IBM Says its Future is in Services, Not Goods

TFGeditor writes "An article at Technology Review quotes IBM exec Paul Horn saying that the company's business model is shifting from goods and products to software and services. From the article: 'Horn's challenge, then, has been to take a $6 billion research organization dedicated to work that advances technology products and get it to do work that benefits service businesses. IBM is thus in the process of answering an important question for all technology companies: can corporations perform useful research in the services arena?'"

Comments

They're only half right

[CSMastermind]

They do have a valuable point but the reason services will be so big in the future is because right now they haven't truly been explored. Most natural service markets can't exist without a goods market to back them up so in this regard they're worng. There will still be a strong goods market, it just won't be as fast growing as the services market.

Re:They're only half right

[Master_T]

What I understand of it he may be right. As labor continues to move overseas due to cheap cost of operation there, we will need to fill gaps of employment. Economist have been theorizing for awhile now that America will become an almost completely service based economy. There are some who believe that we will be able to support ourselves on an economy of services. I do not know all the details of how that works, but the article seems to be pointing in that sort of direction. at least for IBM.

Sure I mean I think we will always farm and always need some production to trade against but otherwise, couldn't we even traffic in some services?

Re:They're only half right

[CSMastermind]

Farming in America is a perfectly competitive market, meaning that sale prices between firms naturally balance themselves out. To ensure added stability the US has many controls and regulations in place to mantain price levels. For the most part it's not worth it to ship food in from outside the US that can be grown at home and it's also not worth it for us to ship farm products elsewhere because anybody with the money to buy it doesn't need it. That's why millions of pounds of food is destroyed each year by the US when there are people starving across the world. It's not because we don't have to food to feed them, it's because it would cost too much to feed them.

Not too surprising

[HMA2000]

Unless IBM wants to focus on competing with the ever growing chinense and other low cost manufactures they have no choice but to get out of hardware. Hardware is becoming increasingly commoditized and that means it will become a very difficult business to carve out a living in.

Not to mention IBM has some incredible hardware and software people on staff that would be far better employed helping those with problems in a consulting role.

New news?

[op12]

Is this really new information? Those IBM ads for their consulting services have been on for a long time now, and the more recent commercials even tout these services as the new (side of) IBM.

Re:New news?

[Michalson]

Mod parent up. IBM has always been a service company. The hardware and software they sell is/was nothing but a vehicle for expensive long term service contracts. While they made a profit on that server they sold you, the real bread and butter was that extended warrenty they convinced you to add on. It's the main reason IBM never liked the home PC market, you just couldn't take customers out to play a round of golf while getting them to sign up for a bunch of service plans. Instead customers bought the hardware and went home, and those that actually used IBM's support expected to get it for free (the utter irony being that because their PC project was literally put down in the basement it resulted in an off the shelf design anyone could copy, leading the "IBM PC" to become the industry leader).

Yeah, right

[Capt'n Hector]

With billions invested in chip fabrication, they're not going to be abandoning that business anytime soon. With their name recognition in other hardware sectors, they're not going to abandon those markets anytime soon. Maybe I'm out of the loop, but when someone says "software," is IBM one of the first things you think of? I could imagine EXPANDING into software and services alongside hardware, but then we're back in the 90s selling "solutions".

Re:Yeah, right

[SydShamino]

>> when someone says "software," is IBM one of the first things you think of?

When someone says "IBM software", I pause, look at my email client on the other monitor (Lotus Notes), and begin to cry...

International Business MACHINES

[DesScorp]

IBM is fast becoming a company that doesn't actually make anything, and this pretty much confirms that. And that's pretty sad, being that this company pretty much invented computing for the the business sector, and brought personal computing to the general public.

They're making lots of cash right now, but one day, perhaps sooner than they think, this approach is going to come back and bite them in the ass. And then there might not be an IBM.

Re:International Business MACHINES

[noisymime]

out of interest how exactly is this going to bite them in the ass?
When a company sets their IT infrastructure they buy x amount of servers. And then the income for IBM stops.
If a company requires 24x7 service then they sign a contract and keep paying IBM continually for years...

