Tuesday, April 12, 2005

Big Blue Goes Over the Rainbow

IBM is shifting gears rapidly and moving away from its traditional technology offerings into something very different. Indeed, Big Blue is continuing to accelerate its move away from hardware and software choosing instead to grow business services.

Truly launched after the purchase of PriceWaterhouseCoopers Consulting in 2002, IBM is plowing aggressively into the business services market. It is a transformational move aiming for higher margins and insulating the firm from the commoditization and slow growth of the computer industry. In addition, CEO Sam Palmisano may be concerned about the intense rivalry from key industry players like Dell – a fierce competitor which mopped the floor with Compaq -- and is now entering IBM’s turf of computer services. In fact, the future may be the present. During 2004, IBM saw revenue growth of only 4.8% and 4.4% in Integrated Technology Services and Maintenance respectively, while Strategic Outsourcing grew at 13%.

IBM’s dive into strategic outsourcing and business consulting is covered extensively by our colleagues Patty Kwan, Issac Chen, and Lisa Feria. A few key examples may help explain the attempt by IBM to transform itself:

Client Type of Service Description
BP Strategic Outsourcing A large part of finance and accounting outsourced to IBM.
Dun & Bradstreet Strategic Outsourcing Significant portion of credit-reporting operations taken over by IBM.
Mayo Clinic Business Consulting Medical research database developed reducing turnaround time and increasing productivity dramatically.

IBM’s shift in strategy is clearly noticed by industry analysts, competitors, and clients. Merrill Lynch & Co.’s Steven Milunovich believes IBM is “on the right track” and will wait to see if this strategy pays off. Milunovich projects that IBM’s diversification strategy and focus on services could possibly yield them a 9% growth in the services division. Palmisano is as optimistic as the analyst and is activity recruiting companies and employees to buy into his “On Demand Business” campaign.

While some companies are choosing to work with IBM, other companies are proceeding with caution. William H. Davidow, author of The Virtual Corporation states that although he “champions the idea of handing off task to partners”, he cautions against executives “going too far too fast” with their outsourcing functional capabilities. McDonald’s showed it wasn’t ready when it declined IBM’s offer to take over accounting and finance operations.

Competitors are skeptical too. Joel P. Friedman, president of Accenture’s BPO unit, does not think IBM has what it takes, at least currently, to be a sustainable competitor in the “business problems” market. He notes “IBM is genetically a technology company” and insinuates IBM’s competitive advantages in technology do not lend themselves to be a formidable competitor. Amex Vice President and CIO Glen Salow concurs and states in CIO.com that IBM’s new strategy is risky and “stripped of its on-demand hype” is nothing more than a promotion which will fail to deliver better service or reduced cost. Many competitors simply think IBM’s “on-demand” foray into business consulting is a theory with limited applicability due to the lack of internal capabilities.

IBM has heard it before and succeeded. The firm clearly has a track record of succeeding in transformational and innovative efforts. IBM’s shift in focus from consumers to business enterprises averted certain disaster and restored profitability. Moreover, few firms can boast of thousands of patents and revolutionary innovations as IBM does.

Indeed, innovation and diversification are good for IBM and are a natural extension of IBM’s core competencies. In analyzing IBM’s architecture (one of its internal capabilities in its ARC), its strong information technology, development of human capital, and strong organizational structure enable the company to build a strong foundation in the information/business consulting business.

Additionally, IBM’s recent history of integrating acquisitions well and its strong balance sheet allow the firm to continue to acquire leaders in the professional services industry. Many potential competitors simply do not have IBM’s financial resources to purchase innovative service providers. IBM’s knowledge of the industry and its own service offerings should enable the firm to purchase companies that offer promise or add immediate value to the firm’s lineup. Furthermore, IBM’s balance sheet allows the firm to collaborate with potential clients for free. An example of this is the work with the Mayo Clinic – something most of IBM’s competitors would be unable to do.

In similar fashion, IBM is able to leverage its vast R&D resources and talent in ways that create markets and services. Rather than try to solve existing problems clients bring forward, IBM is working on creating solutions to problems clients may not have thought about. Most service competitors will not have IBM’s legions of engineers and scientists -- pumping out patents for decades -- who can develop new processes using complicated algorithms for the USPS, for example.

Moreover, IBM clearly has an opportunity to create niche market dominance as the firm leverages technology supremacy with business consultancy. Right now, IBM is clearly able to compete fiercely in the technology arena. It has many of the capabilities HP or Microsoft have. Likewise, IBM is becoming a fierce competitor in the business services sector drawing on similar capabilities Accenture and other consulting firms enjoy. Yet, IBM is the only major firm able to combine the two vastly different competencies into one service. This force could clearly help the firm dominate emerging sectors such as bioinformatics and privacy. For example, the successful joint venture with the Mayo Clinic on gene profiling of leukemia cells resulted in exposure in scientific journals and further investment in human capital. The collaboration may lead to first-mover niche dominance.

Overall, IBM’s critics believe Palmisano is “building a big addition onto a house that’s still under construction”. They are missing the big picture – a house is being built unlike any other and there may be no room for them.

Contributed by Anubhav Gupta, Sumeet Karnik, and Leah Stephens


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