The way to global-services leadership winds through a software landscape

During Samuel J. Palmisano's more than five years as IBM's chief executive, the $91-billion technology giant has exited big-dollar but margin-challenged businesses like hard disk drives, printers, and PCs to focus on delivering high-value solutions that combine industry-domain expertise and information technology.

By Kevin Parker, editorial director and Cole Ollinger, contributing editor August 1, 2007

During Samuel J. Palmisano’s more than five years as IBM’s chief executive, the $91-billion technology giant has exited big-dollar but margin-challenged businesses like hard disk drives, printers, and PCs to focus on delivering high-value solutions that combine industry-domain expertise and information technology.

Of course, even prior to Palmisano assuming the reins, the importance of services to IBM’s future—and the company’s reorganization to address the opportunity—was widely discussed.

IBM executives, however, weren’t the only ones to intuit that provision of IT services would be an increasingly attractive business as technology advances wrought major changes in the way solutions were developed, implemented, and managed.

The last half-decade also saw the rise of offshore technology services providers like Infosys, Wipro, and Tata Consultancy Services. These companies are still growing rapidly while they benefit from a lower cost base and enjoy more generous profit margins than larger U.S. competitors.

As a result, in the last two years, IBM has made a nuanced but noticeable course correction to its future direction. There are several elements involved. One, of course, is leveraging the cost advantages of moving software development work to emerging economies, and today IBM has 53,000 employees in India, for example.

Another is the reorganization of IBM into a “globally integrated enterprise” that serves other enterprises of the same ilk with technology and competency centers that might be located anywhere in the world, including staffing of skilled experts in particular industries, and employee-and-partner collaborative networks capable of uniquely identifying and bundling needed expertise.

Software as a means to services
To support its efforts as a global services company, IBM has acquired a steadily increasing number of software vendors whose technologies enhance its capabilities in that regard.

This arrangement makes capabilities that once may have been available only on a regional basis available globally, while freeing IBM from the need to replicate capabilities on a national or regional basis.

A final element is a renewed emphasis on software, leading IBM to make a number of major software-related acquisitions. In fact, since 2001, IBM has acquired more than 40 software companies.

Of course, selling software is itself a relatively high-margin business. Moreover, it’s increasingly delivered as a service. And software can be a delivery mechanism for expertise and services that wouldn’t otherwise be available cost-effectively.

At this point, about 40 percent of IBM’s pre-tax income comes from software, and the company’s most recent results indicate to some that the changes are already having a positive impact.

“Software doesn’t necessarily lead the way at IBM, though obviously it’s an important and very dynamic part of the business,” says Bob Parker, a senior analyst with Framingham, Mass.-based IDC Manufacturing Insights .

A recent report from Boston-based AMR Research sums it up this way: “IBM’s move toward services, software, and research is part of a strategy to deliver holistic value to corporate clients, but with the added benefit of increasing the digital-to-physical ratio of product sold through its value chain.”

Businesses and brands

IBM today includes these software businesses:

  • Rational Software , for software development and delivery;

  • Tivoli Software , for infrastructure management, including security and storage;

  • Lotus Software , for collaboration, messaging, and social networking;

  • WebSphere Software , for Web-enabled applications and business process management in a services-oriented architecture (SOA) environment. IBM is the market leader in this middleware space.

  • Information Management Software , for advanced database, content management, and information integration, including IBM’s information-on-demand practice initiated in 1996.

Obviously, middleware, collaboration, and information-on-demand technologies are central to IBM’s emerging core mission of delivering IT-optimized business processes and industry expertise to a global market of unprecedented complexity. The background of two more recently acquired vendors having installed bases in the manufacturing industries— FileNet for enterprise content management and MRO Software for asset management—are further illustrative of the trend.

The solution category “enterprise content management” (ECM) includes a range of legacy and emerging technologies to capture, store, and distribute documents and content. According to Stamford, Ct.-based Gartner , the ECM market grew 12 percent in 2006. IBM holds the No. 1 market position with 17,000 customers, including the nearly 5,000 it acquired with the $1.6-billion FileNet deal.

While typically considered an application category, in an SOA-based universe, content management will increasingly be seen as part of the background capabilities of a computing environment.

