Monday, August 07, 2006

IBM makes purchase to energize outsourcing offerings

The news on Friday that IBM had bought MRO Software carried within it a message that may have escaped many readers. Says this article in the New York Times:

IBM is pursuing a strategy of trying to apply more scientific and technology to its $47 billion-a-year global services group.

What does that mean? Think about plain-vanilla data center outsourcing. IBM (or EDS or CSC) takes over a company's data center, their staff, etc., and runs the company's existing applications on its behalf. Perhaps there's a cost savings, perhaps the service levels improve. But there's a limited amount of added value that the outsourcer can bring simply by deploying their processes and their data center space with a client's applications and infrastructure. As a result, large outsourcing deals (making up the lion's share of that $47 billion) often have EBIT margins in the single digits.

Now imagine that IBM could bring some proprietary technology, say the MRO software, to bear. By re-engineering a customer's business processes, then applying their software technology, IBM could dramatically improve the cost/service level equation. They could share some savings with the clients, giving them a cost advantage versus their competitors, and improve their margins as well. And by tying the solution to software that they own and know intimately, they add to their offering's stickiness with clients. Says the Times:

Success in these new businesses requires not only having skilled experts to design new service offerings, but also being able to automate as much work as possible. “You assemble these service solutions with pieces that can be put together, and pieces that embed knowledge — that’s software,” [IBM Strategy and Technology VP Kristof] Kloeckner explained.

That's what's behind the acquisition from a Global Services perspective. It was also part of the rationale of the PriceWaterhouseCoopers Consulting acquisition several years ago. IBM wants to "energize" their outsourcing offerings, an ambitious goal that holds the promise of improving their profits and, not coincidentally, providing a defense against low-cost outsourcers from India.

EDS took a stab at this several years ago with their acquisition of AT Kearney, and that didn't work. But PWC was stronger than AT Kearney, and EDS was never the software powerhouse that IBM is. So IBM is much better-equipped to make "energized outsourcing" a reality.

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Innovation Zen said...

Good summary on IBM's services strategy.

I am not sure though those acquisitions alone will position IBM in a sweet spot. They should fear not only cheap outsourcers in India but also "web 2.0" based solutions (like applied to services).