Friday, May 06, 2005

The Elephant Dances to a New Tune

IBM turned around in the 1990’s by transforming its hardware capabilities into a vision of autonomous computing systems capable of providing customers with processing power wherever it was most needed. Sam Palmisano, IBM’s current CEO, now wants to extend IBM’s dominance to the Business Process Management market.

The Business Process Management market began with the notion that companies would hand off non-core operations to specialized companies that can perform these operations at a fraction of the original cost. Focused on one activity, specialized companies can exploit economies of scale and off-shore operations in low-cost countries. However, IBM has a new twist.

IBM plans to extend its vision of computing power, anywhere and anytime with a portfolio of business services from human resources and customer management to research and development -- powered by its Information Technology capabilities. It defines its “Business-performance-transformation services (BPTS)" as a bundle of business-process outsourcing, consulting and engineering services and business-performance-management software. IBM plans to exploit its broad market offering to help customers simultaneously cut costs and accelerate innovation through improved processes. IBM reckons this to be a $500 Billion opportunity growing at 15-17% annually, compared to its traditional IT services market that is barely growing in single digits.

Can IBM pull this challenge off?

IBM has core competencies that will help it succeed in the BPTS market in the short term, but it will likely face significant challenges in the long run:

IBM will now have two different sets of customers: buyers of its IT capabilities, who could be IBM’s competitors in the BPTS market, and buyers of its BPTS capabilities who could be using IT hardware/software/services from an IBM competitor. This is likely to create tensions between IBM and its original customers who may now perceive IBM as a competitor. IBM may need to worry about losing important current customers like Fidelity while it tries to gain new ones.

On the other hand, executives from another client, the Mayo Clinic, say they were sold on IBM's ability to bring expertise from multiple disciplines to their project. IBM health-care consultants have helped map out ways to use patient data to improve diagnosis and treatment plans by cross-referencing 4.4 million patient records. IBM has also designed a highly sophisticated data-analysis system for Mayo Clinic that runs on IBM's Blue Gene supercomputer and uses IBM's DB2 database engine and DiscoveryLink data-management software to analyze public health-care databases and clinical data.

Customers are likely to value these enormous capabilities that IBM can leverage to help customers improve their businesses.

IBM is facing a wide variety of competitors in the BPT market. Its competition ranges from smaller, more focused players based off-shore like Wipro and Infosys, to larger competitors like HP and EDS. HP has focused on finance and accounting process out-sourcing and is likely to move into Human Resources too. While none of these competitors can match the breadth of IBM’s offerings, they can prove to be formidable players in their own markets. IBM is likely to face cost pressures from the low-cost providers, and possibly focused competition from larger players like HP.

IBM has several competitive advantages in this marketplace:
A skilled work-force that includes the best technical engineers for hardware and software design, to business knowledge derived from its PriceWaterhouseCoopers acquisition.
Proven ability to harness its R&D capabilities for solving critical customer issues like the Honeywell contract.
A strong brand-name: No one ever gets fired for buying Big Blue. Its brand name will allow IBM to convince potential customers that it can lower the risk of outsourcing for everyone, hence resisting price pressures from low-cost providers.
Strong sales force developed over the years for selling hardware, software and services
A broad client base developed over years of selling a wide variety of products and services.
Several small and large acquisitions over the past couple of years designed to bolster its Business Process Transformation capabilities and a proven track record in integrating these companies into IBM.
Several large, high-visibility BPTS projects executed successfully with strategic clients.

IBM can successfully leverage these advantages to become a major provider of BPT services.

The biggest supply problem that IBM is likely to face in the future is that of skilled man-power. As IBM is shifting its focus from IT/R&D to a broad, business skills/IT/R&D based company, supporting the basic research that the company has traditionally invested in will be more difficult.

IBM may also find that in its drive for higher productivity and profits, it has to collaborate broadly with a diverse base of customers, suppliers and industry partners by sharing its intellectual property at no cost. Such a move towards a more open, collaborative model could de-motivate scientists and diminish their initiative for continuous innovation.

Ultimately, IBM may face difficulty providing the intellectual stimulation and incentives necessary to attract and retain top-notch scientists and consultants.

Substitutes and Barriers to Entry:
Since this is a service-based industry, barriers to entry are low. IBM’s brand and reputation will help, but only to the extent that its services are tied to the customer’s core competencies. All non-core activities may ultimately go to the low-cost provider.

IBM’s move toward BPTS marks a bold departure from its current base in providing IT solutions to broad business-based solutions. While IBM has significant advantages in this growing market right now, we believe it may face significant personnel and competition related challenges in the future.

Written by: Shatabdi Basu
Sarah Lee


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