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1/7/2005
10:55 AM
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The Transformer

IBM's new strategy promises business-process innovation.

CEO Lou Gerstner put his stamp on IBM with the creation of autonomic computing systems capable of supplying businesses with processing power when and where it was most needed. Now successor Sam Palmisano is extending that vision by building up a portfolio of business services--from human resources and customer management to research and development--powered by that technology. Palmisano's thinking: If IBM has all the right pieces for customers to run critical business processes, why not sell them the whole process?

The point, according to chairman and CEO Palmisano, is that businesses will be more than willing to hand off generic activities to IBM and concentrate on what they do best if the vendor can help them simultaneously cut costs and improve processes. "You don't create innovation simply by increasing your R&D budget, but by creating an environment in which it can flourish," he said in November at a technology event in New York.

CEO Palmisano says IBM can offer to create for customers ''an environment in which [innovation] can flourish.'' -- Photo by Brad Trent

CEO Palmisano says IBM can offer to create for customers "an environment in which [innovation] can flourish."

Photo by Brad Trent
"Business-performance-transformation services" is what Palmisano calls IBM's next big strategic push. It bundles business-process outsourcing, consulting, engineering services, and business-performance-management software. Palmisano, a former top salesman known as "the closer," is aiming those at what is, by IBM's reckoning, a $500 billion opportunity in provisioning companies' administrative and other business functions. And Palmisano makes no bones about the market's importance to IBM's future. "This is going to be key for us being the leader of where the IT industry is headed, not where it's been," he wrote in an internal memo to IBM staffers in August.

It's hard to argue with that thinking. The market for business-process-outsourcing services alone will experience a compound annual growth rate of between 15% and 18% through 2007, according to research firm the Yankee Group. The IT market--IBM's traditional playing field--will, by contrast, creep up by single digits.

IBM officials say that business-performance-transformation services go beyond what most companies offer under the rubric of business-process outsourcing. Palmisano is assembling resources--from software that can detect and compensate for network outages to high-priced consultants intimately familiar with, say, the ins and outs of health-care regulatory compliance--that he believes give the company the ability not only to run customers' business functions, but to transform them. And improved processes, Palmisano seems to believe, pave the way for true innovation, both within companies and across their supply chains.


''Our strategy is to link acquisitions to our high-value spaces.'' --Ginni Rometty -- Photo by James Leynse

"Our strategy is to link acquisitions to our high-value spaces." --Ginni Rometty

Photo by James Leynse
The strategy isn't without risks for IBM. In launching a range of business services, the company that often chides Microsoft for competing with its own customers is taking on tech rivals such as EDS and Hewlett-Packard, and also--directly or indirectly--heavy users of IBM's hardware and software, such as HR provider Hewitt Associates and insurance-services company American International Group Inc. "Anytime you move into new markets, there are trade-offs," says Ginni Rometty, head of IBM's Business Consulting Services unit and a key member of Palmisano's Business Performance Transformation Services strike force, which also includes software chief Steve Mills and technology czar John Kelly.

Some customers already have expressed concerns. Fidelity National Financial provides mortgage-processing services to some of the nation's largest banks, including ABN Amro, Bank of America, and Wells Fargo. Though IBM hasn't targeted the mortgage-services market, for now at least, the vendor's push into new process-outsourcing markets hasn't escaped Fidelity's attention. "We raised the question with them," says Joe Nackashi, chief technology officer at Fidelity Information Services, the company's IT arm. IBM executives assured him they have no plans to move into Fidelity's turf, Nackashi says.

And that's a good thing, because Fidelity might have a tough time untangling itself from IBM. IBM's mix of hardware, software, and consulting products is a compelling offering for large businesses such as Fidelity. When Fidelity was looking to build a Web-based claims-processing system in order to lower costs and more quickly add new services, it needed an end-to-end refreshing of the applications that support the function. Fidelity wanted to use Java-based middleware, such as IBM's WebSphere, to create a system based on an open architecture. "As a service bureau, we need to support as many platforms as possible," Nackashi says. Microsoft's .Net Web-services platform doesn't meet that standard, Nackashi says, so it wasn't an option. And Fidelity didn't want to piece together offerings from niche players such as BEA Systems Inc. "We wanted a single vendor," he says.

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