Analysis: IBM (NYSE: IBM) discloses its latest earnings on Monday, six months into its latest reorganization. At a recent event, IBM executives demonstrate where Big Blue is going as a company, and analysts from Technology Business Research see a “cultural shift”
HAMPTON, N.H. – In May TBR said in its 1Q15 PSBQ IBM Global Services report, “By refining its technology IP portfolio and coalescing services resources around strategy-led cloud, analytics, mobility, social and security (CAMSS) opportunities, IBM gradually progresses toward a more agile go-to-market model that will enable a return to services revenue growth by 2016.” However, the question remains whether IBM’s realigned go-to-market structure will work fast enough to reverse last year’s trend of deepening services revenue losses.
The corporate reorganization is only six months old, so it may be too early to expect anything but an incremental improvement in the 2Q15 earnings results. IBM began experimenting with agile innovation and delivery methods in 2013 through its Interactive Experience consulting practice in Global Business Services (GBS) when it started co-locating an increasingly diverse array of expertise from across IBM’s business units and breaking the structural barriers between sales and delivery in a client engagement.
This development showed signs of a cultural shift in the company from a siloed organization focused on technology sales to a strategic IT and business transformation services partner.
Recent client wins signal the Interactive Experience consulting-led messaging and engagement model resonate with large enterprise customers, but the practice remains a relatively small revenue contributor (2% to 3% of GS, according to TBR estimates). Significant positive impact on revenues would require replicating this model across IBM’s broader services organization, and IBM moves in this direction by, for example, engaging in more iterative, design-led discussions in its GBS Enterprise Applications group.
However, we expect continued GBS revenue decline in 2Q15 as IBM continues to experience competitive pressures from lower-cost application implementation and outsourcing providers in the U.S.
During IBM Amplify 2015, a three-day conference held in San Diego in May, IBM showcased new solutions in its IBM Commerce portfolio aimed at improving organizations’ ability to engage with customers individually through a combination of design, analytics and SaaS-based delivery. TBR participated in a unique boot camp held by members of the IBM Design team; interacted with IBM executives, business partners and clients one-on-one and in group sessions; and viewed exhibitions and demos of solutions built on IBM Commerce offerings in the conference’s Solution Showcase.
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Impact and opportunities
- IBM assembled an impressive digital marketing technology portfolio and ecosystem, but GS’ peers will also benefit from related professional services opportunities
TBR’s research and interactions with IBM since IBM Smarter Commerce Global Summit in May 2014 suggest the company will continue to reserve this multidisciplinary, consulting-led approach for select clients, while using its network of system integrator alliances (which includes key competitors such as Capgemini, Cognizant, Deloitte and Accenture) to generate sales for its technology portfolio among smaller enterprises. This approach aligns with IBM’s brand reputation as a premium IT services provider capable of handling the most complex technology transformations, but it limits the company’s opportunity to change its image from a technology-first vendor to a strategic partner in the eyes of the broader IT services market. Though IBM is the preferred “partner,” IBM Commerce’s distribution strategy also enables IBM GS’ peers to enhance their digital marketing services capabilities, which over time could create the same pricing pressures and intense competition for digital marketing services deals that challenge IBM’s traditional C&SI business in the U.S.
An executive from IBM’s consulting organization said in a one-on-one conversation, “No one knows our software better than us.”
With IBM GS’ newer commerce solutions such as IBM Marketing Cloud and Journey Analytics, TBR believes it has the advantage as the preferred SI partner with the closest relationship to IBM’s product development teams and the deepest knowledge of complementary IPs such as Bluemix, SoftLayer and Watson. We expect this early advantage will wane in the next few years as mature market customers become more familiar with the new IBM tools and feel more comfortable using lower-cost SI vendors to implement solutions. Also, though IBM GS also partners with high-profile platform vendors such as SAP, Oracle, Microsoft, Salesforce and Adobe to deliver best-of-breed technology solutions using clients’ preferred tools, its competitors have similar alliances, putting more pressure on IBM to continue to build relationships rather than lead with its IP.
However, a growing global footprint of IBM Studios (13 open, with eight expected to launch in 2015) enables Interactive Experience to deliver consulting and solution development services in all of IBM’s geographies, including emerging markets in APAC and MEA, where most competitors have been slower to invest in local resources. Also, recent alliances with Apple and Twitter enable IBM to be first to market with unique services offerings around mobility and analytics.
- Adopting Design Thinking outside technology development will help IBM Interactive Experience sustain its edge in DMS and improve GS’ overall value proposition
Throughout IBM Amplify the company emphasized its IBM Design Thinking approach, which it defines as “a framework for delivering great experiences to our client.” The design boot camp provided hands-on insight to IBM’s solution design process, which it started two years ago in its product teams. IBM Design Thinking, developed by IBM Interactive Experience, Stanford and IDEA, builds on standard design practices with IBM-specific features:
Hills — user-centric problems to be solved
Sponsored users — clients that partner with IBM to design products and identify flaws on the micro level
Playbacks — collaborative sessions involving all IBM stakeholders to ensure the design aligns with the ideal user experience IBM increasingly pushes these design principles in its product development, mandating all new products undergo the IBM Design Thinking process.
IBM notes clients are starting to ask GBS to facilitate IBM Design Thinking exercises as a service, indicating the services opportunity remains an afterthought to IBM rather than a proactive push.
Design thinking as a concept is not unique to IBM. While SI rivals such as Accenture and Deloitte do not promote their end-customer delivery framework under the Design Thinking banner exclusively, their customer interactions involve a similar approach, challenging IBM to differentiate. Augmenting its historically strong position among CxOs with new technology hires that can implement and bundle digital marketing services (DMS) enables Deloitte to capture lucrative opportunities in the DMS market.
At the same time, Accenture’s DMS benefit from research, innovation and resources dedicated to the broader digital practice. The company packages its DMS offerings with other digital solutions or bolts them to engagements. Accenture’s global delivery network supports rapid growth and scale in the space. While IBM Interactive Experience has more direct access to IBM’s digital marketing software portfolio, Accenture’s technology-agnostic approach (given its limited proprietary technology portfolio compared to IBM) arms it with agility to deliver at speed and lead with design discussions through implementation of technology and advertising from multiple vendors.
We believe SIs with balanced portfolios, offering design-thinking services as part of their advisory portion of the customer interaction rather than around technology selection and/or development, are best positioned to win. While IBM’s name acts as a magnet for top technology talent, rivals’ established brands within the professional services arena enable them to scale up their digitally trained bench quickly through organic and inorganic initiatives, creating headwinds for IBM Interactive Experience to meet its recruitment goals.
For example, Accenture recently expanded its design studios network to 15 locations globally, opening offices in Sao Paulo, Milan and Sydney, and acquired Sweden-based digital consultancy Brightstep and Hong-Kong-headquartered digital agency PacificLink. In June Deloitte Digital opened a design and innovation studio in Canberra, Australia, bringing its total to 21 worldwide, and hired Alan Schulman, former SapientNitro vice president of global digital marketing and brand content, as national director of content marketing and creative experience. Lastly, Indiacentric rival Infosys is placing 40% of its workforce of 176,189 employees (as of 1Q15) through Design Thinking classes.
Though IBM has similar initiatives, its massive size and entrenched technology-first culture (outside IBM Interactive Experience) may allow smaller IT services peers to eclipse GS in adapting to the design-oriented, relationship-driven engagement model.
TBR will examine IBM’s progress in shifting to a strategy-led go-to-market model closely during its July 20 earnings.
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.