From a corporate point of view, the best thing about info tech services is that, if everything goes right, a company gets all the handholding it needs to obtain exactly the software applications and computer systems it wants. Problem is, that's also the worst thing about them.
Tech services are labor intensive. New applications are often built from scratch or highly customized. As a result, companies pay about four times as much for services as they do for the software products and computer gear associated with those services. And that's precisely one of the reasons the $650 billion tech services market is growing at less than 5% per year.
IBM (IBM) is about to roll out a new way of delivering services that it hopes will light a fire under its slow-growing services business (see BusinessWeek.com, 8/15/06, "IBM's Revved-up Software Engine"). On Sept. 26, Big Blue launches its strategy to create a sizable catalog of "service products." Two are to be announced immediately, and 28 more are supposed to go public in the next two months.
BLAZING A NEW TRAIL? The idea is to make services as easy to buy, consume, and pay for as products. "It's not just a people service. We combine people services, software, and our knowledge of business processes—and we deliver it around the globe at prices that are more attractive than the cost of companies doing it themselves," says Mike Daniels, senior vice-president of IBM Global Technology Services, which, at $32 billion in revenues last year, is the biggest chunk of IBM's service business.
The move is a key advance in Daniels' effort to improve revenue growth and profit margins. He was appointed to the job in a major reorganization 14 months ago, but his hoped-for turnaround has been slow in coming. The Global Technology Services division didn't grow in the second quarter, though Daniels improved the pre-tax income from a loss in the second quarter a year ago to a $787 million profit and a respectable margin of 9.4% in this year's second quarter.
"My goal is to grow with the industry, and then, when we're there, to surpass it," says Daniels. Even though IBM has been losing market share, it's still the 800-pound gorilla of tech services. Analysts say the rest of the industry may now be forced to deliver services in product-like packages, as well (see BusinessWeek.com, 10/18/05, "IBM's Small Biz Engine That Could").
AN ONGOING QUEST. "When IBM leads, usually other companies try to follow," says analyst Bob Djurdjevic of market researcher Annex Research. He cautioned that other services outfits, in particular the Indian upstarts, don't have the software intellectual property and the knowledge of diverse industries that IBM has (see BusinessWeek.com, 6/5/06, "IBM Wakes Up to India's Skills"). "You can't just roll them off the shelf," he says. "They may be able to pick some niches where they can do it, but they won't be able to do it across the board like IBM can."
The idea of making services more like products has been an ongoing quest for the services industry for years. Already, most of the larger companies, IBM among them, have created what they call service "solutions." Their consultants combine reusable software pieces and best-of-breed business processes to create semicustomized systems for their clients. Indian tech services leader Tata Consultancy Services, for instance, has 40 solutions for nine industries, including offerings for financial services, telecom, and retail. For its part, Dell (DELL) has created a catalog of basic technology installation services, such as migrating from an out-of-date e-mail system to Microsoft's Exchange Server.
STANDARDIZED BENEFITS. What's different about the IBM offerings is they're more sophisticated than Dell's and, at the same time, they're more standardized than service solutions have been. Elizabeth Smith, general manager of IBM's Information Access Services unit, says the new service products will be listed in a catalog complete with pricing formulas. All will contain basic software components, which clients will license from IBM. In addition, they'll include service methods, some of which IBM has patented.
If the customer wants, IBM will write additional customized software that runs on top. With one of the new offerings, Network Convergence Services, for instance, IBM will provide a package that includes assessment, a standardized design, and implementation services for companies wishing to combine voice, data, and video telecommunications services in a single network.
IBM has been trying out the product-like approach with a number of customers. Among them is Northern Lights Regional Health Services, a provincial health-care provider in Canada's oil shale region. The organization's hospitals and clinics are spread over a vast territory, so it relies heavily on telecommunications. Last year, Northern Lights hired IBM to design and build a new wireless network for its central office in Fort McMurray, Alberta.
"We bought it as a package: design, implementation, and price. It was like a checklist," says Colin Jardine, the organization's chief information officer. For Jardine, the big relief is that since his wireless network was designed and installed in a standardized way, it will be easier for him to fix problems if something goes wrong. Also, IBM is on the hook. "If there are any problems down the road, I go to them." That's an extra incentive for IBM to get its new service products right.