Editor’s note: Rather than fighting the current and succumbing to deepening revenue contraction in IT outsourcing, IBM stays afloat by refocusing its Global Technology Services (GTS) capabilities to address evolving enterprise IT needs and drive business outcomes through cloud, analytics, automation and cognitive computing technologies, says Technology Business Research analyst Jennifer Hamel.

HAMPTON, N.H. – The erosion of traditional IT outsourcing (ITO) revenue by the “as a Service” model impacts all IT services vendors, as monitored by TBR’s IT Services Vendor Benchmark. As the largest ITO vendor TBR tracks, IBM (NYSE: IBM) is swimming against this market current, facing continued services revenue challenges as legacy outsourcing contracts mature.

However, rather than fighting the current and succumbing to deepening revenue contraction, IBM stays afloat by refocusing its Global Technology Services (GTS) capabilities to address evolving enterprise IT needs and drive business outcomes through cloud, analytics, automation and cognitive computing technologies.

Combining its large outsourcing and project-based businesses into a single Infrastructure Services (IS) unit comprising four modular service lines made it simpler for clients to consume services from IBM, as TBR examined in its commentary on the IBM Europe GTS Analyst Day in September.

Transforming Technical Support Services (TSS) from an IBM product-attached focus to multivendor support further aligns IBM’s core competencies with the current and future heterogeneous support needs of its customers. An IP-enabled managed services portfolio, growing partner ecosystem and consulting-led approach will differentiate IBM from fast-following India-centric peers as enterprises demand speed, flexibility and — most important — trusted partnerships from IT vendors.

We expect IBM will benefit in the next half of this decade as these demands increasingly outweigh cost takeout in IT services purchase decision-making.

The string of larges cale IT transformation deal wins in the past year indicates this strategy is working.

Event overview

TBR attended the IBM Global Technology Services Executive Salon in New York City on Dec. 8 and 9, 2015, the first GTS analyst event in the U.S. in several years.

Martin Jetter, senior vice president of IBM GTS, kicked off the event www.tbri.com TBR by providing an overview of how IBM is transforming to meet clients’ evolving expectations for enterprise IT services. Other presentations and breakout sessions dove deeper into the various GTS service lines, including TSS, Mobility Services, Resiliency Services, Networking Services and Systems Services, and regional perspectives on Europe and North America.

Representatives from several GTS clients shared insights from their engagements with IBM, and IBM showcased demos of new GTS solutions.

Like a management consultant, IBM advises IT departments on how to transform the role of IT to drive business value IBM’s messaging around business outcomes enabled by technology transformation is not new but rather the continuation of a shift that began in January 2014 with the creation of the Business Analytics and Strategy practice and the IBM Watson unit.

Subsequent actions — the move of the Global Process Services (GPS) unit from GTS to Global Business Services (GBS) in July 2014, and the corporate reorganization into solution units such as IBM Cloud, IBM Security, IBM Analytics and IBM Commerce in January 2015 — aligned IBM’s consulting and delivery teams to accelerate client outcomes by combining business strategy and IT transformation.

Throughout 2015 much of IBM’s services-related marketing targeted line-of-business (LOB) problems such as transforming business models to make use of the Internet of Things (GBS Digital Operations practice), enabling better health outcomes through cloud and analytics (Watson Health unit) and becoming a cognitive enterprise (GBS Cognitive Business Solutions practice).

The central theme of the GTS Executive Salon was how IBM can enable clients’ IT departments to not only react to new technology demands from business users, but drive the transformation by creating an “application economy” within organizations, supported by hybrid IT infrastructure. In each of the four new IS units, IBM offers consulting services to help clients make strategic decisions around which new technologies to adopt and how to transform the internal IT organization to deliver on LOB technology demands while maintaining control over execution.

Decades of experience from thousands of large-scale IT infrastructure engagements across multiple verticals gives IBM the expertise and permission to advise clients on IT operations strategy. This track record of being what IBM terms “the backbone of the world’s economy” differentiates GTS in the IT infrastructure consulting space.

IP-based delivery and multivendor support position IBM to deliver hybrid IT services IBM recognizes — and welcomes — the shift in the IT services market away from labor arbitrage-based delivery models toward service automation and IP-based platforms. A legacy in technology innovation and robust investments in cloud, analytics and cognitive computing over the past several years position IBM ahead of peers for the next wave of IT services engagements.

Watson will play a critical role in transforming how GTS delivers IT services — part of a corporate wide initiative to unify the IBM organization around cognitive computing — by reducing the cost and aggravation associated with IT problem resolution and by predicting pain points before they happen.

Watson and other homegrown tools such as Predictive Analytics for Server Incident Reduction (PASIR) enable IBM to fend off aggressive India-centric competitors by delivering faster and smoother results while enabling innovation of new services (aided by IBM IT strategy consulting). IBM’s most innovative analytics- and cognitive-enabled services are primarily focused on its own products — understandable, as IBM has the most data on its own IP with which to fuel predictive models.

However, the company continues to make progress in becoming more vendor-neutral, which will be essential to serve hybrid IT environments.

Acquiring Gravitant provided IBM with a hybrid cloud brokerage platform that is interoperable with cloud solutions such as Amazon Web Services, Microsoft Azure, Google and ServiceNow. New offerings such as IBM MultiNetwork WAN Services enable IBM to deliver simplified management of wide area networks (WAN) comprising multiple networking providers through a single dashboard — a capability that is strengthened by IBM’s strong partnerships with network technology vendors such as Cisco and Juniper.

As IBM delivers more managed services around hybrid IT environments, we expect it will enhance its Watson and PASIR analytical models with data collected from those engagements and roll out those services beyond its core IBM technology portfolio.

Impact and opportunities TBR believes IBM’s strategy to cater to changing IT consumption preferences is sound, and recent GTS wins indicate the execution is resonating with clients.

In 2016 TBR will watch the following areas for signs that the new delivery model will return IBM Global Services to revenue growth:

 Emerging markets: Presentations on regional perspectives during the IBM GTS Executive Salon focused on North America and Europe, which makes sense given IBM’s large-enterprise focus. However, in his closing remarks, Jetter noted that companies in emerging markets, such as India-based telecoms, could also benefit from IBM’s IT transformation offerings. IBM has the global cloud delivery scale to support clients anywhere in the world, and the new modular portfolio lowers the bar for entry to IBM’s services, which can grow into long-term services relationships. However, pursuing strategy-level transformation opportunities in emerging markets will require IBM to accept smaller deal sizes for consulting work.

 Integration with GBS: Breakout sessions on different transformation areas — experience, work and business model — invoked LOB-oriented themes such as changing consumer demands, expectations around user experience, and workforce enablement that GBS specializes in through practices such as Interactive Experience and Business Analytics and Strategy.

During the event IBM referenced a few examples of client engagements spanning both GTS and GBS service areas; however, the two organizations continue to be run independently and have unique internal cultures. In part, TBR’s assessment of IBM’s success in 2016 will depend on how seamlessly GTS and GBS can work together to refer opportunities and create comprehensive road maps for end-to-end business and IT transformation.

(C) TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.