IBM repackages its brain power

When Lou Gerstner saved IBM in the early 1990s by building the world’s biggest information technology services business on top of its struggling hardware operations, he also created a new model for a technology company. Now Sam Palmisano, his successor, has the daunting task of making that vision work.

If he can pull it off, Mr Palmisano’s achievement will be every bit as impressive as Mr Gerstner’s. In effect, he is trying to reinvent the services industry by injecting disciplines of product development and delivery that are normally found in traditional product markets – and he is trying to do it on a global scale.

In the past, the services business has typically been heavily dependent on the skills and perceptions of individual consultants and other experts, sent out to customers to design and implement customised IT systems. “You needed a tremendously smart business analyst who got out a blank sheet of paper” for each assignment and devised a response from scratch, says Matt Porta, vice-president of IBM Global Business ­Services.

Another IBM insider is more direct: “We didn’t run this as a business before,” adding, of the way services assignments have always been run: “It isn’t scalable and repeatable.”

Turning services, which by definition are delivered by people, into repeatable processes where IBM can get economies of scale, amounts to an organisational and cultural overhaul of significant scale. It also represents a management challenge that in many ways was not addressed when IBM first built its services-and-technology conglomerate.

A number of factors have made the IBM model less effective than it might be. First, the consultants, who are meant to act as a sales channel for IBM technology, have largely continued to operate as they did in the past, approaching each assignment from scratch rather than starting with ideas of service “offerings”, or products that can be used to solve common problems.

Second, the teams of technology specialists used to staff big IT projects have been difficult to organise and mobilise, according to company executives, partly because they have been managed on a local rather than a global basis, making it difficult to match the right talents to the right jobs.

Third, IBM has long sent mixed signals to its customers about the extent to which its services division acts as a sales channel for its hardware and software.

Mike Daniels, head of the technology services operations inside IBM Global Services, says the company is agnostic about whether it promotes its own technology or that of rivals. But to judge by the message from its annual analysts’ meeting last month, where IBM executives stressed the opportunity represented by the services arm, the pressure is on to sell more of Big Blue’s own gear.

“I have an IBM card – anyone who doesn’t think I have a bias towards IBM is naive,” says Mr Porta.

The attempt to remake IBM Global Services is based on a belief that there are more effective ways of using all of IBM’s brain power, from its research and development arm all the way through to its consultants, to design and sell services.

“If you combine labour with IP [intellectual property], you get repeatable offerings,” says Mr Daniels.

These days, IBMers talk about “productising” services, turning them into clearly defined offerings that can be marketed and delivered in much the same way that new mainframe computers are. Its small and medium-sized business unit, for example, now distributes a catalogue outlining its main services.

“We’re becoming more proactive about what we have for sale, rather than going out and making everything customisable,” says Jim Corgell, general manager of small and medium-sized business services.

To create these repeatable services, IBM has set out to isolate and standardise many of the components that go into such assignments. In the new language of IBM, all of the company’s various capabilities, from software to particular IT processes, are talked of internally as “assets” or “content”: units that can be reassembled for specific projects.

Making this new system work, however, presents some challenges. One is the difficulty of organising an army of experts around the world in such a way that the same standardised skills are available for any assignment, wherever they are needed. Creating “brain factories” for this system lies at the heart of IBM’s latest efforts to turn itself into a global company [see below].

A second challenge for IBM is to find the right business model for these new “productised” services. Making processes repeatable effectively means “baking” services into software: some of the work that was once done afresh by consultants on each assignment can be isolated and described in software, making it easier to apply the same processes to subsequent projects.

That has blurred the line between the services and software business models. It means revenue growth is no longer limited by the number of smart consultants IBM can throw at projects. “We always relied on the same business model – one deal at a time,” says Mr Corgell. “But there are only so many hours in a day.”

Maximising the benefits from this mixed business model while limiting the disadvantages – turning work into automated processes while at the same time maintaining the flexibility of its traditional approach to producing customised projects – will be one of the main tests of the new management group in charge of services.

The biggest challenge, however, may be cultural. An organisation that has never been driven by traditional product development and marketing thinking is being asked to adopt a whole new way of working.

Over the past year – since a disastrous first-quarter performance in 2005 – IBM has been trying to put in place the organisational structure and processes to make its more rigorous approach to services work.

It has created, for example, a new compensation system for the salespeople in its “solutions” unit, to encourage them to sell a full set of IBM services and technology for a specific set of customer needs that have been identified as high-growth markets.

“We hadn’t put in place the right systems to treat [the solutions business] as a separate market,” says Mr Porta. He now says the company has devised an “integrated planning approach” for attacking markets where its services, hardware and software can all be brought to bear, adding, of IBM’s new awareness: “The light bulbs are going off and we’re connecting all the dots.”

The company also last year tried to break down the barriers between its strong national divisions, giving a group of “product” managers in services the same sort of global control they would have if they were managing a more traditional technology product.

In the past, global co-ordination around services was at a very low level, says Don DeMarco, head of the fast-growing business continuity and recovery unit. “It was very thin – it was more of a staff function that monitored communications.”

The new processes, however, will be effective only as long as the services managers can build a fresh culture within IBM. In the process, they will need to convince many of the company’s existing workers that they need to do their jobs a different way.

Business consultants, for example, will in future need to market more of what IBM has to offer – though executives deny that this will turn them into salespeople.

“Our front-end is always a consultative sale,” says Mr Porta. “Now, there’s a lot more content for [the consultants] to know about. A big challenge of this approach is to make people aware of what we have.”

The gravy train comes off the rails

Lou Gerstner’s push into information technology services in the 1990s was based on the belief that the value in technology was moving towards services and software, and away from the hardware that had been the heart of IBM’s traditional business.

For its big corporate and government customers, the IBM approach promised a new, more productive era of information technology, since it would become the first technology company that was in a position to prove that what it was selling actually worked.

Yet the services business that resulted – and which accounts for more than 50 per cent of Big Blue’s revenues – is now suffering from acute sclerosis. Revenues, which grew by 2.5 per cent last year, are likely to grow by about the same this year, with a further 3 per cent in 2007 and 2008, according to estimates by Merrill Lynch. The gravy train that led to the earlier growth – the multibillion dollar outsourcing contracts that became a familiar part of IT over the past decade – has come to a halt.

That has exposed an underlying weakness: IBM did not deliver on the original promise of services. Its method of delivering services does not bring consistent benefits for customers around the world, many of whom are facing the same problems – while for Big Blue, the lack of a standardised approach led it largely to miss some of the hottest new markets in technology, such as security.