The Big Blue boom: Betting on services

It may come as a surprise to many golf aficionados, but a direct correlation exists between Tiger Woods and the Internet: both became major forces in the 1990s, and both had the potential to create a new generation of fans for a sport that dates back to 15th century Scotland.

As Woods did his part, executives at the PGA Tour turned to IBM to capitalise on golf's revitalised popularity from a virtual perspective. The result was a service that allowed fans to track live play and follow more than 100 players at a time on 450 acres of courses, making roughly 25,000 shots per tournament.

Steve Evans, vice president of information systems for the golf tournament company, was particularly impressed with IBM's flexible advice on which technologies to use -- whatever's best suited, regardless of the maker.

"I get the right recommendation," Evans said. "I don't get IBM product pushed."

This technological agnosticism is not corporate altruism. It is a calculated risk born of a larger strategy to establish trust with partners and customers. IBM says it hopes clients will increasingly rely on its counsel and naturally gravitate toward its products through a combination of confidence and convenience.

So far, the approach seems to be working. For more than a decade, the company's services business has moved well beyond its roots in routine maintenance. IBM Global Services, whose $42.6bn in sales last year made up nearly half the company's revenue, has become the world's largest provider of information technology services. And this services king is determined to conquer new realms.

The origins of IBM's services unit lie in commonplace contracts to fix computer gear that breaks down. Former chief executive Lou Gerstner is credited with emphasising services as a key to the company's turnaround from losses in the early 1990s. In 1991, two years before his arrival, maintenance services accounted for more than half of the company's $13bn in services revenue. By 2002, the year Gerstner stepped down, maintenance revenue had declined, but total services revenue had soared to $36.4bn.

Since then, IBM has gained business consulting skills with the acquisition of PricewaterhouseCoopers' consulting business and entered the growing market for managing clients' less technical tasks, such as equipment purchases and customer service. The new IBM is processing thousands of insurance claims, ensuring that Procter & Gamble employees get paid, and taking on the repair of televisions and CD players from Philips Consumer Electronics.

"IBM is the dominant player," said Michael West, an analyst at research firm Saugatuck Technology. "Who else has such a cohesive vision?"

Its ultimate success, of course, will not be automatic. As IBM seeks to expand its dominion in services, it faces formidable competition from such established companies as Electronic Data Systems, Accenture and Perot Systems. As it targets midsize businesses, IBM will likely run into niche companies that work exclusively with specific industries, such as banking, transportation and health care. Competition will also come from software makers, including Oracle, Microsoft and SAP.

Moreover, profitability is an issue in the services unit, which saw its gross margin drop four-tenths of a percentage point to 24.5 percent for the first quarter. Yet another concern involves criticism of its offshore-outsourcing practices and a recent internal memo suggesting that communication with employees on the subject be "sanitised".

Despite these issues, industry analysts say, the services business is IBM's to lose.

"It is a very fragmented market, which is why we think there are a lot of opportunities for growth," said John Jones, an analyst at Schwab Soundview Capital Markets.

The technology services market is expected to grow in no small part because of complicated systems that companies find difficult to manage. The combined worldwide market for technology services and so-called business process outsourcing, or BPO -- companies farming out tasks such as finance and accounting -- rose about 5 percent last year to $581bn and is projected to grow about 9 percent annually between 2003 and 2007, Jones said. IBM captured 7.3 percent of that market last year, trailed at 3.5 percent by second-place EDS.

To extend its services leadership, IBM touts its pledge of impartial advice on hardware and software. The company says 45 percent of server computers devoted to customers in IBM data centres are not IBM boxes, and after the recent economic boom and bust, companies would be sceptical of costlier and less creative recommendations that would require entire existing systems to be scrapped.