..

’, 2007). Due to the extent of its international operations, IBM is exposed to huge risks due to possible currency changes in each financial period. IBM India has their assets and liabilities, revenues and costs denominated in Rupees. The company is making its financial report using the Rupee currency, but sends a translated financial report to the US based operations each quarter period. For example, at December 31 2007, currency changes resulted assets and liabilities translated into more dollars that at December 31 2006.

In order to deal with these risks the company uses a variety of hedging instruments that enable it to limit a specific currency risks related to financing transactions and other foreign transactions (‘IBM Annual Report’, 2008). III. Foreign Operations and Its Contribution As mentioned, the company has various kinds of international operations under the Global Services segment. One of these operations is called the Global Financing Services. The Global Financing Services is a segment that is financially reportable as a single entity.

The mission of this segment is to produce a string revenue and equity, and also to facilitate clients’ acquisition of IBM’s products, including hardware, software and services. This Global Financing Services operation finances assets, manages the associated risks and leverages with debt, in order to generate a consistently strong return on corporate equity. The Global Financing Services operation is equipped with the deep knowledge of its clients and also a deep insight of the products being leased. These tow tools allow the segment to manage risks that are normally correlated with financing.

The Global Financing Services has three lines of business, which are: 1. Loan financing and client financing lease to end users and international clients. This sub-segment usually offers lease contract between to and seven years of period. The Global Financing Services factors corporate account receivables for cash management purposes and thus make the financial arrangements which is in accordance to market conditions 2. Commercial financing, which provides account receivable financing and short term inventory to IT products dealers and marketers

3. Remarketing, which sells and leases used equipments to internal and external clients. Externally-remarketed equipment revenue represents sales or leases to clients, while internally-remarketed equipment represents equipment sold primarily to the System and Technology of the Global Services segment. (‘IBM Annual Report’, 2008) The Global Financing Services has total revenue of $ 3. 98 billion in 2007, which $ 2. 5 billion is generated from external sources while $ 1. 4 billion is generated from internal sources.

After tax income is $ 877 million, which is about 7% of the entire net income of IBM’s entire operations. IV. Currency Risks In its 10-K form, IBM stated that due to its significant percentage of its revenues coming from its overseas affiliates who operates under local currencies, the company is considerably exposed to changes in the relative values of non-US currencies, as well as the US dollar itself. As mentioned previously, the company is using various kinds of strategies to tackle the huge risks, including derivatives financial instruments.

Nevertheless, considering that 63% of IBM’s revenues are currently originated overseas, if the international money market performs in an unexpected manner, there is a significant possibility that IBM’s financial positions will be seriously affected (Form 10-K, 2008). V. Conclusion IBM is a true global company with more than half its revenues coming from overseas partners. The portion of revenues coming from overseas operations is also expected to increase in the coming foreseeable years.

The largest overseas investments are made in India, which account for half of the total global operations of IBM. One of these global operations is the Global Financing operations which in 2007, account for approximately 7% of the revenue of the entire IBM operations. Having such a significant percentage of its operations established in overseas regions, IBM is exposed to high risks related to global operations, like currency exchange risk. If the money market is behaving in an unexpected manner, IBM could suffer a considerable loss of revenue because of it.

Nevertheless, IBM has performed precautions in order to prevent such a loss, using various means, for instance, financial derivative instruments. Bibliography ‘About 1 in 5 IBM Employees Now in India’. 2007. Associated Press. Retrieved October 27, 2008 from www. accessnorthga. com/detail. php? n=205230 Campbell-Kelly Martin. Aspray, William. 2004. “Computer a History of the Information Machine – Second Edition”, Westview Press, page 37 IBM Form, 10-K. 2008. IBM. Retrieved October 27, 2008 from http://www. IBM. com IBM Annual Report 2007. 2008. IBM. Retrieved October 27, 2008 from http://www. IBM. com

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