Editor’s note: Geoff Woollacott is Senior Analyst/Engagement Manager and Bryan Belanger is Professional Services Practice Analyst at research firm Technology Business Research. This is the first of a three-part analysis of IBM’s (NYSE: IBM) plans to exploit business opportunities based around its “Watson” program.

HAMPTON, N.H. - The name Watson represents high-level big data and analytics and the catalyst for deep and far-reaching changes 
in the ways IT provisioners deliver, and customers consume, technology.

IBM is well positioned to capitalize on the market opportunities these changes create. The purchase and consumption shifts obliterate historic best practices in ways few companies fully fathom. The blueprint IBM laid out to analysts in Toronto last month indicates it
has made the operational changes and technology investments necessary to protect its market position and capitalize on displacement opportunities arising from competitor adherence to outdated go-to-market business models.

The springboards for IBM’s multifaceted initiatives around big data and analytics are the multibillion-dollar investments in Watson development, the attendant acquisitions of large solutions sets from SPSS, Cognos and Unica, and the niche-specific, tuck-in acquisitions of entities targeting financial services and fraud risk assessments such as Algorithmics and i2 Group.

Watson will begin to scale as the hardware engines required to drive it become smaller, pushing the capability down-market and horizontally, with the latter being launched with Watson Engagement Advisor for Artificial Intelligence-based call center and customer-initiated query. Similarly, IBM will drive Watson deeper into the initial industry targets of financial services and healthcare through acquisition and companion application sets in the medical diagnostics fields.

IBM intends to:

1. Continue operational convergence of its Software Group (SWG) and Global Business Solutions (GBS) organizational silos. New buyers drive IBM move to converged solution selling.

a. IBM excels at C-Suite communication, and it knows there will be new buyers for their technology and IP capabilities as consumerized IT becomes reality. IT managers driven by demands to shift IT consumption from capex to opex need the ability to listen to each specific line-of-business  manager and their respective need for actionable outputs from the underlying technology these line-of-business purchasers have little interest in understanding, or learning how to operate and maintain.

b. Continue evolving how IBM monetizes its IP assets, with large consultative engagements at the forefront of this shift. IBM highlighted its key banking partnership with Grupo Financiero Banorte General Director of Technology Guillermo Guemez and IBM Global Leader, BAO Transformation Services Glenn Finch, outlining in detail the output-driven contract arrangement between the firms. IBM remuneration will be tied to a select set of five to seven KPIs that will be reviewed and modified annually and against which IBM’s payments will be calculated. Technology will not be the determinant of that compensation; instead, compensation will be based on direct top- or bottom-line business impact.

c. IBM announced the creation of an Integrated Center of Competency (iCOC) virtually staffed by 650 high value specialists from their Global Business Services and Software group teams and the unwillingness to sell IP assets from one without tight integration with the other. The intersection results in what TBR calls IP optimization (IPO), which others coin as “hardened” process or
“industrialized” process.

2. Continue consumerization of analytics development and output manipulations for consumable analytics capable of putting at the fingertips of executive road warriors the metric levers they need to pull to optimize their businesses on the fly. This will result from hardened process essentially baking into the tools, GUIs and thought leadership of its data scientist team to quicken time to intelligence. SPSS and Cognos tools continue evolving to simplify and mask the underlying technologies less critical to technology consumption than the resulting outputs these tools create.

IBM Data Analytics: operational convergence and contractual simplicity and accountability

The industry’s focus on and perpetual talk of its newest shiny object, linguistically coined “output,” articulates the impatience end customers have for discussions around basic technology that do not translate into actionable business value or the outputs. In an ever-changing landscape, customers want to focus on the results and care far less about the underlying technology.

During the first day, IBM highlighted a financial services customer use case and feathered in discussions around pricing and converged competency centers melding SWG and GBS expertise.

\IBM talked at length about the rigor associated with the negotiations for its contract with Grupo Financiero Banorte, and laid out the simple, flexible contract pricing for the engagement. Each year IBM and Banorte established five or six KPIs to be monitored during the year, which drive IBM’s overall engagement fees. IBM stresses these have to drive longer-term contract lengths (and therefore represent defensive posturing against shorter BPO/ITO deals) as well as a high level of customer collaboration and trust.

To underscore the way in which it will reorganize to address these emerging customer requirements, IBM announced the creation of iCOCs between the SWG and GBS. As IBM finds ways to drive cost takeout on the more process-oriented maintenance services, it expects customer cost savings will be reinvested in the converged IP offerings emanating from these two organizations, with the pricing modeled after contractual arrangements deployed with Banorte. No itemized SKUs, no piece parts — just one flat fee tied to business value as determined and monitored by the actionable customer outputs.

Part Two: IBM Watson: Expanding into new industries and further down-market as Moore’s Law allows