Big Blue at Your Service
IBM's savvy marketing of
technology knowhow is spicing up its growth
You might think spending $200
million of his company's money would cause Honorio Padron to shop around for the best
price. But in February, the chief information officer of CompUSA (CPU)
awarded IBM (IBM)
a seven-year contract to run his company's entire computer operations and software
development--without considering another supplier.
With its Big Blue foot in the door, IBM then began showing Padron other high-tech
delights. After a peek at IBM's point-of-sale technology, Padron is testing the system in
one of the company's 218 stores. If he's wowed, that could mushroom into a $40 million
deal. And in April, after Padron was ''blown away'' by IBM's Web-design services, he
awarded the computer giant a consulting study to revamp the retailer's E-commerce efforts.
In two years, CompUSA has gone from spending less than 10% of its technology budget with
IBM to forking over 80%. ''They really jump through hoops,'' says Padron.
If many of the top companies on the BUSINESS WEEK Info Tech 100 supply the plumbing for
the wired world, then IBM, No. 17 on the list, is the general contractor of the group. To
be sure, the $82 billion computer giant does supply its share of infrastructure
gear--computer servers, disk drives, networking equipment, and database software. So far
this year, it has signed multibillion-dollar technology deals with Dell Computer,
Nintendo, and EMC Corp. And on June 7, IBM signed a seven-year, $8 billion agreement to
supply Acer Group with disk drives, displays, and microchips.
But it's services that make IBM a standout. Competing against everyone from Electronic
Data Systems to Big Four accounting firms to boutique shops offering only Web services,
IBM has emerged as the world's largest purveyor of technology services. It counsels
customers on technology strategy, helps them prepare for mishaps, runs all their computer
operations, develops their applications, procures their supplies, trains their employees,
and even gets them into the dot.com realm.
It's a bet that IBM Chairman Louis V. Gerstner Jr. made in 1993 that's paying off now.
While his predecessor was prepared to break up IBM, Gerstner decided that the company's
strength was its sheer breadth. He declared IBM would offer its corporate customers
soup-to-nuts solutions, from tiny silicon wafers to massive mainframes to special software
for clients in transportation, financial services, and other industries. What ties IBM's
diverse product portfolio together? Services.
Big Blue's growth engine is high-tech knowhow. With hardware sales essentially flat and
software revenue growing modestly, the company's Global Services unit has stoked IBM's
financial turnaround. Its services revenue has jumped from $16 billion in 1996 to $23.4
billion last year. Services now account for 29% of sales and 17% of profits. Half of IBM's
290,000 employees are in services. In the first quarter ended Mar. 31, IBM had built up a
huge $55 billion backlog of services business. And in the past four quarters, IBM signed
more services contracts than either of its rivals EDS (EDS)
or Computer Sciences Corp. (CSC)
have inked over the past three years. ''They are totally unstoppable,'' marvels Susan
Scrupski-Miranda, a consultant at IT Services Advisory, Hillside, N.J.
Now, IBM hopes to lift its services business into the stratosphere with an intense focus
on the Net and a $500 million marketing campaign built around E-business. IBM was one of
the first technology companies to cater to companies starting to set up Web sites and
shift traditional operations to the Net. Today, IBM has over 30 E-commerce services,
including Web-site design and Web hosting--which generated $3 billion last year. And
Gerstner expects that's just the beginning. On May 12, he told Wall Street analysts that
market researchers predict 60% of the money spent on E-business industrywide will be for
services. ''As the world's largest services company, we're right in the middle of the
sweet spot,'' he crowed.
Gerstner has his eye on what IBM calls ''the E-line.'' That's the line separating
companies that do either all or a growing portion of their business on the Web--like
Charles Schwab Corp.--from those that don't. Right now, IBM is focusing on customers below
the E-line that haven't yet embraced the Net or are just getting started. IBM wants to
parlay its role as trusted corporate service provider into savvy Web adviser. Says Douglas
T. Elix, a general manager of IBM's Global Services unit: ''There's a lot of business to
be had helping companies get above the E-line.''
There's no guarantee, though, that IBM will be the one to get it. While Big Blue is a
leader in technology services, no one company dominates. IBM has twice the market share of
EDS, its closest rival, but that's still only 8.4% of the $361 billion global market,
according to market researcher Dataquest Inc. Now, IBM is facing fresh rivals in Net
services, including chip giant Intel Corp., which announced on Apr. 22 that it was going
to run Web sites for clients from its own data centers. What's more, traditional customers
are getting into the field with so-called selective outsourcing offerings. By using
expertise developed in their own businesses, companies such as United Parcel Service will
take over jobs like logistics, payroll, or supply chain management.
What does IBM have going for it? Scale. The company has the broadest array of technology
in the computer industry. And IBM is the only technology-services company spending $5
billion a year on research and development. IBM won a huge services deal with Monsanto Co.
in part because its researchers were working with pattern-recognition software that
Monsanto's scientists could use in genetics research to track similar gene patterns.
''This is what makes us unique,'' says IBM's Elix.
It's at least one of the things that set IBM apart. Most companies can't match what IBM
invests in the NASA-style control rooms that run the computer operations for clients--from
complex disaster-recovery schemes to backup power generators. ''Could I ever afford a data
center like IBM's? No,'' says CompUSA's Padron. ''Why would I want to replicate that? I
don't build my own power plant or telephone company.''
IBM benefits from such sentiments in ways other than revenues. Success in services feeds
another need--high-tech talent. When IBM wins an outsourcing deal, it typically hires the
customer's technical employees. As part of the CompUSA deal, IBM gave jobs to the
company's 130 full-time technical staff and 200 contract workers. Last year, IBM hired
18,000 people in services, and it expects to hire as many this year. And it's holding onto
employees. Elix says the employee turnover rate is just 8%, compared with an average of
15% for tech-service companies. ''They're getting the resources everybody is fighting
for--employees who have industry knowledge,'' says Dataquest analyst Allie Young.
IBM is doing a better job satisfying customers, too. Consider discount broker Charles
Schwab. IBM helps manage the company's Web systems that handle up to 76 million hits a
day. Last December, when Federal Reserve Chairman Alan Greenspan was preparing to address
Congress, Schwab CIO Dawn Lepore started getting nervous. She wondered whether her
company's computer systems could handle the load if Greenspan said something that moved
the markets.
So Lepore called IBM to order more computers. Trouble was, that typically takes 30 to 90
days and she needed them in three days. No problem. IBM chartered a plane and flew the
equipment to Schwab with time to spare. ''That is the kind of relationship you have to
have with a vendor,'' says Lepore. ''IBM understands what it means to support an
enterprise 24-7.'' Keeping customers like Schwab above the E-line should help IBM's top
line too.
By Ira Sager in New York
