Here it is.
And Now, Big Blue Is at Your Service
By SAUL HANSELL
t was the way the new, improved IBM was supposed to work. In September
1996, Louis V. Gerstner Jr., the company's chairman, lured a handful of
corporate chief executives to a daylong strategy seminar. During a discussion
of research collaboration among companies in different fields, Robert B. Shapiro,
the chairman of Monsanto, wondered aloud whether his pharmaceutical and
agricultural-products company could use any IBM technology in its genetics
research.
Within weeks, a SWAT team of IBM executives was dispatched to Monsanto's
headquarters in St. Louis, armed with tantalizing discoveries from IBM's labs that
could be used to help map the gene structure of seeds and human cells. Once in
the door, the IBM salesmen looked for other opportunities. Lo and behold, a year
later, Monsanto signed a 10-year deal worth hundreds of millions of dollars to
IBM.
But the contract wasn't for computers or for software. And gene research was the
smallest part.
Instead, the agreement called for IBM to run Monsanto's mainframe computer
system, to install and maintain its 20,000 personal computers, to operate the
network that links its facilities and to write new application programs for the
company. Having gotten its foot in Monsanto's door, IBM showed its stuff -- and
its stuff these days is services.
Competing with everyone from Electronic Data Systems, the computer-services
giant, to accounting firms to the pimple-faced high school nerds who set up Web
sites for small businesses, IBM has grown in a few short years into the world's
largest provider of technology services. It advises clients on technology strategy,
helps them prepare for disasters, trains their employees and even gets them onto
the Internet.
The services business was started in 1990, three years before Gerstner was hired.
But it played right into his strategic gamble that the way to revive the tottering
company was to capitalize on what others saw as IBM's handicap: its sheer size.
He quickly pulled back from the strategy of his predecessor, John F. Akers, to
divide IBM into smaller, more nimble units, perhaps in preparation for spinning
them off. Rather, Gerstner decided, IBM would offer its traditional big customers
one-stop shopping for computer products, from microchips to mainframes. And
services would be the glue that bound all the hardware together.
While Gerstner has stabilized the other parts of IBM, the unit now called IBM
Global Services has been the engine of growth. Its revenue rose from $2.1 billion
in 1990 to $19 billion last year, with increases exceeding 25 percent annually.
That is now one-fourth of the company's sales, more than from mainframe
computers or any other product line. And services now account for half of IBM's
240,000 employees.
"It's not just the
fastest-growing piece of
IBM; services have
become the soul of IBM,"
said Laura Conigliaro, an
analyst for Goldman,
Sachs & Co. "IBM got to
where it is today by
offering its customers
excellent service, solutions
and support, but had
largely given them away
free." Now it charges.
Services may be the soul
of IBM, but they aren't
always a godsend. Profits
represent a meager 10
percent of sales, far less than for its other businesses.
In addition, some analysts say IBM lags behind its competitors in some hot areas,
notably writing application programs and helping companies farm out business
functions like purchasing and payroll.
"IBM has a history of being very good in services that surround its product line,"
like mainframes, said John M. Whiteside, a former top IBM services executive
who is now the chief executive of Servicenet, which runs computer networks for
companies. "The question is, can they produce a set of services for the next
decade that embraces the hardware and software of all vendors?"
Meantime, with EDS recovering from a two-year slump and new entrants
crowding the computer-services field, competition is heating up even as Asia's
economic turmoil shrinks its prospects as a market.
nd now, IBM faces a new challenge: the departure of Dennie M. Welsh.
While Gerstner can take credit for nurturing IBM's services business, the
initiative is largely the creation of Welsh, the Tennessee-born engineer who ran
IBM's contracts for NASA during the Apollo and space shuttle programs. Welsh
persuaded IBM's management to tap into its experience in running big computer
systems for the government and go head to head with EDS in the market for
operating corporate computer systems. He then nursed the services business
through several tough early years with a mix of personal enthusiasm and his
ability to navigate the complex corporate structure.
"Dennie Welch was a lone wolf crying out and pursuing the business, and no one
was paying too much attention to him," said Stephen T. McClellan, a
computer-services analyst at Merrill Lynch. "He has surprised a lot of skeptics in
moving IBM beyond the hardware and software business."
Two weeks ago, Welsh said he would take a
leave of absence to fight an immune disorder so
rare that the company says it has no name. He
was replaced by Samuel J. Palmisano, his
deputy in the early years of the services business who went on to run IBM's
personal computer division. Palmisano, 46, is among the most prominent of a
generation of younger IBM executives seen as potential successors for Gerstner,
who just signed a second five-year contract.