FileNet is said to be the first company to have created a commercially successful document-imaging solution for businesses, in 1985. In the 1990s, electronic document management and workflow—including a graphical interface for process modeling—was first introduced.

Today, a range of capture, search, and networking capabilities; integrated document and Web content management; as well as middleware and SOA make ECM a powerful capability for managing the widest possible range of content types delivered via applications, portals, or other modalities.

The endgame, however convoluted the journey, is the ability to access and control information regardless of format, platform, or location—much like product life-cycle management today is all about managing design information regardless of the platforms involved.

On the other hand, IBM’s $740-million purchase of MRO Software—which provides Maximo software as well as services to manage the life cycle of plant, equipment, and IT assets—seemed a somewhat unusual acquisition for IBM, as the acquired vendor was seen primarily as running a software applications business.

But nearly 70 percent of MRO’s annual revenues have been services- and support-related, and its involvement in IT asset management—a capability IBM already offered—was in its infancy at the time of the purchase.

In fact, the lines between plant and IT asset management continue to converge as industrial assets are equipped with intelligent devices or RFID. Further, asset management is a natural platform for an ever-wider range of services offerings.

Finally, rather than be a stand-alone application, in an SOA environment asset-management services can be combined with other needed capabilities in a single system.

One good example

Detroit-based DTE Energy , which operates gas & electric utilities and serves 3.5 million Michigan customers, has completed a large-scale enterprise business system project managed by IBM Global Business Services. Critical IT business systems were updated companywide.

One of the six major business solutions included in the project was IBM Maximo software, which replaced “scores” of small, custom-developed applications used for tasks like tracking Freon containers on trucks.

DTE Energy’s single integrated system consolidates critical capabilities, including work and asset management, supply chain, geographic information system, human resources, finance, and mobile workforce management. Besides cost savings, the consolidated system delivers operational and employee efficiencies.

“When we started on this project, DTE Energy’s goals were clear: improve energy generation efficiency, increase worker productivity, and reduce the costs associated with operations,” says Bill Sawyer, VP of Maximo Operations, IBM Software Group. “The go-live demonstrates the combined value of IBM software and services, as well as the ability to meet the unique needs of a major utility like DTE Energy.”

IBM Maximo can be paired with the IBM Tivoli platform to manage operations and IT assets in a single system, and with a focus on service management. Recently released IBM Maximo 6.2 extends the Tivoli service management portfolio beyond data center and IT assets to cover equipment in plants, facilities, and vehicles used in industries that include manufacturing.

“There is a lot of commonality between these types of assets,” says Houghton LeRoy, a senior analyst with Dedham, Mass.-based ARC Advisory Group. “They all need to be configured, deployed, maintained, and retired. Vehicle fleets and plant equipment have software, processors, built-in intelligence, and other characteristics of IT assets.”

Eric Luyer, manufacturing industries marketing manager for IBM Maximo, agrees. “Especially in process manufacturing, the ownership of control systems and robotic machines that require condition-based maintenance and predictive analytics involves both plant management and IT departments,” he says.

LeRoy sees a future merging of the IT help desk and plant maintenance functions. Systems administrators won’t repair pumps, of course, but the help desk may find itself processing work orders, service requests, and condition-based alerts for all classes of assets.

Not everyone is sold on the idea that IBM acquiring software vendors is part of a well-thought-out vision for servicing globally integrated enterprises in a new IT era. As an AMR report recently noted, IBM has “taken great pains to position itself as not being in the enterprise application software business,” but the MRO deal could “destabilize the demilitarized zone between IBM and the large enterprise software application providers.”

Parker doesn’t see it. “SAP is not likely to get into sensor networks and wireless monitoring, and IBM isn’t getting into ERP,” he says.

In any case, the changes of the last several years have produced a noticeable improvement in results.

On July 18, IBM announced financial results for its second fiscal quarter, including a 9-percent increase in revenue from second-quarter 2006. “This quarter’s strong revenue growth—our best since 2001—underscores our global capabilities, as well as the higher value that clients place on our expanding software product line and wide range of services that are helping them transform their businesses,” says Palmisano.

As IBM CFO Mark Loughridge concludes, “Software is now the largest provider of IBM profit, and our most stable source of growth.”