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IBM retools Global Services

Big Blue seeks higher, more profitable ground in the market for business computing services.

IBM's corporatewide restructuring announced Wednesday points to the computing giant's struggles in reshaping its massive Global Services division around high-margin business consulting services.

As a big part of the effort, Big Blue will institute a series of changes in its operations, including planned layoffs of between 10,000 and 13,000 employees, the company said Wednesday. The brunt of those changes are planned for its European operations.

The goal of the restructuring is to reduce bureaucracy, eliminating the need for a traditional pan-European management layer and creating small, more flexible teams that can work better across borders. Around the world, IBM plans to consolidate service work into fewer locations.

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What's new:
In a major restructuring announced Wednesday, IBM is shaking up its Global Services business, part of a plan to move toward high-margin business consulting and away from traditional computing services.

Bottom line:
The high-end services are meant to set IBM apart from low-cost technology suppliers such as Dell, and traditional computer consulting companies such as Hewlett-Packard, EDS and Accenture. The strategy is to combine IBM's technology products and research with its business-minded consultants, which is something few other services companies can do, IBM executives claim.

More stories on IBM Global Services

The announcement follows disappointing financial results for the first quarter of this year. The restructuring is expected to involve a pretax charge of between $1.3 billion and $1.7 billion in the second quarter.

The moves illustrate an internal race at IBM to retool its $46 billion Global Services division, which represents half the company's revenue. Big Blue is pushing aggressively into high-end business consulting and outsourcing services, yet it's still tied to its traditional services business. It's restructuring efforts are designed to accelerate its move toward business consulting and away from traditional computing services.

"The dilemma IBM faces is that they have the most coherent strategy and simultaneously the most retrograde businesses," said Mark Stahlman, an analyst at Caris & Company. "The traditional body-shop consulting and outsourcing components of Global Services are lagging."

As part of its shift, IBM plans to announce on Thursday another in a line of business consulting services, which it calls business performance transformation services (BPTS). Its latest offering will let corporate clients contract with IBM product designers and consultants to explore business opportunities pegged to new products.

The impetus behind the "transformation" services is to give IBM a larger portion of corporate spending, including money dedicated to nontechnology functions such as human resources, accounting and customer support. The way it works is that IBM either takes over a customer's processes wholesale or dispatches its business-savvy consultants to rewire how that company does business. IBM estimates that spending on these business processes comes to some $500 billion.

Avoiding "commodity hell"
These high-end services are meant to set IBM apart from low-cost technology suppliers such as Dell, and traditional computer consulting companies such as Hewlett-Packard, EDS and Accenture. The strategy is to combine IBM's technology products and research with its business-minded consultants, which is something few other services companies can do, IBM executives claim.

In a similar vein, a desire to get out of "commodity" businesses was the primary motivation for IBM to sell its PC business to Lenovo, a transaction that closed earlier this week. CEO Sam Palmisano said in December that the PC industry's high-volume, low-price model was at odds with IBM's strategy to be a "high-value innovation provider."

By offering a greater number of business services, IBM is also trying to fashion a more lucrative services business. Margins in traditional computing services, such as maintenance and support, are being squeezed by competition and by customers who increasingly renegotiate more favorable contracts, note analysts.

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In one example of the kind of deal Big Blue is after, the New York Stock Exchange contracted with IBM's engineering group to design handheld computers to be used by traders. That consulting job in turn led to more significant sales of back-end software and server hardware, said Lee Green, IBM's director of worldwide corporate design.

BPTS "is such a significant market that it's an avenue...we can't ignore," said Eric Pelander, the leader of strategy and change services for IBM's Business Consulting Services group, formerly PricewaterhouseCoopers. "BPTS is a strategic focus for IBM...so you will see a refinement of our portfolio."

As part of its consulting push, IBM is also getting a more substantial foothold in the business process outsourcing field, an expansion beyond IBM Global Services' roots building and maintaining computer systems on site.

The company is in the latter stages of negotiations with Midwest energy company NiSource in a deal that could be valued at $2 billion over the next 10 years.

Looking to lower its operating costs, NiSource is in discussions with IBM that involve handing over several of NiSource's business functions, including information technology, human resources, customer support, billing and procurement, according to NiSource spokeswoman Kris Falzone.

"We're looking at a potentially transformational outsourcing engagement," said Falzone. "We are trying to focus on our core business."

In these types of engagements, IBM generally upgrades the technology underpinning a business process and tries to get the system running more cost effectively. The company has a small number of clients in each of its different business process outsourcing areas.

Along with software, business process outsourcing continues to be where IBM makes acquisitions. For example, last year Big Blue bought Indian call center provider Daksh to beef up its support outsourcing services, and it purchased Maersk Data to offer a wider range of transportation services.

Rocky transition?
But, as the company's planned restructuring illustrates, reforming its massive services division will be a complex, and sometimes painful, process.

The areas that are expected to feel the brunt of layoffs are traditional "break-fix" computing services, an IBM insider said last month. The anticipated changes have already drawn protests by IBM workers in Germany and France, where IBM reported poor results last quarter.

Stalhman at Caris & Company said IBM's pursuit of higher-end services is a sound strategy but that the transition will cause "air pockets" that could disrupt the company's overall financial performance. He said IBM's current problems with Global Services will make it difficult for the company to meet its expectations in the second quarter.

Though IBM touts the growth of BPTS and its importance to the company's strategy, the area is still small compared with the rest of Global Services. In the first quarter of this year, BPTS revenue grew 40 percent to $900 million, out of a total of $11.7 billion in Global Services revenue.

On top of pursuing higher-margin consulting services, IBM is also upgrading portions of Global Services to be more profitable, noted Gartner analyst Michele Cantara, who covers the professional-services industry.

For example, Big Blue is investing in the computing infrastructure to allow it to host many customers' applications from the same hardware, making those services more cost-effective for IBM.

"If they can combine higher-margin services aimed at the CEO or CFO with more repeatable solutions, that gives them services at the high end and the low end," said Cantara. "IBM has to figure out the right balance."