May 13, 2008 8:14 pm

Small matter of the Big Blue challenge

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For IBM, the king of the IT services business, imitation is the sincerest form of flattery. But if Hewlett-Packard thinks its purchase of EDS will immediately put it toe-to-toe with the market leader, IBM’s own long and difficult ride in services should make it think again.

IBM Global Services, which accounts for more than half of the Big Blue’s revenues, has rebounded to become the main driver of the company’s earnings since the middle of last year. After a period of negligible growth, it has taken a radical restructuring and new leadership to revive the business, lifting growth back to 9 per cent in the first quarter even before the benefit of currency fluctuations.

This represents a second act for a business that helped to save IBM from disaster in the early 1990s. The first act, under Lou Gerstner, involved what at the time was still a novel idea in the IT world: combine services with hardware and software to sell “solutions” to large customers who were more interested in solving business problems in their organisations than buying individual components of technology.

One problem Mr Gerstner faced for years – and one that will now be inherited by Mark Hurd, HP’s chief executive – was to fight the suspicion that IBM was putting its own interests before those of its customers by using services merely as way to sell its computers and other gear, a perception that has lingered for years.

Under Sam Palmisano, IBM has had to find a second act. More competition for the standard IT outsourcing deals – not least from low-cost companies in India – and a greater sophistication on the part of customers in how they buy these services contributed to an underlying problem for the services business: that it has lacked “scalability”, since growth meant simply building bigger and bigger armies of employees. Finding all the talent and getting greater operational leverage from the business became the overriding problems.

Mr Palmisano’s answer was to try to change the model, first of all by buying the consulting arm of PwC in an attempt to push his services business further up-market. That deal, completed five years ago, is finally paying off, but only after considerable pain.

“It has taken a long time, and caused a lot of tension and turmoil in the business,” says Ben Pring, an analyst at Gartner. Much of that was due to the challenge of integrating such a big people-based business.

IBM has also had to overhaul the portfolio of services it offers, and how it delivers them. Mike Daniels, head of the technology services arm, sums up the direction as: “Fewer services businesses with higher impact.”

That has meant a stronger focus on areas such as information security, and what Mr Daniels says are services geared to a slowing economy: “The plays we chose to run are focused on yielding productivity imp­rove­ments for clients. There is increased need for people to sweat the assets.”

Another factor behind IBM’s services revival has been a refinement of the business modelso that not just able to compete with low-cost competitors in India, but is starting to beat them at their own game.

That has involved shifting the economics of the business by reducing the headcount devoted to any one assignment. Repeatable tasks, rather than delivered afresh on each assignment by individuals, are turned into software – one reason that the IBM services arm has itself been making software acquisitions in recent years.

IBM has also shifted more of its resources into low-cost areas – something that EDS has only recently started to do – and shifted to a more global services organisation.

“We saw opportunities to standardise and globalise the delivery,” says Mr Daniels. “Our physical presence is now equal to that of the major Indian companies.”

This has been about more than just reducing costs. Dana Stiffler, an analyst at AMR Research, says more effective globalisation has been needed to find the talent required to feed growth.

That makes running a modern global IT services group one of the most complex jobs in international business management. For Mark Hurd, the HP chief executive who has already won plaudits for his revival of a venerable technology conglomerate that had fallen on hard times, it will be a tough second act.

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