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As IBM prepares to embark on the second year of the Sam Palmisano era, it looks like the time for a clear, compelling vision may finally have arrived.
After a flat year in 2002, IBM needs something. Although it can count its blessings—the company has not faltered badly, as have some rivals—IBM is caught in a no-growth torpor brought on partly by a protracted downturn in technology spending. Facing increasing hardware competition from relative newcomers in enterprise technology such as Dell Computer Corp., slowing software sales and even shrinking revenues in the service business, IBM has reported level or lower revenues and earnings in every quarter under Palmisano. Thats forced the companys leader to cut costs—eliminating an estimated 15,000 jobs last year—and to come up with a strategic direction that will inspire not only investors and IBMers but also—most importantly—enterprise customers.
Palmisanos answer, unveiled in November and fleshed out since with a series of new products and partnerships, is what IBM calls eBusiness On Demand. By pouring $10 billion over the next few years into self-healing and utility computing technologies, along with business process outsourcing integration tools and expertise, IBM officials say, eBusiness On Demand will help enterprises reduce complexity and respond to lightning-quick changes brought about by online commerce.
But is On Demand computing clear and compelling enough to rally IBM, its partners and its enterprise customers? Or is it just a warmed-over update of IBMs e-business strategy of the mid-1990s? For some IT executives at least, the goals of cutting complexity and boosting agility prove that Palmisanos eyesight is 20/20.
“Thats right in line with where we expect our technology providers to go,” said Jim Haney, vice president of architecture at consumer appliance manufacturer Whirlpool Corp., in Benton Harbor, Mich., which is pushing to build quicker online links to trading partners and customers. “If they can help us do it faster and cheaper, we can gain market share.”
Still, say others, in an era when IT managers are interested in shaving costs, selling the somewhat-fuzzy On Demand concept will not be easy. Nor, they say, will convincing enterprises and ISVs that IBM should suddenly be considered a top-tier business consulting provider, on a par with Accenture or McKinsey & Co., even though the company acquired PricewaterhouseCoopers consulting business in September.
“Acquiring business process expertise, as IBM has done, is not the same as having it integrated throughout the company. Well have to wait and see how well they do at integrating PwCC,” said Pat Flynn, vice president, CIO and longtime IBM customer at truck manufacturer Paccar Inc., in Bellevue, Wash.
The eBusiness On Demand strategy is rooted in the belief that as businesses use the Internet to integrate with partners and customers, they will need to slash the time it takes to respond to competitive challenges.
“EBusiness On Demand means making environments more adaptable,” said Steve Mills, senior vice president and group executive for IBMs Software Group, in Armonk, N.Y.
The On Demand strategy makes use of the companys so-called autonomic computing initiative, which is intended to create self-managing, self-healing computing platforms. It is also geared toward the concept of utility computing, in which enterprises access and pay for only the amounts of, say, storage or server cycles used. IBMs investments in grid computing; Linux; and its Project eLiza, the forerunner of the autonomic computing initiative, underpin the current thrust.
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The new element in On Demand is the focus on rapid business process change and integration. Besides enabling enterprises to quickly adapt servers and networks to new business requirements, said Irving Wladawsky-Berger, IBMs vice president for server group technology strategy, also in Armonk, IBM wants to provide services, middleware and industry-specific best practices to allow enterprises to launch or modify online business processes on the fly.
That focus on business-process-level change and integration, said Mills, is what sets On Demand apart from strategies such as Microsoft Corp.s .Net and Sun Microsystems Inc.s Sun Open Net Environment, which tend to stop at the IT infrastructure. “Just because Microsoft embraces Web services doesnt mean they can integrate. It just means they can connect. Its not the same thing,” said Mills.
IBMs attempt to move up the food chain to business process consulting, outsourcing, and other products and services makes business sense, say observers. As intense competition turns many classes of enterprise hardware, software and even traditional outsourcing into low-margin commodities, IBM is forced to look for products and services that set it apart. In the past year alone, the company has been forced to abandon such commodity activities as desktop PC and disk drive manufacturing. Focusing on business process change will allow IBM to differentiate itself, said Marty Clague, formerly vice president of IBMs Global Industries e-Business Solutions unit and, since October, CEO of services provider Covansys Corp., in Farmington Hills, Mich. “Its a bold move and the right one to expand the business,” said Clague. “Right now, its where money is still being spent.”
IT research organization The Yankee Group recently predicted the market for business process outsourcing will grow 15 to 18 percent per year over the next five years, to $300 billion. Thats more than twice the growth rate for all of IT spending over the same period, according to Yankee, in Boston.
IBM has been spending plenty to play in that market. The biggest single investment was for the purchase of PwCC. The $3.5 billion it paid for the company brought IBM 28,000 employees, many of whom are business process experts with deep knowledge in such industries as banking, insurance, manufacturing, chemicals and pharmaceuticals. IBM plans to use those experts to develop industry-specific business process best practices and will offer products and services based on them—many from ISV partners—that run on IBM server hardware and middleware such as WebSphere and DB2.
In the insurance industry alone, PwCC brought 1,000 consultants who are domain experts. IBM recently announced it will team them with 15,000 IBM Global Services employees serving insurance industry customers to form what it calls the Insurance Transformation Solutions unit within the companys Business Consulting Services. The unit will sell those business process On Demand services and products to insurance companies. According to Mills, IBM will take similar steps in other industries.
To support the move, IBM is redirecting money from other product areas. The company in November announced it will shift $1 billion in research and development spending over the next three years to develop business process transformation best practices and support tools such as advanced analytics. The move was in part made possible by the companys decision to exit its hard disk drive business, which it plans to sell to Hitachi Ltd. for about $3.5 billion, said IBM Senior Vice President for Technology and Manufacturing Nicholas Donofrio, in Armonk.
IBMs Software Group under Mills has been beefing up the business process integration, modeling and management capabilities built in to its WebSphere and Tivoli products through a series of acquisitions (see chart, Page 28). In January 2002, for example, the company enhanced WebSpheres business process integration tools through the acquisition of CrossWorlds Software Inc. And soon, IBM will add to WebSphere business process modeling capabilities acquired in the September purchase of privately owned Holosofx Inc.
Eventually, said Mills, IBM will use such tools to build a series of integrated industry-specific applications that enterprises could use to launch business processes internally or as outsourced services.
As IBM invests in making the On Demand concept real, however, some longtime enterprise customers say the company shouldnt lose sight of such core IT technologies as chips, server management and storage. “Without those, why would anybody continue to go to them for services if theyre just deploying other peoples technology? If they drop the ball on technology innovation, it will come back to bite them,” said Whirlpools Haney.
This, say experts, is Palmisanos real challenge: maintaining IBMs technology leadership while navigating the companys migration up the business process consulting food chain. “He needs to stay focused on software and services while, at the same time, managing the declination in the hardware business in such a way that the company still makes money at it,” said Dale Kutnick, chairman of Meta Group Inc., in Stamford, Conn. “If he does that, in a few years people will say, Who was Lou [Gerstner]?”