Still, Palmisano will have a difficult time sustaining the momentum. After all,
IBM, which eliminated nearly 200,000 jobs in the early 1990's, is hiring 18,000
new people into its services division each year.
"Sam's challenge is simply growth," Welsh said recently of his successor. "We
have been growing this thing at 20 percent or more for some time. Statistics don't
allow that to continue forever."
In many ways, the dynamics of the services business are the delightful opposite
of the treadmill that forces hardware manufacturers to run faster and faster in
place to sell ever more powerful machines at ever lower prices.
Once companies buy these improved machines, they have to program them,
maintain them, update them and train employees to use them. For IBM, in
essence, the computers are the razors it sells to reel in captive customers, and the
the services are the blades that the users have to buy again and again. It is the
same logic that prompted General Electric to build a business servicing the jet
engines it manufactures.
The scope of IBM's services
offerings can be seen by traveling
to Boulder, Colo., and prowling
the enclosed walkways that
connect the low buildings at the
company's 493-acre site nestled
in snow-covered mountains, one
of nine such operations around
the world.
The command center is one of
those showy rooms, modeled
after NASA's Mission Control,
in which dozens of hushed
technicians scurry about under a
glowing wall of giant television
screens, pausing occasionally to tap at computer terminals. They are busy
performing IBM's classic, and biggest, technology service, in which it undertakes
big, computerized functions like accounting and inventory-management for clients.
This outsourcing business took off in the recession of the early 1990s, when
companies were searching for ways to cut costs. Some even got an initial financial
kick, because IBM and EDS bought their computers and hired their
data-processing workers in return for 10-year contracts.
While downsizing and layoffs no longer land an executive on the cover of a
business magazine, "strategic partnerships" and sticking to "core competencies"
often do. So the Boulder operation does more than save clients money. Monsanto
wasn't looking simply for mainframe outsourcing; it wanted a partnership with a
single company for research, programming and computer operations. "We are
looking for fewer, more substantial relationships," said Patrick J. Fortune, the
company's chief information officer.
Other parts of the Boulder center knit such relationships together. Through a
tunnel from the command center is the computer room, where the late-model IBM
mainframes that handle much of the large-scale data crunching still have the
appearance of the black obelisk in the movie "2001."
Snaking into the computer room are enough telephone lines to keep a small town
chatting. IBM has built one of the largest data networks in the world, with links
to more than 100 countries. Not only does this network connect IBM's far-flung
data centers to its corporate customers, it has turned into a major product in its
own right. Companies use the network to connect electronically to their suppliers,
for example. And, increasingly, IBM helps companies like Merrill Lynch hook
their customers to the Internet.
Nearby is a vast facility that has an eerie "Twilight
Zone" sense that something is amiss. There are
rooms and rooms filled with desks, telephones and
computers, but not a person is to be seen. This is a
new, $34 million disaster-recovery center, which
will spring to life the next time a hurricane,
earthquake or terrorist act disrupts a client's
operations.
IBM keeps copies of clients' computer data, so its
machines can stand in for theirs. And IBM
employees will answer customers' phones until
they send their own staffs to Boulder.
Another building houses hundreds of work
stations, but unlike the disaster station, it is
buzzing with earnest young techies. This is the
fastest-growing part of IBM's service business: the
workers operate help lines for stumped computer
users at corporations across the country.
Fifteen years after IBM introduced corporate
America to PC's, it has become clear that the cost
of buying them is only the tip of the financial
iceberg of maintaining them and training employees
to use them. And beyond the cost is the confusion.
These days, many big companies don't even know
how many PC's they have or what programs are
on them. And that makes it difficult to upgrade the
machines' software or track down bugs.
ncreasingly, corporations are paying
companies like IBM as much as $250 a month
per user to take these problems off their
hands. "We can take control of your PC and tell
you that your printer is out of paper," said David
Graves, a systems developer in Boulder. "Then we
can tell you where in the closet the spare paper is
stored."
The glitz and scope of the Boulder facility are a far
cry from the seat-of-the-pants operation Welsh
and a few other executives cobbled together in 1990.
"We got started when IBM was at its worst," Palmisano recalled, referring to
IBM's slide into red ink in 1991. "And we needed capital to start up and to hire a
lot of people, but we had to earn our way every day."
Then, when the operation opened for business, nobody was interested.
