Commentary: IBM's on-demand strategy is bigger than IT

By Forrester Research
Special to CNET News.com
November 14, 2003, 10:30AM PT

By Ted Schadler, Principal Analyst

IBM's strategy to help companies thrive in a networked economy--and open up new markets for IBM--is now a year old.

So how's it going? Pretty well and getting better. The vision's much clearer today, and 320,000 employees are energized to win the business transformation and data center deals that ensure Big Blue's future.

Forrester recently journeyed to San Francisco's Museum of Modern Art to attend the first-birthday bash for IBM's "On Demand" initiative. CEO and host Sam Palmisano was joined by customers General Electric CEO Jeff Immelt and eBay CEO Meg Whitman to lay out the next phase of his On Demand vision.

Under Palmisano's leadership and the On Demand umbrella, IBM is recasting itself as a supplier of IT-enabled business innovation--and the IT goods and services to deliver it. The big takeaway? IBM sees e-business on demand as more than IT. For IBM, On Demand is a label that describes a company's behavior and operating strategy in the networked economy.



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Palmisano's strategy unites six IBM businesses--PCs, servers, software, IT services, outsourcing and management consulting--into a single organization. In the past 12 months, all IBM executives have repositioned their businesses as On Demand--sometimes with painful convolutions. Still, the benefits of this shared vision are showing up in products from the DB2, Tivoli, WebSphere and xSeries efforts, among others.

Customers are buying when they can figure out what to buy. In a recent Forrester survey of 95 enterprise-class IT executives, 35 percent said that they are interested in using IBM to make their data centers conform to the On Demand message. But last year's focus on utility pricing was a confusing diversion, and IBM's breadth of products and services still makes it difficult to figure out what to buy. IBM must simplify its offerings and explain what makes them On Demand.

Competitors are attacking but none has IBM's reach. No competitor is in more than three of IBM's six businesses. While Oracle is competing on grid software, Microsoft on the enterprise software stack and Hewlett-Packard on data center automation and IT outsourcing, no vendor can cover the IT breadth--or customers' tech-enabled business transformation and outsourcing needs--the way Big Blue can. The customers won over the next three years will be locked in for a generation--and IBM has more customer doors to walk through than anybody else.

Partners are intrigued but still searching for hooks. It's a fait accompli in the minds of partners like SAP that IBM will lead the pantheon of high-tech suppliers. But how will the On Demand vision translate into more customers and dollars for partners? It's still hard for partners to figure out how to work with IBM across multiple products, how to take On Demand to small companies, or how to ride on top of a variable pricing model. IBM has partner program work to do here.

Investors like the bottom line but are waiting for revenue growth. IBM is applying, under the leadership of Linda Sanford, the On Demand principles of business integration and process simplification to its own operations. For example, the PC business is improved because it now sees the quality of components coming off a supplier's line in Hungary before taking shipment. IBM's savings last year were $5.7 billion. But the On Demand strategy has yet to accelerate IBM's lethargic--even negative--revenue growth.

It's also clear that Palmisano sees On Demand as IBM's strategy to attack three expanding technology-enabled markets. IBM is making investments and pursuing:

• Business transformation projects: IBM's Business Consulting Services group (40,000 employees from the PricewaterhouseCoopers acquisition) gives the company management consultants to help business executives improve their businesses. This consulting group brings process and industry expertise to the table. One IBM executive said that half of all big deals start with business transformation that leads to business process outsourcing deals.

In four domains--human resources, logistics, procurement and supply chain management--IBM can manage customers' core processes. Procter & Gamble is an important first example of an HR outsourcing relationship. With ever-deeper adoption of Internet connections and standards, the market for business process outsourcing in the United States alone will explode to $146 billion by 2008, according to our forecast.

• Business process integration projects: GE's Immelt said that "IT is the lifeblood if you're process-focused." IBM's longstanding ability to take on complex integration projects like eBay's massive trading platform gets new life with IBM's investments in industry-specific process maps, tools and expertise.

Process integration that cuts across a company's functions or business units is the starting point for automating processes linked to suppliers and customers. If IBM can tap even a small percentage of the waste in the trading processes of most industries over the next 10 years, it can add tens of billions to its top line.

• Standards-based infrastructure projects: For 10 years, IBM has been investing heavily in open standards. Its contributions to Linux, Java and Web services have helped force the high-tech industry to step up to interoperability. Under the Linux banner, IBM is taking these standards into the data center to help customers do more with less using an architecture that it calls the on-demand operating environment.

Once CIOs get a taste of the self-funding opportunities of data center standardization and automation, they will look for more and bigger projects. IBM will benefit as CIOs look to simplify and rationalize their data centers--without going to the CFO for more money.

Commentary: IBM's on-demand strategy goes beyond IT