International Business� What?
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IBM, a company that had hardware as part of its name, has so transformed itself that hardware is now the smallest part of its product offerings. It was not an overnight process; indeed, it's taken two decades and two very different CEOs to come to this place. But thanks to Louis Gerstner and Sam Palmisano, IBM has moved beyond just hardware into its own almost peerless domain.
Out of the $23.3 billion in revenue for the second quarter just ended June 30, just $3.9 billion came from the Systems and Technology group, which is IBM's hardware unit. It's the second-smallest unit at IBM (NYSE: IBM); the Global Finance arm is the smallest.
As a hardware company, IBM is only a little bigger than Sun Microsystems was just a year ago and about the size of EMC (NYSE: EMC). With $5.2 billion in sales last quarter, IBM's software business is bigger than the hardware business.
Between Global Technology Services and Global Business Services combined, it's far and away the largest services company in the world. Business services this quarter were $13.4 billion, 60 percent of total revenue. IBM has an estimated backlog of services work at $132 billion, and services are very high margin, certainly much more profitable than hardware.
The result is a change in how the company presents itself to customers and potential customers. "When IBM now goes to market and reaches clients, it's the services that they lead with," Eugene Zakharov, director of the Professional Services Business research at Technology Business Research told InternetNews.com.
"They lead with their consulting capabilities, their integration capabilities, and once the solution is created, IBM decides what kind of software and hardware to use, whether it's IBM or HP or Dell. So at the end of the day it's not even IBM hardware they are differentiating any more."
David Moskowitz, president of the consultancy Productivity Solutions, added that "Hardware used to be what they did. Now it's just one of the many things that they do. They lead with a business solution that involves not just services but may or may not involve a box."
Solving hard business problems
Hagen Wenzek, director of IBM Corporate Strategy, acknowledges that the company no longer leads with products. "We see ourselves as someone solving hard business problems," he told InternetNews.com. "We think about going out and working with the people and provide the right hardware, the right software and services, data and information, everything, to fix the problem."
Indeed, that's what's behind IBM's latest batch of TV commercials that feature IBM researchers who talk of their work to "build a smarter planet." Instead of selling z Systems or WebSphere, IBM is promoting its PhDs.
It has good reason to brag. In 2008, IBM was awarded 4,186 patents, the first time any company has broken the 4,000 mark in a single year. IBM beat out Microsoft (2030) and Intel (1776). It has more than a dozen research centers featuring some of the brightest technologists in the world, including multiple Nobel laureates, but they aren't living in a world of isolation, Wenzek notes.
"[Researchers] have supported [the company] a lot by not being an isolated guy in the ivory tower but by being exposed to what is going on in the market by sitting in on projects," he said. IBM researchers also routinely sit in on customer meetings.
"They got exposed to what is really necessary in the market and pulled that learning, that interaction with the clients, into the way they do research. I think that's fundamentally different from an approach of having these folks hidden away working in darkened rooms and trying to come up with great ideas accidentally," he said.
This de-emphasis on the IT ingredients is also being driven by customers, especially in emerging markets. "We hear from our clients, 'don't talk about IT, tell me how can this service shape my economy, how can it help my people get access to credit.' In the conversations, you want to hide it, you want to focus on the outcome and not the nitty gritty stuff that sits behind it," said Wenzek.
Next page: The reinventors