IBM Must Leverage Custom Services For GrowthIBM Must Leverage Custom Services For Growth

IBM's services revenue amounted to 47% of its sales in 2004, compared to nearly zero just 10 years ago. But for the company to survive and grow it must find a way to transform the low-margin and nonrecurring segments of its services operations into a more profitable business, Gartner analyst Linda Cohen said at the Gartner ITxpo Symposium in San Francisco on Thursday.

Failing to do so will result in sudden swings of fortune, something IBM isn't used to, such as the reduction of 13,000 employees revealed earlier this month after weak first-quarter results. The move caught IBM's own employees by surprise, prompting a group known as the Alliance@IBM to propose a 10-minute work shutdown May 23.

One way IBM could transform its services business is to identify its most profitable customers and seek repeat business with them. To do so, it must figure out where its IBM Global Services skills can standardize the technology infrastructure in certain industries, then deliver a similar infrastructure to multiple companies at a price that customer CEOs and CFOs find irresistible, explained Cohen, Gartner's IBM services analyst.

IBM already is pursuing such a strategy under its On Demand marketing campaign. Instead of selling technology, it's drafting component business models that lay out processes shared by many similar businesses, along with a blueprint for the underlying technology to deliver those services. By having an approach that can fit several--or many--companies, IBM can leverage what's now a one-of-a-kind service offering to many customers. It also can reduce what it must charge for such services, Cohen said.

IBM would sell such services on the basis of its ability to transform the business processes within a company to allow them to expand their own business in a cost-effective manner, she said. IBM's pricing would be low at the initial process-transformation stage and grow only as use of its recommended infrastructure helped the business to grow.

"IBM is drawing up those maps for segments of industries that are already on its preferred hardware" and software, Cohen said. It's a means for the company to avoid billing customers for large sets of hardware and software up front. Instead, "you get only what you need when you need it," and you pay more only as the business gains revenue with its own success, she said.

But IBM will have to choose carefully the businesses into which it enters with what Gartner and IBM call a "business-performance-transformation service," Cohen warned. She was optimistic that IBM would be able to make such a services transition, partly because it has transformed so much of its own business from hardware and software product sales into services over the last decade.

IBM told service prospects that it was a neutral and trusted partner that could run their IT operations at a savings. "They've done a great job of convincing people they can do that," she said. Now it has set about convincing select customers that they should transform their businesses in ways IBM recommends.

IBM will try to move those big outsourcing deals over to business-performance-transformation services, Cohen said. "They will say, 'If you want to do this outsourcing deal your way, the price goes up. If you'll do it our way, the price goes down.' "

IBM would be able to leverage repeatable elements of a somewhat standardized infrastructure across many companies, instead of doing custom work for each outsourcing deal. Cohen said the move would allow it to leverage its outsourcing skills for greater profit if customers can be persuaded there are benefits on each side.