IBM on the Downsizing Route


International Business Machines Corporation, largely known as IBM has recently been in the news for its downsizing efforts. Streamlining seems to be the mantra of choice as IBM is looking at more low profit business arms that it can get rid of. These rumors are credited to people aware of the company’s strategies and the industry experts.

Big blue not so big anymore

IBM is popularly referred to as Big Blue. Various industry sources are speculating that apart from the call center unit, IBM may be looking to commoditize various other low-profit margin operations.

The sale of the call center unit at a time when the low profits of the same unit came into focus. The sale might have sparked the raging rumors of downsizing. Synnex Corporation entered into a business deal with IBM when the company bought the customer care outsourcing unit from IBM. The deal is rumored to be valued around $505 million.

The rumors

An insider from the company who chose to be unidentified as the internal discussions were strictly private, was quoted as saying, “Some areas in software services, back office are among candidates being talked about in this context.” The same employee was also quoted as saying that the units that might go on the chopping block are still under speculation and that nothing has been set in concrete as yet.

IBM itself, however denied the rumors and said that IBM has not decided to sell any of the back office operations. In fact the IBM spokesperson sent an email that said, “This is about continuous transformation. IBM has always been defined by an ability to transform and reinvent our business. To sustain this innovative model and to deliver unique client value, you must anticipate and lead technology shifts, including evolving ahead of the rest of the industry. This core belief shapes IBM’s decisions on all investments, acquisitions and divestitures.”

A market shift

The pure software services market is undergoing a paradigm shift in its service arena. More and more customers are continuously shifting to pay-as-you-go models for the use of software services. With work from smaller teams being preferred over the work from teams that are paid by the hour, the earlier models are on the rethink block.

The global economic crisis as always in various other facets of the economy, is a catalyst in the paradigm shift. Automation, reducing the increasing demand for remuneration and software that is intellectual property based is the new paradigm that has the potential to reverse the fading fortunes of software companies like IBM.

Understanding the business numbers

The business decisions taken at IBM can be understood in the context of the entire Indian software industry according to some trade analysts. IBM also reflects to a large extent, the business decisions of India’s top software companies.

In the IBM annual report of 2012, one of the main highlights was the fact that the company’s share of revenue from software grew from a registered 27% in the year 2000 to a significant 45% in the year 2012.

Mark Loughridge, Chief Financial Officer at IBM, when speaking at an investor briefing mentioned the company’s intention of streamlining efforts such that the software arena would contribute to half of IBM’s total businesses by the year 2015.

HfS is an outsourcing advisory firm based in the United States. The company’s founder Phil Fersht was quoted as saying, “IBM wants to move into cloud-based service provision, where it is steadily spending its way through its $20 billion war-chest. It is the classic play to reposition the firm for non-linear growth, which is what most of the leading Indian firms are craving and struggling to achieve.”

He was also of the opinion that the move was bold and it brings questions of IBM’s appetite into question. “It does raise future questions on IBM’s appetite to rely on people-intensive businesses that are not always aligned to technology transformation. Will the same happen eventually with finance or HR (human resources)? Will IBM tire of processing paychecks and invoices, like it has done with taking customer service calls? With significant client investments, such as Cemex (finance and accounting) and Kraft (HR), it doesn’t appear that the firm will do a 180 anytime soon, but with this decision to exit CRM BPO, it does raise doubts as to the company’s long term focus outside of technology services and software.”

In this quote, Fersht refers to CRM BPO. The term stand for Customer Relationship Management Business Process Outsourcing. The term is in simplified terms the act of outsourcing the customer management program of one company to an IT services firm.

The IBM legacy

Although the IBM business strategies are being questioned, the name IBM was respected as a pioneer when it took over entire functions and departments for different companies like Kraft, Cemex and Bharti Airtel.

The future of the IT services industry

The move and decisions made by IBM solely for their own business has sparked an entire re-think for the industry as a whole. Commoditized businesses and their worth are under the microscope for now according to IT analysts.

Thomas Reuner a Principal researcher at the Ovum research based in UK was of the opinion that IBM was trying to hand over as many commoditized businesses so that they can move on to better opportunities that will hand expected margins over to the company. He was also quoted as saying that businesses should strategize and psychologically be prepared to let products that are established in their segments go, especially if it means newer and better opportunities.

Deals between IBM and Lenovo (the sale of the PC business to Lenovo) and Dell’s decision to go private are all in line with the same strategy that IBM relied on in selling of commoditized products.

Another Ovum analyst, Margaret Goldberg was quoted as saying, “The deal is also an interesting move for IBM, as the IT powerhouse- bested by rocky earnings as of late- pursues a strategy of exiting relatively lower-margin businesses (and acquiring other companies) to concentrate on higher value-add and potentially more lucrative areas in IT services, consulting and cloud.” The analyst was talking about how the business strategy that IBM has adopted allows them to get rid of lower-margin businesses and focus their energies instead on higher-margin services with the lowest possible risks.

She was also quoted as saying, “With this deal, which will close in a few months, IBM will still be able to offer CRM BPO services as part of its end-to-end value proposition to customers, without shouldering the financial challenges of that business. We will be curious to see whether IBM makes similar decisions regarding other parts of its business going forward.”

The future

In the deal that IBM made with Synnex, the CRM BPO services for IBM will feature Synnex as a strategic partner. IBM has changed the face of the Indian IT industry as a whole. With the cutting edge of technology offerings, IBM is a head above the competitive industry.

IBM recently made Watson (an artificial intelligence based computer system named after the founder Tom Watson) available to clients. Most of the competitors in IBM’s sector do not have any similar offerings, making IBM’s position enviable.

With effective strategies and streamlining of thought processes behind the technology, IBM is starting to monopolize the Indian IT industry.

2012 ended with a revenue of $104.5 billion for IBM. With a profit of $17.6 billion in 2012, the company is well on its way to being the definition of success. 14% of the year’s revenue was generated from hardware and financing, 41% from services and 45% from software. With game changing strategies and innovations, IBM definitely is a company to lookout for in the future.

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