Big Blue moves to 'off the rack' services

The massive professional services division is undergoing a reorganization meant to make some of its consulting services resemble discrete menu items, rather than all-you-can-eat catered meals.

The shake-up of the $47.5 billion business--which accounts for more than half of IBM's revenue--reflects downward price pressure from an increasingly global computing-services industry. Having more repeatable offerings helps improve the profit on delivering services, analysts said.

The changes also underscore IBM's need to ="5695600"> reignite its services business. Once an engine of growth that helped avert IBM's demise a decade ago, Global Services is in need of some tinkering to continue fueling profits.

"We need to reengineer how we do systems integration," said Val Rahmani, IBM's general manager of infrastructure management services. "We need to make service offerings look like a product...It's a very different thought."

In one reflection of the change, Rahmani was moved from one of IBM's product groups, its Unix server hardware business. She reports to senior vice president Mike Daniels, one of three executives appointed by CEO Samuel Palmisano last summer to lead Global Services.

The strategy at Global Services calls for the creation of standardized offerings built using IBM's hardware and software.

For example, IBM is developing security services using its Tivoli software. Rather than build it anew in every customer engagement, the company can now offer that same security service--spelled out on a product list like shrinkwrapped software--to many customers, IBM executives said.

That's a significant break from the current modus operandi at IBM Global Services. Large professional-services providers--including IBM, Hewlett-Packard, Computer Sciences Corp. and Electronic Data Systems--typically operate on a deal-by-deal basis.

High customization a tough sell
Services can be anything from worldwide installation of a complex business application to ongoing maintenance of data center gear. Generally speaking, the more complicated the job, the better for the services vendor, because highly customized systems translate into more consulting time.

But Forrester Research analyst Julie Giera said that the "your mess for less" approach is becoming a tougher sell. Offshore companies, offering everything from application development to business-process outsourcing services, are using lower prices to crank up their competitiveness against established companies. In reaction, all providers are focusing on standardized services, because they can offer them at lower cost, Giera said.

"The entire industry has to move this way, because the industry is moving to a global delivery model," she said. "It's a transition that IBM has to make--and it's going to be tough."

A standardized service that can be delivered over and over translates into better profit margins. For example, a program for setting up Web-based customer account management can be reused widely among banking industry customers, reducing the need for IBM to design and write that code again.

That notion of reuse and standardization is increasingly being spread across IBM Global Services, according to company executives. Rather than simply hawking amorphous "services," Big Blue has developed 10 technology services product lines with published prices. The product lines cover common corporate computing needs, such as system architecture or storage.

Although "productization" may be good news for IBM's profit margins, the shift does put to risk its vow of working with other vendors' gear, Forrester's Giera said.

IBM Global Services has built an image of being "technology agnostic"--willing to maintain servers from HP or write software for Microsoft's .Net platform.

"IBM had to break away from the reputation it had six or seven years ago, that they were pushing IBM products in services deals," Giera said.

As standardization becomes more popular, Giera expects all services vendors to offer discounts to encourage customers to use standardized services instead of more customized deals.

IBM Global Services spokesman James Larkin said Monday that the company remains committed to being technology agnostic and will continue to take on contracts involving a high degree of customization.

The Armonk, N.Y., company intends to maintain its long-standing partnerships with the likes of HP and Oracle, he said. What's changed is that IBM's products--notably, its servers--are becoming "best of breed," Larkin said.

"Increasingly, you'll see us bring IBM hardware and software to the fray, but that doesn't happen all the time. It depends on the circumstances," he said.

Regardless of how IBM chooses to sell services, customers have an incentive to go with more off-the-shelf service offerings: Forrester estimates that highly customized contracts cost 40 percent more than standardized offerings.

Big transition
The increasingly global nature of the professional services market has already bitten IBM, which is also seeing downward price pressure in software and hardware. The company is rejiggering how Global Services operates, building on last summer's reorganization of the division, Rahmani said.

In the past, divisions in other countries--IBM's so-called "geos"--had primary control over deals. Now the company is making organizational changes to better share products and consulting skills in specific areas, such as desktop maintenance or applications for the financial industry.

"We were very much deal-by-deal, and each country was king," Rahmani said. "We really didn't share...Reuse was ad hoc."

To keep costs down, IBM is ramping up services operations in developing countries, including India, China, Brazil and eastern Europe.

In parallel, IBM is seeking profits in high-end business consulting services. Specifically, the company is trying to grow its business-process outsourcing business, in which it assumes control of a customer's accounting or human resources department, including both technology and employees.

In addition, IBM is seeking to codevelop products with customers by tapping its engineering expertise. For example, last week IBM announced a partnership with St. Jude Medical to work on a portable patient-monitoring system.

The ongoing changes at Global Services appear to be having a positive financial impact. Since last year's first-quarter slip, which was followed by layoffs and a companywide reorganization, IBM has met or exceeded its profit targets.

And Bernstein analyst Toni Sacconaghi forecasts that IBM's services business will improve its profit margins and drive higher revenue growth this year. In a recent research note, Sacconaghi said the main risks to IBM and Global Services are "increased competition in outsourcing and from offshore firms...(and) IBM could face execution issues stemming from its restructuring effort."

"It really comes down to how (IBM) will stick to the new strategy," Forrester's Giera said. "Will they give up deals that are not based on standard platforms? That's a big transition for the sales guys."