IBM: Lets Make a Deal

By Stan Gibson  |  Posted 2006-02-21

IBM: Lets Make a Deal

Alone among companies, IBM can bring business consulting, data center management and application development expertise to bear—and thats just in services, never mind hardware and software. Its a potent combination, gathered together to satisfy customers who wanted—as former IBM CEO and erstwhile IBM customer Lou Gerstner once did—a single number to call for all IT needs.

But IBMs arsenal is now arrayed against a universe of customers that increasingly want to pick and choose—or multisource, much like General Motors recently did with its outsourcing deals—often negating the synergies so painstakingly put in place and making it harder for IBM Global Services to grow at a robust rate. But IBM is adapting, and customers are starting to see a new, surprising IBM: one that is willing to go after smaller deals with the same energy that Big Blue used to reserve for its biggest accounts.

"We ask ourselves, Why would a company the size of IBM be interested in Coty?" said Dave Berry, CIO of the New York-based cosmetics and fashion company, noting that Coty is privately held and has only $3 billion in revenue, even after its recent acquisition of Unilever cosmetics. The answer to that question may shed light on where IGS is looking for growth. Berry figures IBM wanted to break into BTO (business technology optimization) for smaller companies with international operations and wanted to show that its approach would work for those customers, which make up a large potential market.

Although IGS continues to win big contracts, the unit is not seeing the kind of growth that excites Wall Street. Revenues from IGS, including maintenance, decreased 5 percent to $12 billion in the fourth quarter. IBM signed services contracts totaling $11.5 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Consulting Services, Integrated Technology Services and Maintenance, of $111 billion.

Click here to read about IBMs $1 billion information management effort.

But the units backlog fell by $2 billion even as its new contract signings lagged, noted veteran IBM watcher Bob Djurdjevic, president of Annex Research, in Phoenix. However, IGS profitability was up in the quarter, a sign that IBM is putting quality ahead of quantity in the deals it signs. Further evidence of this preference may be that IBM didnt get as much business from General Motors as rivals EDS and Hewlett-Packard did. A source familiar with the negotiations indicated one reason was that the terms of the contracts were not to IGS liking.

Three paths to the customer

Last year, apparently in the hope that three units could generate more growth than one large one, IBM Chairman and CEO Sam Palmisano handed the reins of IGS to three seasoned executives: Ginni Rometty is in charge of Enterprise Business Services, which is mainly made up of the former PricewaterhouseCoopers Consulting, acquired by IBM in 2002; Bob Moffatt heads Integrated Operations, focusing on what services IBM delivers and how it delivers them; and Mike Daniels handles IT Services, which performs application development, data center management and e-business hosting.

The structure lets IBM offer multiple faces to customers: those that want the whole enchilada—from business consulting to application development to data center operations—can get it, while those who prefer IBM offerings a la carte can have it their way, too.

Read more here about IBMs recent restructuring.

"Its a recognition that you have to be excellent in each individual competency as you are a team that integrates across the whole," said Rometty in her offices in IBMs compact, angular headquarters building surrounded by rolling Westchester woodlands. "Im responsible for the parts of our business that are the business orientation. I have to be best-in-breed," she said.

Some customers are picking more than one item on the menu. ABN AMRO signed a $2.24 billion deal with IGS in September thats mainly for IT infrastructure but includes application development from IGS as well. However, ABN AMRO chose to multisource the deal, selecting Accenture along with Indian outsourcers Tata Consultancy Services, Infosys Technologies and Patni Computer Systems for application development and support. Several recent customers, including Unilever, The Gap and Firemans Fund Insurance, declined to be interviewed for this article.

Other customers, such as Coty, have found that one piece of the IGS puzzle suffices. Coty signed a deal in November for only the business transformation outsourcing services of IGS, working with IGS U.K. office from its own IT headquarters in Amsterdam, Netherlands. IGS beat out Accenture, an incumbent services provider to Coty, to win the deal.

IGS is helping Coty build a new procure-to-pay system, which will be hosted at an IBM data center in Endicott, N.Y. The system encompasses $420 million in Cotys corporate procurement expenses, covering IT equipment, office supplies, and travel and expense accounting.

"Were looking to better those numbers, to rebenchmark in a couple of years, at a lower price," said Berry. "Any savings will be used to fund strategic initiatives such as new brands. The budget should decline every year. You can spend more if you can save money," said Berry.

But Coty has other dealings with IBM, which it prefers to keep separate. In IT hardware, Coty is an IBM shop, using xSeries, iSeries and pSeries products, which it buys through a third party. "How does IBM go to itself and negotiate lower prices?" asks Berry.

This question comes into play where Coty is building a new data center in North Carolina, and IBM is doing the project management. "There are not many cases where they get better prices than we could," said Berry, who is seeking 30 percent savings on hardware, up from his customary 25 percent Coty discount.

Next Page: Granular meets global.


If dividing into three units and going after smaller customers are examples of granular thinking, so is an approach IGS execs are calling the Component Business Model.

If IBM can break a customers business into components and address each piece with a repeatable services discipline, the thinking goes, then IBM can lower its overhead by not having to reinvent the wheel for each account—and the company can justify going after smaller accounts such as Coty.

"Think of it as an X-ray of a business—a Component Business Model. We have built them for many different industries. Its a unique view of how a business can be broken into pieces and what the applications and technologies [are] that support those pieces," said Rometty.

IBM is seeking to dovetail its componentized views of different businesses with its expertise in SOAs (service-oriented architectures), she added.

The cost factor

But will such novel approaches be enough in the long run? One analyst insisted IGS will have to bring its costs down. "There are lots of new customers in the past year, but IGS overhead is too high. Their cost structure is too high compared to Indian outsourcers," said Julie Giera, an analyst at Forrester Research, in Cambridge, Mass.

However, IBM seems to understand that and is bent on utilizing its worldwide resources—especially in low-cost countries such as India, where the company has been steadily adding workers.

From 2002 to 2004, IBM increased its employment in India from 6,000 to 23,000, while its head count in the United States has declined from 137,000 to 134,000.

"We are a global company. That means we have local roots, and we take advantage of global resources. My job at IBM is to be the facilitator of the globalization of the company," said Moffatt, who noted IGS improvement in margins and credits the adoption of standard practices for its worldwide offices, not just hiring Indians rather than Americans, for the gain.

Taken together, these incremental measures are keeping IGS healthy, even if they are not delivering the kind of turbocharged revenues that IBM might have wanted when it grabbed hold of PricewaterhouseCoopers Consulting three and a half years ago.

But in the treacherous outsourcing waters in which IGS navigates, where stiff competition, thin margins and risky deals stand ready to wreck the less cautious, it will have to be enough—for now.

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