Monday, April 11, 2005

Think Blue and Smart

New headline on the recent issue from BusinessWeek reads IBM wants to run your business, in attempt to free itself from the confines of the $1.2 trillion computer industry that is projected to grow at just 6% clip each year. IBM is not exactly meddling into new turf that competes with other consulting companies such as Accenture Ltd. and Wipro. Instead, IBM is capitalizing its mighty trusted brand, patents, software programmers, and the 3300 researchers/scientists to help other companies think smart. It’s no surprising that IBM is taking on this direction as CEO Sam Palmisano ran the company’s servicing division since 1973 before taking the helm as president in 2000. If you are a hammer, everything looks like a nail.

Not to underestimate Sam’s strategy in augmenting IBM’s global service segment that accounted over 48% in sales in 2004, outpacing the other divisions at 8% growth rate, but the concern raises the question: Are companies willing to hand-over every aspect of their functions by relying on one company’s expertise?

The answer to the question is not so much about the security issue that may potentially hold companies hostage or help companies gain efficiency. The issue, however, surrounds on the commoditized computer industry in which IBM competes, specifically, whether IBM can afford NOT to take on this direction. As Dell continues to gain momentum in climbing up in servers and tech services, Dell is expected to grow at more than 30% annually, catching up with IBM’s $42 billion services business. In most likelihood, according to Steve Meyer, Dell’s VP in services unit, services will go the same way has hardware.

The strategy IBM is undertaking avoids battling in the cutthroat markets by re-packaging computing solutions from a knowledge-based consulting approach. Combining its legions of PhDs and patents, IBM has the knowledge capacity and resources to compete directly with consulting giants, such as Accenture. Contrast to this belief, Joel P. Friedman, president of Accenture’s BPO unit, says “IBM is genetically a technology company…I think our history of solving business problems and our industry knowledge gives us an enormous advantage.” Unfortunately, that is an under-statement to IBM prowess. For example, in the aerospace business, IBM forged an R&D alliance with Boeing to create technologies for network-centric warfare. In biotech, IBM teamed with Mayo clinic to pool the digital information on 4.5 million patients. The research task helped Mayo cut from 5 people a year to 1 person in 15 seconds. In the information segment, IBM used advanced algorithms to help US Postal Service create a mailing process and distribution system for its 400+ facilities nationwide. These initiatives not only helped sealed IBM relationship with strategic partners (potential customers) but also helped shift IBM’s learning curves by understanding the structures and challenges among these major industries.

What is unique about IBM’s model is its team of scientists/mathematicians/academics ready to help identify and solve complicated business problems, which differentiate IBM from other conventional consulting firms. By tapping into its think tank, IBM can readily transfer the solutions into customizing software and then, stitching together networks providing companies a one-stop shop package. But is it a sure bet that companies would rely on IBM to perform these extensive and yet sensitive service for them? In many cases, companies already employing IBM network services may utilize IBM’s new service. Case in point, P&G has tackled IBM’s know-how to revamp P&G internal operations and Marathon Oil Corp has handed much of its finance operations to IBM. Despite companies, such as McDonald (BW 4/18/05 issue, pg 71), may opt to maintain in-house management, the scope of clientele for IBM is vast. For most middle markets (or second tier companies) that are merely playing catch up with industry leaders, the service that IBM provides is invaluable to strategic cost saving. Other narrower niche but major market players such as bio-pharmaceuticals that thrive on innovations would most likely take on a hands-on approach in managing their own internal operations, a segment that IBM may not be so successfully capture.

Merrill Lynch & Co. analyst, Steven Milunovich, cited “I think IBM is on the right track…But it’s not going to be clear for two years if they’re right or not.” The validity of this comment comes from the pre-requisite on offering favorable terms for unpredictable long-term contracts in order for IBM to win over lukewarm customers. Given the nature of cost uncertainty in running a computing operations, as a result, IBM may lose money on deals for years (BW 4/18/05, pg71). IBM’s strategy sustainability would also depend on the success in integrating and leveraging IBM’s consulting unit, PricewaterhouseCooper, with its servicing division. Meanwhile, IBM must be able to retain key employees as human resources are a critical factor to IBM’s overall success. It’s certainly no sure bet but IBM’s attempt is definitely making in-road to an area very few companies are equipped to play on a level field.

By Patty Kwan, Issac Yi-Chung Chen, and Lisa Feria


Blogger Rachel Soloveichik said...

I think IBM is making a mistake switching into services. It's one thing to help design databases, where IBM really knows what they're doing, but it's another to run customer service. I doubt IBM has any competitive advantage running customer service or billing.
What IBM is really doing is trying to avoid downsizing their workforce. They don't want to fire people, so they're entering new businesses. It seems like a bad idea to me.

11:40 AM  

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