IBM Global Services Launches Building Block Outsourcing – A Bridge To Cloud Computing

IBM Global Services Outsourcing Announcement Highlights

• Is announcing four building blocks and a new schema for its outsourcing customers
• Claims time-to-implementation savings of up to 60%
• Claims cost savings of up to 50%
• Is a bridge between traditional outsourcing and Cloud Computing
• Plays to IBM’s strengths as a hardware and software supplier
• Should make outsourcing more flexible
• Has the advantages of standardisation and componentisation
• Significantly demystifies outsourcing, making it less of a secret science

What Is IBM Global Services Announcing?

IBM is launching four new outsourcing offerings (coloured red in Figure 1). It positions each one as follows:

1. Server Management – assesses the customer’s IT environment to determine the optimal virtualisation plan for x86 servers, migrates the appropriate servers to virtual images and provides on-going server management
2. Storage Management – allows clients to manage storage spending proactively, provides a flexible, consistent service, builds a foundation for transforming the client environment; includes assessments, data migration, tiered storage management and data protection elements
3. Service Desk – optimises the end user platform and devices throughout the ownership lifecycle; enhances productivity, improves quality and customer experience and reduces IT costs; streamlines the management of heterogeneous environments; builds new business models increasing the organisation’s value and differentiation
4. Integrated Communications Services – provides a number of pre-configured, standardised service products, maximising ROI while minimising risk through effective and efficient design, the deployment and management of communications, networking and application environments

It will fill out the other areas over time of course. It will also need to integrate these outsourced services with STG’s Smarter Computing and the customer’s own retained IT applications and try not to over-complicate the schema in the process.

IBM Global Services Is Big Business

IBM’s Global Services has more than a 1,000 customers in 400 sites in over 100 countries. On its own it was the 6^th largest IT supplier in 2010. Its two major businesses are Strategic Outsourcing and Business Consulting – the former is bigger, although the latter grew faster, following to the acquisition of Price Waterhouse Coopers consulting arm for $3.5 billion in 2002. Integrated Technology and Maintenance are both significant revenue earners for IBM, generating $17 billion in 2010. Its revenue history by quarter and service area is shown in Figure 2 which is taken from ITCandor’s ITC Market Model.

IT Services is also highly profitable for IBM, accounting for 42% of the company’s profits in 2010. It is refreshing to see it positioning its services for the first time in building blocks and intriguingly different from its STG divisions approach to workload optimised systems, where multiple components are being bundled into solutions.

An Important Bridge Between Outsourcing And Cloud Computing

Cloud Computing is clearly akin to outsourcing and, if not addressed carefully, could seriously reduce IBM’s services revenues. Typically only multi-tenancy Cloud implementations offer a significant reduction in TCO. Where an on-premise solution is replaced by a single-tenancy Cloud service the capital investment will be similar, although moved from customer to supplier. The supplier may be better at negotiating lower prices for equipment, better scale economies and may be more efficient in running data centre operations, but these will almost always be offset by the margin the vendor takes from the customer. Today’s announcement suggests that IBM has made strong improvements in its processes, allowing it to reduce the costs it passes on to customers: however there is no suggestion that these service will be offered on anything other than a single-tenanted basis. IBM has massive experience in compliance management of course, which puts it miles ahead of most of the new Cloud Services suppliers.

Will This Herald Flexible Outsourcing?

We have spoken over the years with outsourcing customers who have been frustrated by the inflexibility of their contracts, which typically run for at least 5 years. In addition there remains a constant change in technology which can make outsourced solutions irrelevant over time – the influx of smart phones into the corporate world, for instance, would have been difficult to address in contracts signed before Apple’s iPhone launch in 2008. In addition to the surprises technology throws in, renegotiating contracts has typically been prohibitively expensive – not least because the supplier’s profits are back-loaded into the end of the contract period. This building block approach may help if the effects of change are restricted to the component service, although we’d be surprised if IBM made any significant reduction to the minimum contract length. IBM will inevitably take moves to protect itself from the risks of greater flexibility: these will become clearer once it expands on its go-to-market approach.

Some Conclusions – IBM Global Services New Approach Should Help Customers Reduce Their IT Costs

IBM generates about half of its revenues from IT Services, of which outsourcing is the largest part. By adopting a new schema and building block approach it is taking a big brave step away from custom engagements towards more standardised services. It will undoubtedly be successful if it can substantiate its claims that customers can to reduce the time taken to implement these services by up to 60% and their costs by up to 50%.
We believe that this forms the first important bridge between traditional outsourcing and Cloud Computing, which are naturally allied subjects. IBM is also playing to its strengths incorporating hardware and software elements and it will be difficult for other vendors to follow without extensive partnership agreements.
Growth in IBM’s Services revenues will be dependent on the attractiveness and openness of this new approach in winning new customers and/or extending the breadth of its engagements with existing ones.
We believe large IT users should look at a number of areas to make significant savings. In particular:

• The potential of multi-tenanted Cloud services instead of single tenancy on or off premise
• Automation and autonomic techniques instead of customised professional services
• The adoption of standardised approaches and architectures rather than point solutions

Today’s announcement should help with the latter two, but not the first of these aims. However we applaud it in taking an important step away from what in the past has sometimes been a secret science.
Are you a user of outsourcing or managed services? How have you achieved greater flexibility over the last few years? As always please let us know by commenting on this article.