In-Depth

Albert's Analysis: Presto! Chango!

• By Sam Albert
• 05/01/2001

IBM’s Transformation to a Service Company Has Happened Before Your Eyes

IBM’s Global Services (IGS) division is "where it’s at and where it’s going." Big Blue has been quietly making the transition from a hardware and software manufacturer to a full-scale IT services provider. Already, the company’s Global Services unit employs 150,000 people in 160 countries, and it generated an astounding $33 billion in revenue in 2000. (Roughly 38 percent of IBM’s total revenue.) Yet, while this division seems to be the glue holding IBM’s hardware and software components together, its success remains one of IBM’s best-kept secrets.

IBM is keeping its eye on services to the e-business community. That means relying less on "traditional" revenue generators. Easy to say, but remember that 2000 was a tough year for many IT leaders, including IBM. Revenue growth slowed, as the industry plowed through a year of increased competitive pressures, more commodity pricing on PCs and a slow rebuild from the aftermath of Y2K. IBM’s Global Services unit was a big player in the Y2K market. It has also been the beneficiary of some very large outsourcing contracts. There are only a limited number of those types of deals. IGS needs to evolve to replace these revenue streams.

So, perhaps, we would understand if IBM made a move to backstep to its traditional revenue generators. But, it hasn’t done that. Instead, IBM continues to track the growth trends driving the services market – factors, such as the customers’ demand for solutions, not piece parts; their need to leverage the power of technology for competitive advantage; and the need to act quickly in this ever-changing world.

Business leaders are looking toward strategic outsourcing services, delivered through a Global Services model called "e-Sourcing," to reduce their IT costs, improve productivity and maintain key competitive advantage.

Accordingly, Global Services has organized its products and services into four basic groups: Business Innovation Services, Integrated Technology Services, Strategic Outsourcing Services and Learning Services.

This is a simpler approach to the market. Up until the end of 2000, IBM’s Services Group had multiple practices and offerings that tended to overlap and confuse the market. It has consolidated and simplified its offerings in an attempt to continue its growth.

We see many opportunities for IBM to capitalize on the e-commerce market. Company leaders are learning that becoming an e-business "player" doesn’t begin and end with setting up online commerce. They must also redesign and streamline all core processes, including accomodating new and legacy systems, for full integration across their enterprise. These executives are asking for – demanding – total systems integration from their vendors. And, while they’re at it, they don’t tolerate failure, downtime or security threats. Tall orders!

Business recovery services, security and privacy protection are also becoming a large piece of IBM Global Services’ offerings. Currently, IBM operates three major recovery centers and 14 regional centers in the U.S. and boasts one of the largest business recovery practices in the world.

Other areas of growth, as forecasted by IDC, include Web hosting, e-markets, storage hosting and ASP enablement. IBM seeks to meet all these areas through its strategic outsourcing – part of that "e-Sourcing" model I mentioned. Big Blue has also developed technologies, software and services to corner the wireless e-business market. The company has generated more than 40 patents to protect new technologies that include mobile e-business consulting, mobile hosting and operational services.

We all remember that IBM entered the services business very recently, about the time Lou Gerstner took over the helm. Even more revealing – a full 80 percent of Global Services consultants have been hired just within the last five years.

With this aggressive stance has come an emergence of new rivals in the IT consulting space, including EDS, Fujitsu and Accenture (formerly Andersen Consulting), PricewaterhouseCoopers and Cap Gemini Ernst & Young. All are bidding for a bigger piece of a technology services pie that IDC estimates will top $470 billion worldwide by 2003.

The good news for IBM is that the market is clearly playing to its strengths in e-business strategy, business transformation and strategic outsourcing. So, even as the market space gets more crowded, I believe IBM will hold its own. Gerstner had the vision to move IBM toward strategic IT consulting, as a high-level adjunct to its usual offerings. And now, IBM is committed to moving ahead on that roadmap and journey. Watch this ride!