Last Friday, the stock market took a nose dive on the news that IBM will miss its expected quarterly profits. The report forced down the price of shares of other tech companies, as analysts took this to mean tough times ahead in the computer industry. But, as analyst Mark Stahlman noted in an interview in Business Week (The Old IT Is Dead. Long Live the New), the real problem isn't macroeconomics:
Q: Why are IBM and so many other companies missing their earnings numbers? Is it macroeconomic factors or a structural shift in information technology?In other words, there is still a lot of disruptive innovation yet to come. Companies who are hoping to sit back and cruise along based on their current technological capabilities are in for a rough ride.
A: The macroeconomics are really only important when there's nothing important happening in the technology. When the technology is lively and there's some significant product or architectural transitions coming, that always trumps the economy. We're in a period of really intense technology change -- probably the most concentrated period of technology change yet.
IBM seems to be one of the companies that understanding the need to change and remake itself. It is trying to transform from a technology company to an information company (see the cover story of a recent Business Week: Beyond Blue):
Over the past two years, Palmisano has built these concepts into a strategy that would be laughable -- if it weren't so serious. His goal is to free IBM from the confines of the $1.2 trillion computer industry, which is growing at just 6% a year. Instead of merely selling and servicing technology, IBM is putting to use the immense resources it has in-house, from its software programmers to its 3,300 research scientists, to help companies like P&G rethink, remake, and even run their businesses -- everything from accounting and customer service to human resources and procurement.
Why remake the company? Because, as Michael Dell preaches and practices, information technology is be coming a commodity. It is the application of information where value-added now lies.
IBM, with its legions of PhDs and closets full of patents, is not built to duke it out with the likes of Dell. Palmisano's strategy promises a neat escape. Instead of battling in cutthroat markets, he takes advantage of all the low-cost technology by packaging it, augmenting it with sophisticated hardware and software, and selling it to customers in a slew of what he calls business transformation services. That way IBM rides atop the commodity wave -- and avoids drowning in it.
What does it take to re-orient from technology to information? Working with the client in a high-tech, high-touch relationship. For example, as the BW story relates:
In its pursuit of vital industry experience, IBM -- much like an eager college intern -- is sometimes willing to work for free. IBM's unpaid partnership with the Mayo Clinic dates back to a cocktail party in 2000 in Mayo's hometown of Rochester, Minn., where IBM has a computer factory. A Mayo employee and an IBMer realized that scientists at both companies were working on genomics research. This soon led to joint projects on gene profiling of leukemia cells, and a published paper in a scientific journal in 2003. This is not the kind of connection that Dell, Accenture, or Wipro is likely to make.
IBM and Mayo quickly moved on to a more ambitious project: changing the way medical research is done. They set out to gather data on 4.5 million patients and to make it easily searchable by researchers -- but without compromising patients' privacy. A research task that used to take five people a year can now be done by one person in 15 seconds. Eventually, Mayo and IBM believe, physicians will tap into a vast storehouse of data, real-time, when they're diagnosing patients. "This is the way to transform the way we practice medicine," says Dr. Nina M. Schwenk, chairperson of Mayo's Information Technology Committee. And for IBM, it's a foot in the door of the $1.4 trillion health-care business.
While IBM had plenty of skilled engineers in Rochester, they practically needed brain transplants if they were to do breakthrough work for Mayo. So the company sent some of its brightest engineers back to school. Working with the University of Minnesota, the company arranged in 2003 for a series of three-day crash courses in everything from molecular biology to protein sequence analysis. So far, 50 people have taken the classes. Nothing illustrates more starkly the gyrations at IBM: Engineers who once worked on a fading family of mainframe-style computers are now helping to chart the future of medicine.
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A lot of these newfangled service deals haven't been around long enough to show results -- but a few have. At Nextel, for instance, IBM's takeover of the company's customer-service operations helped improve its customer satisfaction ratings from also-ran to top of the heap. P&G is another success story. In January, 2004, IBM took over part of P&G's human resources in a 10-year deal valued at $400 million. P&G has so far outsourced 3,500 jobs, including some in computing and customer relations. In HR, it had set 21 standards for speed and accuracy in such categories as payroll and expense management. The IBM-run operations met them all. In the month before IBM took over, P&G had met only nine of the goals, according to market researcher Gartner Inc.
With those victories under its belt, IBM is scrounging for new markets. In addition to its four original businesses -- accounting, HR, customer service, and procurement -- it is now plowing into six others. They include after-sales service for consumer electronics, insurance-claims processing, and supply-chain optimization.
Will this work? That remains to be seen. Both the service side and the technology side were responsible for IBM's missed quarterly performance. As Chief Financial Officer Mark Loughridge was quoted in the Wall Street Journal ("IBM Results Fall Short of Targets As Companies Slow Tech Spending"):
at least some of the weakness in mainframes was expected, in part because the machines sold very well in the prior year.
Mr. Loughridge also placed blame for the shortfall at the feet of the giant services organization, which accounts for about half the company's revenue. Those services encompass everything from handling a company's payroll operation and designing computer networks to basic consulting.
Mr. Loughridge said IBM had "execution issues" in services, and that the company was beginning restructuring efforts, largely targeted to Europe, that would try to clean those up.
Clearly, IBM has ways to go in its transformation. We will see if Wall Street has the patience to see it through.