Re:What about this question?

[C. Mattix]

From IBM's standpoint they are getting R&D for free from the open source community. That is where much of the new products are getting produced.

They should follow GM ;)

[TheNarrator]

GM learned long ago that making physical stuff is a pain in the rear because of unions and pension obligations and became a mortgage lenders (GMAC) that makes cars as a hobby.

http://www.financialsense.com/editorials/reality/2 004/november.html

GM's total revenues were $185.5 billion with a corresponding net income of $3.8 billion. However, only $1 billion of this net income came from automotive sales. The $2.8 billion balance came from financing and insurance operations (including mortgage lending). In other words, only 26.3% of General Motors' net income came from automotive sales. Clearly, GM has become a financial services company (that happens to also manufacture automobiles) and its future success is directly linked to its ability to compete in the financial services industry. After all, America now has a finance/debt-based economy.

Linux's entry into the mid-market

[G4from128k]

As much as U.S. IT folks hate outsourcing (actually it's offshoring that they dislike), it is a way for Linux to penetrate those mid-sized business that don't have the IT to handle OSS themselves. If a mid-sized company outsources customer care, finance & accounting, HR, etc. , then they don't care about the "source" of the underlying software at the provider as long as the service provider does a good job at a decent price. I would suspect that some outsourcing service providers -- IBM certainly -- leverage Linux for its low-cost per seat and economies once you have the scale to support it. The rapidly growing outsourcing providers also offer a greenfield opportunity for Linux -- if you are starting an outsourcing company from scratch then you have the opportunity to pick whichever OS works best without as much an issue of retraining and entrenched workforce.

Once Linux builds up a competent portfolio of business software (some outsourcing service providers also sell their software), that software will attract non-outsourcing businesses to Linux

International Business Knowledge.

[Anonymous Coward]

"IBM is fast becoming a company that doesn't actually make anything, and this pretty much confirms that."

Welcome to Alan Toffler's "Idea Economy". Forseen over twenty years ago. The only problem is that the nature of the "commodity" means that people respect "Knowledge"* and the products of knowledge (IP)*1 even less than they do physical goods.

*See previous "/." stories on universities, and the glorification of not knowing the subject matter.

*1 See stories on copyright and patents, let alone trade secrets (Apple).

Everything Real and Tangible will be in Asia

[mslinux]

One day, America will be a big 'service economy' where we:

a) Produce Nothing.

b) Consume Everything.

c) Print lots and lots of worthless dollar bills.

Re:Everything Real and Tangible will be in Asia

[fbg111]

Except the services we sell to all the other countries who have no clue how to efficiently produce their goods., build their power plants, feed their ever growing populations, and cure their sick.

And once they learn how to do all that stuff, what will they need us for? Or do you think they'll never catch up?

We currently have the best university system available

That depends on government funding for research, funding which is being cut across the board left and right these days. DARPA, NSF, etc, are all cutting funding, especially for pure university-based research which is the most crucial in maintaining America's long-term technological leadership, academic quality, and even tax base that is required for additional funding. Without pure research, technological advancement and the steady stream of neato gadgets we take for granted will dry up.

and that translates into the best educated country in the world.

Sure, that's why American students are always at the top of every published academic ranking and consistently win international contests. I won't bother to link to the recent /. stories on this.

Which translates into valuable services.

An economy can't survive on services alone. There is only one way of creating wealth, and that is by taking raw materials and applying work and ingenuity to turn them into something worth more than the sum of their parts. We used to do take wood and iron and turn it into ships and trains; now we take sand, aluminum, and copper and turn it into microchips. Voila, wealth is created. At best services allow you to ween a little more value out of the products you've created, especially if you see custom software (eg IT consulting) as an enabler of hardware, or something that helps you get more value out of your hardware. At worst, services are simply a wealth transfer, with no additional wealth created at all.

