International Business Machines Corp. (IBM), the world’s largest computer services company, is exploring ways to exit more low profit margin businesses after selling its call-centre unit earlier this month, according to people familiar with the company’s strategy as well as experts.
Big Blue, as IBM is known, may soon get rid of portions of businesses that have low profit margins and are commoditized, two people said this month.
IBM sold its customer care outsourcing business for $505 million to Synnex Corp. earlier this month.
“Some areas in software services, back office are among candidates being talked about in this context,” said one of two persons directly familiar with internal discussions in the company. He asked not to be identified because these moves are being discussed privately.
He added that the company has not officially put any units on the block so far, and is currently only evaluating various options.
An IBM spokesperson denied that the company was considering exiting all its back office services business.
“This is about continuous transformation. IBM has always been defined by an ability to transform and reinvent our business. To sustain this innovative model and to deliver unique client value, you must anticipate and lead technology shifts, including evolving ahead of the rest of the industry. This core belief shapes IBM’s decisions on all investments, acquisitions, and divestitures,” the spokesperson said in an email.
As more customers shift to pay-as-you-go models of billing for software services, and demand more work from smaller teams that are not billed on the basis of the hours put in, IBM and its pure software services rivals are beginning to rethink their old ways.
These companies are also beginning to seek ways to arrest ballooning payrolls through more automation and intellectual property-based software platforms that can be used to serve additional clients without having to hire more.
“Any business that means hiring too many for additional income is surely a part of such discussions,” said the second person, who also spoke on the condition of anonymity.
Indeed, IBM’s annual report of 2012 begins by highlighting the fact that the share of revenue from software grew from 27% in 2000 to 45% in 2012.
At an investor briefing earlier this year, IBM chief financial officer Mark Loughridge said the company plans to have software business contribute half of the total business by 2015.
The company’s moves must be seen in the context of what the software services industry, including India’s top software firms are trying to do, said a consultant.
“IBM wants to move more into cloud-based service provision, where it is steadily spending its way through its $20 billion war-chest. It is the classic play to reposition the firm for non-linear growth, which is what most of the leading Indian firms are craving and struggling to achieve,” said Phil Fersht, founder of US-based outsourcing advisory firm HfS Research.
The sale of IBM’s contact centre business does hint at more such initiatives in the pipeline, he added.
“It does raise future questions on IBM’s appetite to rely on people-intensive businesses that are not always aligned to technology transformation. Will the same happen eventually with finance or HR (human resources)? Will IBM tire of processing paychecks and invoices, like it has done with taking customer service calls? With significant client investments, such as Cemex (finance and accounting) and Kraft (HR), it doesn’t appear that the firm will do a 180 anytime soon, but with this decision to exit CRM BPO, it does raise doubts as to the company’s long term focus outside of technology services and software,” Fersht said.
CRM BPO stands for Customer Relationship Management Business Process Outsourcing, essentially, the outsourcing of a company’s entire customer management programme to an IT services firm.
IBM was among the pioneers in taking over entire departments and functions for companies such as Cemex, Kraft, and Bharti Airtel Ltd.
For the information technology industry, IBM’s moves are occasion to reflect on where the commoditized businesses are and whether it’s worth betting on them for the future, said an IT analyst.
“Organizations have to be able to strategically but also psychologically let established segments or products go and move to new opportunities that yield the expected margins,” said Thomas Reuner, principal analyst at UK-based Ovum Research.
“It’s in line with IBM’s strategy that it is trying to divest businesses that are too commoditized . We have seen such attempts in the past with Dell going private and IBM selling PC business to Lenovo,” Reuner added.
Soon after the Synnex deal, Ovum’s IT analyst Margaret Goldberg wrote: “The deal is also an interesting move for IBM, as the IT powerhouse— bested by rocky earnings as of late—pursues a strategy of exiting relatively lower-margin businesses (and acquiring other companies) to concentrate on higher value-add and potentially more lucrative areas in IT services, consulting and cloud.”
Overall, by exiting a low margin segment that does not offer scope to do high margin services in the future, IBM is also avoiding other risks facing such business.
“With this deal, which will close in a few months, IBM will still be able to offer CRM BPO services as part of its end-to-end value proposition to customers, without shouldering the financial challenges of that business. We will be curious to see whether IBM makes similar decisions regarding other parts of its business going forward,” Goldberg wrote.
As part of the deal, Synnex has signed on as a strategic partner of IBM for CRM BPO services.
At least two CEOs at top Indian software firms said IBM’s recent moves reflect another big transition that could be difficult to emulate for Indian companies.
“It’s not that easy for us because what IBM considers commoditized is nearly 70% of what we do. We recently lost a deal to IBM because they offered Watson to the customer—a capability we don’t have,” said the CEO of one of the top three Indian tech firms.
Watson refers to IBM’s latest artificial intelligence based computer system. It is named after IBM founder Tom Watson.
IBM ended 2012 with $104.5 billion in revenue, 14% of which came from hardware and financing, 45% from software, and 41% from services. The company returned a profit of $17.6 billion in 2012.