WHY `SYSTEMS INTEGRATION' SOUNDS LIKE POETRY TO IBM
In years past, "services" was a subject that tended to induce narcolepsy among managers of computer companies. Nobody cared much, especially when some speedy hardware gizmo was setting new records. But now, all that has changed. Corporations, hard-pressed to cut costs and gain competitive advantages, are hiring outsiders to handle part or even all of their data processing--from writing software and fixing broken PCs to running entire data centers. And as growth in hardware revenue and profit slows, computer makers are turning to services as the golden egg.
No computer maker is more intent on getting a boost from services than IBM. Indeed, Big Blue says its goal is to garner 50% of its revenues by the year 2000 from selling software and services. That could fatten its profit margins. More important, the push would help maintain its influence with customers even as they switch to commodity-like hardware, especially desktop computers.
IBM is already a giant in software and services. Together, they contributed $23 billion of its $69 billion in revenues in 1990. But while software revenues grew from 10% of sales in 1986 to 14% last year, the services portion shrank--from 17% to 16%. Much of that decline can be explained by a slide--now halted--in IBM's hardware-maintenance business, which accounts for 68% of the total services figure.
LOWBALL PRICES. The rest reflects how difficult it has been for IBM to compete for service business against such companies as Electronic Data Systems and Andersen Consulting. Says Bonnie Digrius, an analyst at consultants Gartner Group Inc.: "IBM is still trying to find the right equation." Indeed, Digriussees IBM's worldwide share of the heated systems-integration business, in which suppliers design, build, and install complex information systems, actually falling between now and 1995--from 27%to 23% (table). Why? Even though the market is growing 19% a year, moreand more competitors are vying for business, often by quoting lowball prices.IBM has one big handicap in the commercial systems-integration arena: Despite years of experience, most of its jobs have been in the federal market, where contracts run longer and usually aren't fixed-price, says Doug Wilder, manager of the systems-integration program at Input, a Mountain View (Calif.) market researcher. IBM is trying to match its more nimble rivals but remains a "huge battleship" that can't quickly turn itself around and reorient its marketing efforts to push a complex array of services instead of just the latest hardware, says Digrius.
But IBM is breaking traditions andtaboos to succeed. For instance, it has just formed a 50-50 joint venture with accounting giant and frequent systems-integration competitor Coopers & Lybrand. Their new Meritus Consulting Services will provide management consulting to selected industries. The joint venture is also intended to give IBM the type of consulting expertise that helps Andersen Consulting and others become long-term advisers to customers. Those connections often are key to winning lucrative systems-integration deals.
At the same time IBM formed Meritus, it made the rare move of hiring an outsider, Robert Howe, formerly of Booz-Allen Hamilton Inc., to guide the company into the consulting business. Howe was signed on, according to M. Bernard Puckett, vice-president in charge of IBM's Applications Solutions unit, because "our instincts are not always the best" when IBM enters such unfamiliar territory.
REDRAWN MAP. IBM made an even more unusual move on Mar. 26 when it announced that it would work with archrival American Telephone & Telegraph Co. to make their respective mainframes and network management systems work better together. That should help both companies win "outsourcing" deals, ones in which a company takes over and runs a customer's entire data processing department or network. The arrangement will also strengthen IBM's hand against Electronic Data Systems (EDS), the General Motors Corp. unit that practically invented commercial outsourcing and, with 50% market share, still dominates it. IBM now has just 6% of that business, but Digrius projects that it will edge up to 7% by 1995, while EDS's share will fall to 28%.
IBM has even reorganized its sales force to push services. Last November, it carved up the U. S. into 64 geographical and industry-oriented trading areas. Each has authority to create customized bundles of services and products. The corporate division that previously set nationwide service prices and termshas been dissolved. Now, the company also gives equal sales-quota weight to service and product revenues.
Winning in services is critical to IBM's future success, observers agree. Says Melvyn E. Bergstein, senior vice-president at Computer Sciences Corp. and head of its commercial systems-integration arm: "IBM really understands they're playing a survival game ona world stage against real power players. It has to be preemptive." The name of the game, rivals say, is accountcontrol--making sure customers stick with IBM gear. Firming up account control is all the more important in today's market, where standardized softwareis making it easier for customers to switch suppliers. By shifting the emphasis to services, Bergstein says, IBM can block the inroads of such large Japanese rivals as Hitachi, Fujitsu, and NEC. Their strength is in making hardware, not in designing systems to solve specific business problems. Furthermore, they are not organized to provide services such as outsourcing, particularly in the U. S.
DO OR DIE. IBM stands to gain against domestic rivals, too. The more data centers that the company runs as an outsourcer, the smaller the available market it leaves for makers of IBM-compatible mainframe gear such as Amdahl Corp. and Storage Technology Corp. And the earlier IBM is brought in to consult on a large computer project,the more it can influence product choices.
Predictably, IBM's do-or-die push into services is upsetting some rivals. Systems integration and outsourcing pit it against some of its own best customers, including EDS, Computer Sciences, and Andersen Consulting. Darwin Deason, chairman of Affiliated Computer Systems Inc., a Dallas outsourcing company, says he has complained to the Justice Dept. that IBM is "breaking thelaw" by offering outsourcing services under the IBM name. He says that a 1956 consent decree, which IBM signed to settle an antitrust suit, calls for IBM to offer such services only at arm's length through a subsidiary. Dawson also accuses IBM of winning outsourcing deals by quoting prices 40% below cost. IBM says it is not violating any laws or agreements.
IBM has a long way to go in systems integration and outsourcing. But as Computer Sciences' Bergstein says: "IBM can afford to make mistakes because it has tremendous cash flow. Now's the time to experiment." If the experiments succeed, services will generate profits that are anything but boring.A SHRINKING LEAD?
IBM 27% 23%
ANDERSEN CONSULTING 6 10
ELECTRONIC DATA SYSTEMS 8 10
DIGITAL EQUIPMENT 5 9
Percent share of systems-integration market revenues, including hardware and
DATA: GARTNER GROUP INC.
John W. Verity in New York