Good old Big Blue

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IBM is doing something right. Last week even the unstoppable Google stumbled, failing to meet the lofty expectations of its cheerleaders. Microsoft too delivered mildly sub-par numbers in its fourth quarter as it felt the effect of a faltering economy. But IBM sailed calmly on, producing its third successive strong quarter.

It is tempting to simply put this down to the resilience of Big Blue’s model. Only about a third of revenues are now made in the US. Half of sales come from services that produce reliable income year in, year out: such as outsourcing, or maintenance of the massive mainframe computers that the group still builds.

Yet the performance – second-quarter sales growth of 13 per cent year-on-year – should be seen in the context of five years of re-engineering at IBM. The move towards offering an integrated mix of IT services, hardware and software did not start well. IBM’s purchase of the consulting arm of PwC in 2002 serves as an excellent example of how extremely difficult it is to integrate people-based businesses: as cultures clashed, the intellectual capital walked straight out of the door. At the same time, offshoring exploded, and aggressive pricing from domestic rivals such as EDS and Indian competitors killed margins.

Since then, however, IBM appears to have slowly mastered the model of an integrated hardware, software and services supplier. Commodity businesses such as PCs and printers have been sold, while the group has spent money expanding in software. It has shifted closer to customers in emerging markets, while concentrating on higher value areas such as security, instead of just simple labour outsourcing.

The plan, laid out in 2007, to grow earnings at an annual rate of 15 per cent out to 2010 through a mixture of cost cutting, acquisitions and organic sales growth is very much on track. For an octogenarian, the world’s largest IT services company has a remarkable spring in its step.

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