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IBM Needs A Shakeup

In the wake of a tepid first quarter, IBM officials say a "sizeable restructuring" is imminent at the company. Given its recent string of underwhelming financial reports, nothing less would seem in order.

To review, IBM on Thursday clocked in with the latest in a long series of stagnant quarterly efforts. The company's revenue grew just 1% when you don't count gains from currency conversion. A big culprit was the lackluster performance of its vaunted Global Services unit. Supposedly IBM's cash cow, Global Services managed to increase sales just 3%, to $11.7 billion. Tough market conditions, huh? Not so fast. That very same day, Indian service provider Infosys Technologies reported a 50.2% increase in sales of IT services, to $455 million in the quarter.

The boom at Infosys indicates that IBM's weak quarter is not so much a signal of a big tech slowdown as it is a sign that IBM needs a shake up. Overall spending on IT outsourcing increased 68% year-over-year in the first quarter to $11 billion, according to Technology Partners International. Hardly a bear market for the services industry. Yet the number of strategic outsourcing deals IBM signed in the period fell 4%. That's right, IBM managed to ink 4% fewer outsourcing contracts during a quarter in which the market grew 68%.

IBM is stuck with a big, bloated infrastructure, a bureaucratic administrative organization, and it lacks the agility and favorable cost structures enjoyed by emerging, global competitors such as Infosys, Wipro Technologies, and Tata Consultancy Services. CEO Sam Palmisano and his inner circle know that all this means tough choices are inevitable, sooner rather than later.

Expect IBM to move more jobs--maybe even a whole business unit--offshore more aggressively than ever. Expect a middle management shake up in order to get "decision making closer to the customer," as CFO Mark Loughridge put it last week. And expect the unexpected--Palmisano proved he's capable of truly bold moves when he sold off IBM's PC business to China's Lenovo Group. If another big chunk of the company moves East, don't be too surprised.

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