Why Services Lead the Way for IBM

By Darryl K. Taft  |  Posted 2008-09-03

Why Services Lead the Way for IBM

For the last several years, as IBM's services business goes so goes IBM.

Indeed, like the overall U.S. economy, IBM's business has become more and more dominated by services--both business services and technology services. But IBM's services business does not exist in a vacuum. IBM leans on its other units to help with the services effort (more on that later).

IBM Global Services delivered a record 2007 performance of $54.1 billion in revenue and continues to lead IBM's charge this year. Most impressively, the organization has posted record profit for nine of the last 10 sequential quarters, said Adam Klaber, general manager, Global Business Services, IBM.

And, led by services, IBM's financial performance has been nothing but consistent, in that on the heels of the record 2007 showing for IBM Global Services, the business unit delivered another big quarter in the company's second quarter, which ended July 31. For the second quarter, Global Services exceeded expectations with revenue growth up 16 percent year-over-year while expanding gross profit margins to 29.6 percent. Moreover, IBM delivered hefty signings, exceeding analysts' expectations with signings totaling $14.7 billion, up 12 percent, while increasing the backlog of services signings to $117 billion, up $1 billion year to year, Klaber said.

For its part, IBM has the largest, most differentiated services business in the market--a unit uniquely positioned to deliver high-value solutions to clients, Klaber said. In terms of services performance over the last five years since the PricewaterhouseCoopers acquisition, gross profit for the unit has grown from $10.7 billion to $15.4 billion.

"We've been trying to transform how we deliver consulting services and scale that in a much broader way to leverage the knowledge we have around the world," Klaber said.

Klaber said the IBM services unit accounts for about 56 percent of IBM's overall revenues.

Although IBM competitors like to refer to IBM as the "complexity company," or the company that likes to keep its software solutions complex so the company can send in its services unit to go in and "fix" the problem for customers, Klaber calmly noted that, "We don't make that much of the technology that we build off of; we work with many other third parties."

Indeed, IBM officials said that although IBM services solutions often include IBM software and hardware, other suppliers' products are also used if a client solution requires it. Contracts for IBM services--commonly referred to as "signings"--can range from less than one year to more than 10 years. Within Global Services there are two reportable segments: Global Technology Services (GTS) and Global Business Services (GBS).

Meanwhile, the future of services at IBM is about automating labor-based processes and using that intellectual property from that automation to create repeatable software assets, said Robert Morris, vice president of Services Research at IBM.

If there is anything like a secret sauce to IBM's success in the services business over the last several years, it is the company's move to integrate IBM Research efforts into the company's services business. Out of the marriage between research and services has come a slew of asset-based software and services investments.

IBM Research has been helping transform IBM services by applying automation and management to a whole different layer of work, Morris said. "We already know how to go into a company and automate manufacturing, customer relationship management, supply chains and HR," he said. "We will continue to do that and apply advance technologies from IBM Research to drive new kinds of opportunities in those spaces. But while our competitors might play in those spaces, too, aiming to squeeze another 10 percent of efficiency out of each process by pouring bodies into the problem, IBM is automating those processes with standards-based assets and moving into entirely new spaces. IBM isn't just interested in making things 10 percent better, we are going after adjacent spaces and entirely new markets to make them 10 times better...things like road charging for traffic congestion and smart grids for utilities...bringing shipping into the 21st century, working with the world's top hospitals to transform healthcare and drive personal health records."

Morris said over the last four years "there has been quite a change for us as we realigned IBM Research to be very focused on the services part of the business." And as part of that effort, IBM researchers have been working closely with IBM services clients. "You've got to get close to the end user," Morris said. "We need to understand their business problems and model the business. PwC had a component business model and we put computer science into that. We could never have done that if we didn't have consultants. We had all the techniques, but we would have been making up problems." However, with domain knowledge of the consultants added to IBM Research algorithms and assets, the company can deliver targeted solutions to different verticals and "we can do it on a client-by-client basis," Morris said. "What we've built using software engineering technology is a whole pipeline" of assets for implementing solutions for services clients, he said.

