From: XXXXXX XXXXXXXX [mailto:firstname.lastname@example.org]
To: XXXXXXXX XXXXXXXX
Subject: Exclusive Story Opportunity: THE MAD SCRAMBLE TO BE IBM
I am writing to present you with an exclusive opportunity to speak with IBM senior leadership on the hottest trend now occurring in the IT marketplace.
First some background…
Buying a technology services company has become all the rage recently. Beginning with HP’s acquisition of EDS last year and continuing with the recent purchases of Perot Systems by Dell and ACS by Xerox, an unprecedented buying spree for services companies is underway. But why?
When you cut through the “synergy’s speak” and the bombastic rhetoric, a common and overwhelming truth emerges. The challenged makers of PC’s, Printers and Copiers are in a frenetic race to be … IBM.
The recent Xerox/ACS merger is an example of a commodity hardware player trying to diversify and get into the services business. This follows on the heels of HP acquiring EDS, and Dell buying Perot Systems. In each case — HP, Xerox and Dell — we’re essentially talking about manufacturing companies, with products (whether it’s PC’s, printers or copiers), that are rapidly becoming commoditized, and that need to find new sources of revenue, in order to demonstrate to their shareholders that they can somehow grow margin. And each is desperate to work the IBM playbook.
The problem, though, is that in each case, they are acquiring yesterday’s services model. Each of the acquired companies (EDS, Perot, ACS) is labor-centric, largely US-based, and largely low-end services. So while yes, they are getting into the services business, they are getting into the old kind of services business where it is very hard to scale and grow margin.
That older services model is one that IBM was part of only as recently as 7 years ago – prior to the biggest transformation of a business unit in the history of IBM. 7 years ago, IBM was threatened by the rise of labor arbitrage-based services companies from India (WiPro, Infosys, Tata, etc) and was undergoing some serious soul-searching. IBM leadership faced a dilemma: how to provide counsel and engage with clients from a position of deep industry expertise while simultaneously bringing standardization and software assets into the delivery of its technology services. And fast!
The response was indeed swift. In 2002, IBM purchased PwCC for 3.5 billion (after HP has failed to acquire it for $18 billion) and brought deep industry-based consulting into its portfolio. Thus began, the transformation of IBM’s services business from one-off, customized services engagements to an entirely new higher value model of helping business and governments transform and innovate industry by industry – a model that continues today to be embraced by clients around the world. Following the acquisition of PwCC, a strategic decision was made to inject software and intellectual property from IBM’s vaunted Research labs into Services to automate traditionally labor-based services processes. IBM acquired companies that helped with that automation, and that led to the emergence of IBM’s silver bullet — the automation of services and the development of repeatable, software-like services assets. The combination of industry expertise (consultants and services experts with deep industry know-how) and software/intellectual property delivered across a standardized model has proved to be a game-changing combination for IBM in the marketplace.
What IBM found out was that combining Software and Services could overcome labor arbitrage. Without the transformation, IBM would have been under mortal threat. That threat however looms for IT Services companies who didn’t transform, and it looms even larger for challenged commodity hardware companies who try to buy their way into the game. What HP, Dell and Xerox will find is that it’s hard to scale a labor-based business, especially if your workforce is primarily US-centric. And it’s hard to grow margin if you are stuck in the low-end of the services business. And in the case of HP/EDS, it’s very hard to grow these businesses if you cut costs and lay off the labor.
And all of this is not to mention objectivity in services. In each of these cases, the manufacturer is not shy to say that a major reason for the acquisition is to build a new channel for their hardware. IBM has long been product agnostic in its services business for a reason. Using a services engagement to hawk hardware, doesn’t wash well with clients, who expect objective counsel from a services provider.
All of these things, IBM learned the hard way. At one point, back at the turn of the decade, we started to see the Indian pure plays eat into our margins. We knew at that point we had to have a new approach to services. We knew it could no longer be purely a labor play. We knew we had to start automating labor-based processes. And we knew that in doing so, we also had to move up the chain with our clients and start doing the kind of services work where our clients would be more likely to pay us a premium, whether it’s building smarter electrical grids, managing traffic congestion, applying analytics to healthcare or designing new supercomputer models for finding petroleum reserves.
This is why IBM acquired PwCC. And it’s why we’ve been on an acquisition binge to get software companies that help us automate labor-based services processes, and then build repeatable software assets that help us grow margin. It’s why we have reoriented our Research organization to focus on our clients complex optimization problems. It’s why we’ve reorganized the SW group along industry lines. HP, Dell and Xerox are not building any of these capabilities. Rather than transforming to compete in the new world of services, they are buying yesterday’s services model. A model that lacks consulting, software and intellectual property. Having been in a sharkfight with the Indian services competitors and winning because it had those assets, IBM has some advice for HP, Dell and Zerox: “You’re going to need a bigger boat.”
We think with what’s happening in the market right now, there’s a pretty compelling story for you to examine. One that contrasts what HP, Dell, Xerox (and surely others) are trying to do – and what IBM has done over the last 6 or 7 years. It’s two very different approaches. I encourage you to speak with all the parties involved from Palo Alto to Austin to Armonk.
Who’s right .. who’s wrong? Will the big bets pan out or will they end up dragging down the once might titans of technology? We’ll let the readers determine that. For our part, IBM senior executive Mike Daniels can speak with you exclusively to provide detail on IBM’s strategy, and provide our point of view on the competition and the looming battle for supremacy in a hotly contested IT services market worth billions to the winners.
Clients, analysts and industry observers are also available to discuss.
I’m looking forward to working with you on this exclusive opportunity at this unique time in our industry. If you are interested in supporting documents, please let me know and I will send them to you promptly.
IBM Global Technology Services
11 Madison Avenue, 18th Floor
New York, NY 10010