The Big Blue boom: Betting on services
Published: 15 Jun 2004 12:30 BST
More things to more people
Another part of IBM's strategy is to offer a broad range of technology services that few other companies could handle at once. They include developing software applications, helping clients recover from disasters and running clients' computer operations.
One way IBM expects to land new contracts is to pair its technological expertise with the business prowess it acquired from the 2002 acquisition of PwC Consulting. IBM combined the roughly 30,000 PwC consultants with 30,000 of its employees to form a massive unit called Business Consulting Services, which accounts for about 30 percent of the company's service revenue.
Linda Cohen, an analyst at market research firm Gartner, said the former PwC consultants were vital in getting IBM into the fast-growing BPO market. Worldwide spending on these outsourced functions rose about 8 percent last year to roughly $405bn and will increase to $682.5bn in 2008, according to research firm IDC.
IBM tries to stand out from the competition in this area by offering what it calls "business process transformation services". IBM says it will not only handle a procedure for a customer, but will improve it, too. IDC ranks IBM and Accenture as the most advanced IT services companies when it comes to business process outsourcing. IBM says it has a pipeline of potential business transformation outsourcing deals worth about $15bn.
"They're doing the right things to assume a leadership position," IDC analyst Katrina Menzigian said.
One of Big Blue's most prominent customers is consumer products giant Procter & Gamble, which last year signed a 10-year deal worth $400m for IBM to manage employee services such as payroll and benefits administration. P&G spokesman Damon Jones said IBM stood out from rivals such as Convergys and Accenture because of its collaborative approach.
"They really did value the expertise that our people brought," he said, adding that P&G was looking for better service, lower costs and innovation. "Some providers come in and say, 'We're the experts in this area. Get out of our way and let us do it.'"
About 800 P&G employees around the world moved to work for IBM when the contract took effect in January. The arrangement has so far focused on IBM taking over responsibilities rather than offering new processes. Jones said the transition has gone smoothly.
Brave new worlds
The expansion in services has often taken IBM into new territory. "It's going to be hard to continue growing without getting into new markets," said Richard Petersen, an analyst at Pacific Crest Securities.
For example, in a deal to manage after-sales services for Philips in North America, Big Blue will repair television sets. IBM argues that the work is not such a stretch, given that TVs and other consumer products covered in the deal now incorporate digital technology.
What's more, consumers buying high-end TVs are going to expect a high level of customer service akin to that of computers, said Bob Zapfel, general manager of IBM Global Services for the Americas. "These are products that have the requirement for more of an IT system-like support model," he said.
Other parts of business process deals, such as handling employee expense reports, require a fair amount of manual and clerical work. Such lower-skilled labour is taking off in developing nations, and IBM is part of this trend. Through its P&G deal, IBM is handling payroll tasks out of a centre that P&G set up in Costa Rica.
IBM is also acquiring Daksh, a 6,000-person company that offers transaction processing and telemarketing services in India, where IBM already employs 9,000 workers, with more on the way this year. A contract IBM signed in February with Shell calls for it to provide IT services from India to the oil giant.
Yet even as it expands its global reach, IBM's services unit is thinking smaller. The company is aiming for midsise businesses, those with 100 to 1,000 employees, which are estimated to number 100,000 in the United States alone. Last year, Big Blue launched its Express initiative, which includes hardware, software, services and financing plans tailored for such businesses.
Collaborating with smaller systems integrators is central to IBM's strategy in this market, said Kneko Burney, an analyst at research firm In-Stat/MDR. But the company must first overcome a reputation for bullying partners.
"IBM has been perceived to be a horrible partner over the years," Burney said. "But they've really cleaned up their act."
The dubious legacy is just one factor inherited by a new leadership in IBM Global Services. Anxiety about the unit's profitability may have prompted IBM to change its leadership in early May.
When IBM's top sales executive left to head Siebel Systems, the company moved Doug Elix from services chief to head of sales. Former chief financial officer John Joyce was appointed to lead the services operation.
"The margins in the services business have been below par for the last couple of quarters," Schwab's Jones said. "That's given Joyce a chance to raise his hand to say, 'Let's make some changes, and let me take a crack.'"
But Joyce is not just a number cruncher. Before becoming CFO more than four years ago, he led the company's Asia-Pacific group. He may well need to tap that broader experience in dealing with obstacles that go far beyond accounting ledgers.
The services operation must, for instance, adapt to a rising level of automation that IBM and others are pursuing. Gordon Haff, an analyst at research firm Illuminata, said computer systems will eventually become more reliable and work together more easily, reducing the demand for technicians.
Zapfel conceded that IBM Global Services faces serious challenges as it attempts to expand its empire. But he suggested that occupying the throne as the largest technology services company in the world, with an army of 180,000 consultants, has its advantages.
"We like the position from which we're competing," he said.
This report is part of a three-part series focusing on IBM.
Part one: Reinventing IBM: The evolution of on-demand
Part two: The Big Blue boom: Betting on services
Part three: IBM: Research is the key
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Services - how long have we been hearing about thi... Kikki Bona Sijabat
