Why Services Lead the Way for IBM

At IBM, services are king as the IBM Global Services business leads in the company in revenue by producing consecutive quarters of increased profitability. However, it is not services alone that make the IBM unit so effective, but Big Blue's integration of its research arm into the services mix, as well as IBM software solutions including Rational and WebSphere.

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.