Growth at IBM Global Services grinds to a halt

When Lou Gerstner finally stepped down as CEO of systems giant IBM at the end of February 2002, many analysts sarcastically suggested that his timing could not have been better.

While Gerstner has been widely credited for turning the company around, the year 2001 had proved to be the most disappointing yet under his stewardship.


Company: IBM Global Services

HQ: Armonk, New York

Main activities: IT services

Last full year revenues: $34.96 billion

Last full year net income: Estimated gross profit of $9.6 billion

Key issue: IBM Global Services – once a growth driver at the computer systems giant – has slipped into revenue decline in key areas of its business. It needs to tap into new areas, such as the mid-market, if it is to stave off competition from nimbler rivals.



Trading deteriorated as the year wore on and by the fourth quarter, even the flagship IBM Global Services unit – the main engine of growth at IBM during the 1990s – had been hit. To the surprise of many, revenues there fell 1.4% to $9.06 billion. Excluding maintenance the decline is estimated at 2%.

This compares poorly with most of IBM Global Services' main rivals, such as Accenture, CSC and EDS. In their respective final quarters of 2001, they achieved revenue growth rates of 5.6%, 8.8% and 13.5% respectively. So is IBM Global Services' comparatively puny result indicative of a deeper malaise at IBM Global Services?

IBM blames a number of factors. Gerstner said that the main cause for the downturn in IBM Global Services' fortunes is that its systems integration business, which makes up one of three main areas alongside outsourcing and maintenance, has slowed because clients have frozen or cut back on new projects.

At the same time, mainframe maintenance, remains a solid, profitable, if unexciting business. Overall, however, outsourcing was the only major growth area, and its 6% increase in revenues was not nearly enough to offset the poor results elsewhere.

During an economic downturn, conventional wisdom suggests that outsourcing should boom because companies see it as a way of cutting or at least controlling their IT costs. Put simply, IBM is not winning enough outsourcing business compared to its rivals.

But chief financial officer (CFO) John Joyce says that 2002 promises to be a better year for IBM Global Services. In 2001, several large outsourcing contracts took longer to finalise than initially expected and revenues from these contracts have only just started flowing in 2002.


Sam Palmisano, IBM


Furthermore, a number of contracts signed in the fourth quarter were closed late, further depressing services revenues. "The acceleration in signings in the fourth quarter will contribute to a pick-up in 2002," says Joyce.

Ovum Holway analyst Peter Foster also says that the results are not as poor as they first seem because of currency conversion issues. However, they are still not exactly sparkling. "IBM said that Global Services' revenues would have been up by 1% at constant currency in the last quarter," says Foster.

But veteran IBM watcher Bob Djurdjevic at Annex Research takes a different view. He says that performing a thorough analysis of IBM Global Services' revenues – determining which parts of the business are performing well and which are doing poorly – is often a matter of guess work because of the opaque manner in which IBM reports.

Djurdjevic has been highly critical about the opacity of IBM's finances for many years. He claims that IBM has shuffled revenues in and out of its various divisions, making it difficult to accurately measure their growth. "We don't have a clear line between hardware and services," says Djurdjevic.

For example, IBM might count one major element of its business under services in one quarter, while counting it under hardware in another, depending on what unit Gerstner and CFO John Joyce wished to emphasise, he says.

In terms of business strategy, Djurdjevic says that part of IBM Global Services' problem is that it has grown complacent and failed to adapt as effectively as rivals.

In particular, EDS has based its recent recovery in part by tailoring new services to the mid-market. This approach has been followed by Cap Gemini Ernst & Young, which set up a special unit called Sogeti to target this burgeoning market.

Yet IBM Global Services continues to focus on the high-end business where once big-spending CIOs have been told to economise. New IBM CEO Sam Palmisano may therefore need to put aside his promise not to make major changes if IBM Global Services is to find and sharpen its competitive edge.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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