Don't buy into the malarky that America can prosper as we have without actually making anything. As funding is diverted from pure research to military expeditions and whatnot we undermine our base of future product innovation and development, while China learns our manufacturing techniques through outsourcing and educates hundreds of thousands of engineers and scientists in our universities, who are capable of bringing their education, research, and innovativeness home and away from the US.

As American CEO's sometimes cannibalize their companies' future for immediate stock price gains and golden parachutes, so our recent presidents, CEO's, and financiers seem to be doing to our entire country.

Re:Everything Real and Tangible will be in Asia

[Anonymous Coward]

An economy can't survive on services alone. There is only one way of creating wealth, and that is by taking raw materials and applying work and ingenuity to turn them into something worth more than the sum of their parts.

Well, this is the point of the information services economy, isn't it? The raw materials are existing data and lots of energy and foodstuffs, and the result is data with less entropy. You forget that the only reason your "real goods" have value is because people want them. A ship abandoned on a mud flat while everyone goes parasailing has zero value. A chunk (or stream!) of data that people use while parasailing has value. There is no "safe" industry with intrinsic value separate from the constant struggle of supply, demand, and production efficiency.

short term

[goombah99]

IBM always was a goods+services company. You were not buying a bar code reader as part of how you would monitor inventory you were buying a big-blue inventory control system and if the best method for you was a bar ocde reader that's what IBM would implement for you. IBM sold instances of objects not function calls.

For IBM slightly higher Short term profits are indeed in services. since much hardware these days is commoditized.

The only reason IBM could get away with just repackaging commondity software and hardware is because they have no competition for innovation. They can just innovate in services and not worry.

But what is IBM going to do when some other company say toshiba decides to sell goods_services and some toshiba engineer invents a holographic terrabyte on a chip memory and they wont sell it to IBM. IBM is giving up its 100 year formula for why people by IBM. IBM means you have an assured path to the best service and hardware. Long term profits are in goods+services.

as the parent poster implied. This sounds like what happened to ATT and HP.

Capability & Maturity Model research could ben

[MarkEst1973]

My company is currently going through CMM Level 2. I can't tell you how much evangelizing I've done regarding standard processes.

The cost of building custom applications needs to drop dramatically. Standardizing how they are built is one step towards this goal. Further research into this can also reduce the cost.

Very competitive bids can be made by a service organization when their cost to produce the service is low, whether that service is network maintenance, custom application design, or what have you.

At least that works on the small scale of our consulting company with a few million in revenue. I should imagine such a thing would scale to a larger company and make them even more competitive.

Re:Necessity -- IBM is in last place

[G4from128k]

I wish them luck, but they have a ways to go. This Information Week survey ranked IBM last among the top 12 big outsourcing service providers. The article suggests that IBM's customers are not that happy with the service yet.

With IBMs large resources and historical expertise in service, they may be able to turn it around. We shall see.

They might be closer to all right

[qortra]

Why do you claim service markets can't exist without a goods market? More and more, people have all the technology they need to have pretty much every type of content (interactive or not) delivered to their home without the need for physical goods. This means that education, news, entertainment, communication, and most business can be done over the internet.

But honestly, I'm asking, why does there need to be a substantial goods market to back up these services (given that many people already have the technology to do all these things)?

History repeats itself

[vanyel]

Does anyone remember Control Data Corporation? Used to be, a long time ago, there were two main players in computers: IBM handled business and CDC handled scientific computing, with some gnats flying around, though DEC was more of a dragonfly ;-). The world changed, however, and CDC waned in the 80's. Their spin: "We're going to go into services, not hardware". I think they're a vague memory in the absorption history of another company now (Hmmm. I guess not quite so vague, but I've not heard them mentioned anywhere in ages: CDC Wikipedia entry)

Amusingly, COBOL programming on a CDC Cyber put me through college. When I was about to graduate (81) and doing the interview thing, I'd been put in touch with a head hunter that specialized in finding positions for Cyber programmers. I went to an interview in Dallas, TX, and although it went well, when I came back, I said "no, I want to work with microcomputers, not mainframes." I got the classic "there's no future there" response. I've always wondered what became of her...