"I was 4 percent of my sales plan in 1993," said Daniel R. Colby, one of the
earliest sales executives Welsh recruited. "It was real touch-and-go whether we
were in the right business."
The company made some whopping mistakes. When a key phone line supporting
Amtrak's reservation system was cut, it turned out that IBM had never installed a
planned backup. As a result, the railroad's phones were dead for half a day. But in
classic IBM fashion, it shipped in so many shock troops so quickly to fix the
problem that it was able to repair its relationship with Amtrak.
Other customers were not so understanding. Some, like First Tennessee Bank,
abandoned IBM altogether. And several customers that stayed were money
losers, because IBM had won its early contracts with below-market bids.
Lessons were learned, however. As IBM figured out what its real costs were, and
as it grew bigger and more efficient, it stopped the kamikaze bidding. As for the
unhappy customers, it placated them by writing into their contracts the exact
service level they could expect. It promised to fix problems within an hour or a
day, depending on how much they were willing to pay. If that is spelled out, IBM
says, there's less room for complaining later.
IBM also had to explain to customers that the squads of systems engineers who
for years had helped to set up new mainframes and keep them humming would
now be sending bills for their services. But because this unbundling of services
helped IBM to lower its computer prices, the complaints were muted.
The company has had to navigate through the potential conflict between
providing the best services and promoting its own hardware and software. At a
client's request, IBM will buy and operate computers made by Hewlett-Packard
or Sun Microsystems and use software from Microsoft or Oracle.
Competitors are quick to note that IBM technicians' advice might not be
completely objective, since they are obviously tempted to denigrate rivals'
products and pitch their own. And Welsh made no bones about the fact that
whenever he could, he pushed computers made by IBM and software from its
Lotus subsidiary. Indeed, IBM's services unit has turned into one of the
company's biggest customers for hardware.
The business began to hum in 1995, when IBM posted $12.7 billion in services
revenue, edging past EDS to become the world's largest computer services
company two years ahead of Welsh's master plan.
"They have done a great job in building mass in the service business and a very
good job in persuading the market that IBM is a credible player," said Gary J.
Fernandes, vice chairman of EDS. "We were lured into a false sense of security by
the long record of success we had."
Now, Gerstner is pushing IBM's services business with a huge marketing
campaign built around the Internet. Once companies dip their toes into the on-line
waters -- what IBM calls "e-business" -- they will realize they will also need to
improve the rest of their systems to keep up, the theory goes. Linking big,
complicated systems to one another plays right into IBM's strengths, the
company figures.
"In my old life at the IBM PC company," Palmisano said, "we wanted to put
customer support and ordering on line, but we had to get daily information on our
parts available from the warehouses of our suppliers. To do that you have to
upgrade your entire system."
When other companies go through the same exercise, he said, "a lot of people are
just going to say: 'You run all this for me. I just want to take the orders when they
come in and be done with it.'"
mall businesses are another vast untapped market that Gerstner has
declared a priority. There are millions of them, representing nearly half of
the technology spending in the country. And many are hopelessly
perplexed by their computers. IBM is using the expertise it gained in running its
corporate personal-computer help desks to offer scaled-down versions of the
same service.
For example, it has just introduced a series of prepaid service cards, which look
like telephone cards and are sold in shrink-wrapped packages by computer
dealers. One, which costs $200, entitles the holder to call IBM five times for help
on any of dozens of software programs.
The company is selling another card -- this one for $25 per computer, with a
minimum of five machines -- that is good for one disaster-recovery mission by
IBM, complete with air-shipped delivery of a new computer and use of a nearby
IBM office, if needed.
Similarly, IBM is about to test a mass-marketed training and consulting package
aimed at helping small businesses to use the Internet. For fees of $1,000 to
$5,000, customers will get the right to a certain number of seminars delivered over
the Internet, written material and the ability to get answers to some questions by
electronic mail.
Actually, IBM's small-business product line starts at prices as low as $25 a
month for a service that lets companies put their own home page on the World
Wide Web.
Why would Big Blue bother with anything that small? For the same reason it was
interested in joining Monsanto in genetics research: Once a customer whets its
appetite at $25 a month, it is often just a matter of time before it wants a fancier
Internet site that can take credit cards. Funny, IBM has just the thing. Just buy a
$15,000 I.B.M. server with the $5,000 IBM Net.Commerce software. Need to
design your site and get all of this hooked together? Perhaps a $50,000 IBM
Smooth Start service package will do.
Well, at least that's the way the new, improved IBM is supposed to work.
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