In addition, Morris said IBM's investments in SOA (service oriented architecture) have helped the company in this new world of asset reuse. "With SOA we're beginning to see a large degree of reuse," he said.

Starting Earlier, Ending Later

Meanwhile, in addition to the researcher's brain power and algorithms that help automate processes for the services business, the tooling for building the reusable assets comes from IBM's Rational suite of development tools. "We deliver value through our Rational tools," Morris said. "Most of the techniques are implemented as plug-ins for our Software Group tools. For GTS we use a lot of our Tivoli tools, and for GBS we have a lot of components built on Rational and WebSphere. So you have products, services and research all working together in a triple-play model."

And to manage the software supply chain, "We've created a methodology called Application Factory, which is like project management on steroids," Morris said. The Application Factory deals in the concept of "work packets," which break out work items for processes. Morris said work packets represent "a new research area for us, because we realized traditional project management tools were very deficient."

And the services team also uses IBM's Rational Asset Manager (RAM) to house all the assets it uses for engagements. "We have re-engineered all of our assets on a Rational Asset Manager-based repository. so our hardware, software and services business all comes together and can reach into that repository. We have tens of thousands of assets. And it's not all just code; there are business processes, workflows, data models, etc."

Moreover, what sets IBM apart from its competition is "We start earlier and end later," Morris said. "We're end to end. We're building the assets now that our clients haven't even asked for yet."

Michael Valocchi, a partner and global industry leader for energy and utilities in IBM Global Business Services, said he came into IBM via the PwC acquisition and "it's been a fascinating six years; I don't think we could have realized the potential."

Indeed, "When we came into IBM we said leave us alone, let us do our piece," Valocchi said. Yet, "where we really got surprised was with the assets that were floating around the place," he said. "It took us a few years to identify the assets and to put them together."

Valocchi said he found out about research assets like "Deep Thunder," which is a weather modeling asset. "The granularity was amazing, and we could put that to use in things like dispatching crews for utilities. We could know where bad weather was going to hit."

So after feeling his way the first couple of years after IBM's acquisition of PwC, "I got a lot more proactive in the next three years in what it was my team wanted to build and how we could build it using research services."

For instance, another research asset is an algorithm for projection faults that could be used for fault detection in utilities. "So we began to look at whether we could detect where a line would go down before it goes down and whether we could 'self-heal' it before it goes out," Valocchi said.

"And it's not only the help from research, but also the software piece," Valocchi said. "One thing we're hitting up against is business intelligence. In the utility industry there is so much data out there and companies don't know how to use it. We used to read your utility usage once a month, now we can do it every 15 minutes, automatically. And we're starting to build the analytical engine that surrounds all that. We want an asset that can translate into any software. We'll have content packs and data models that can then get transferred into code."

Valocchi said he is pleased to have the IBM software group at his back, "because I could get caught up in developing code and that's not my strength or my business; my business is consulting."

Yet the bottom line is that "replicable assets are driving better margins," Valocchi said. "From a competitive perspective there aren't many companies that have this kind of breadth. We've figured out how to blend these assets, and it's one of the ways I beat my competition."

Meanwhile, IBM is watching rival Hewlett-Packard and what it is doing in the services area, particularly in light of HP's $14 billion acquisition of technology services provider EDS in May.

IBM officials estimate that HP's research and development spending is up less that 1 percent since 2002--investing $3.6 billion in 2007, while revenue increased from $72 billion to $104 billion in that time. As a percentage of revenue, HP's R&D investment dropped from 4.6 percent to 3.5 percent. In the same period, IBM R&D spending is up 29 percent since 2002, and IBM spent $6.2 billion in 2007. IBM invests nearly twice as much as HP on R&D and has more than five times as many researchers in its research labs and 20,000 software developers, IBM officials said. Moreover, while HP is focusing on a handful of areas for the next five years, IBM is focusing on the next 20 years, Morris said, noting that over the past three years, HP dropped from the third to fifth to ninth in terms of the number of patents filed, while IBM has been No. 1 on that list for the past 15 years. 

In addition, HP has not integrated its research arm into its services business, IBM officials said. "They are following yesterday's business model," Morris said. "They're just getting to where we were five years ago."

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