February 1, 2003

Mind Over Matter

IBM's new consulting unit is evidence that the company anticipates sweeping change

by Justin Kestelyn

IBM claims to have seen the future and that it will be dominated by intelligent enterprises. In December, the company did some nimble footwork to ensure a significant presence there.

The news attracted little notice at the time because of its splashy Rational Software Inc. acquisition announcement (see News & Analysis), but in late November, IBM formed a new high-end services unit, On Demand Innovation Services, staffed by 200 IBM Research consultants. The company is diverting a significant portion of its R&D budget — $1 billion out of $17 billion — to fund the unit over its first three years. According to a company statement, the establishment of this unit signifies the first time IBM Research has made its scientists and consultants formally available to customers, a decision the statement characterizes as the "biggest organizational shift" in that organization since the early 1990s.

This unit will play a strategic role in the company's new "on demand" strategy. This $10 billion, companywide initiative — not to be confused with utility computing, a different concept that the on demand moniker confusingly evokes — envisions a new strategic IT infrastructure on which businesses, in CEO Sam Palmisano's words, "will differentiate themselves through their ability to dynamically adapt to marketplace changes."

This differentiation is primarily enabled by the deployment of strategic software in which services play a large role; computing power and speed — IBM's R&D focus for decades, and the inspiration for thousands of patents — are increasingly beside the point. IBM has now apparently formalized the idea that software and services will not only complement, but perhaps eclipse, hardware as a core revenue engine in the next five years. (It's worth noting that half the company's researchers now work on software projects.)

Strategic Targets

The new unit has a roadmap that could hardly better represent the strategic IT territory: advanced analytics, business process transformation in which consultants will help customers align business strategy with IT investments, and information integration. (The unit will also focus on "experimental economics," in which new business models will be evaluated and validated by researchers.)

Interestingly, these projects all imply heavy IT department involvement; they're just too complex and technologically risky to leave solely to business managers. Indeed, IBM executives have identified bioinformatics research, a process that inherently requires close collaboration between IT specialists and domain experts (see "The Rise of Business Informatics," Editor's Page, May 28, 2002), as an application area that would benefit from the new unit's services.

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History's Scrap Heap

Clearly, IBM is embarking on a transformation that competitors will have no choice but to accelerate themselves. With blades, clusters, and server appliances occupying increasingly more data center floor space at the expense of big iron, ultimately, competitive differentiation will no longer derive from raw computing power. Brains really will be more important than brawn.

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