Abraham Thomas, Managing Director, IBM India: Playing a whole new game

It's 20 minutes into the interview, but you can tell that Abraham Thomas isn't quite with you. Seated in his unpretentious office in Bangalore, the 39-year-old Managing Director of IBM India looks obviously distracted. It is as though he's waiting for something to happen. As it turns out, that is indeed the case. Suddenly, Thomas' mobile phone rings and he eagerly excuses himself to answer the call. Watching him you can see the creases on his forehead clear; then a big smile streaks across his face, and finally he pumps his fist twice in the air. There's good news. His global services team has just bagged a 10-year it outsourcing deal with ABB in India. The best part about it: it's worth more than Rs 100 crore.

Increasingly, it is such big hits that Thomas wants to score. As the slowdown forces cutbacks in spending on boxes (servers and PCs) and applications, Big Blue is looking more and more for outsourcing it projects. Happily for the Singapore-born Thomas, there are plenty coming his way. In the last 17 months, he's sewn up a dozen such deals with companies, including Tata Steel, ABB, Ballarpur, Whirlpool, and Cadbury. While Thomas or his clients won't reveal the size of those deals, BT learns that some of them are unprecedented. For example, the Tata agreement could fetch Big Blue Rs 400 crore over the next 10 years. Says Thomas: ''IBM Worldwide gets 40 per cent of its annual revenues through the annuity services model (read: repeat annual income). My goal is to ensure that IBM in India also reaches that target.''

That brief, in fact, may have come directly from IBM's new CEO, Sam Palmisano, who is credited with turning IBM's unglamorous services business into a $35-billion money-spinner. At last count, some 50 per cent of IBM's profits came from the services business. Some Wall Street analysts expect that part of the business to grow to $50 billion by 2004.

IBM'S BIG BLUES

Sam Palmisano, CEO, IBM: Focus is on services For the first time since the early 90s, IBM issued a profit warning (amidst allegations of 'aggressive' accounting) in April this year. Not exactly a task that Sam Palmisano-Big Blue's new CEO who succeeded Louis Gerstner on March 1, 2002-must have looked forward to. But it's a sign of the times that a company long considered the Titanic of it industry should acknowledge feeling the heat. Wall Street reacted predictably, pushing the stock down 10 per cent on the news. IBM's eighth CEO in its 91-year history, however, isn't too worried. For, there aren't too many companies in the business that are as well placed to buck a downturn as Big Blue. Globally, it operates five business segments: (global) services, hardware, software, global financing, and enterprise investments. Therefore, if there's any tech company that can battle a slowdown it is IBM. But there are some internal problems that IBM must contend with. Its personal computers, disk drives, and semiconductors businesses are losing money hand over fist. Last year, they bled some $500 million (Rs 2,450 crore) off IBM's bottomline. That apart, growth is slowing at the company. In 2001, its sales fell 3 per cent, compared to an average 5 per cent growth in the mid-90s. Most analysts believe that Palmisano will push software and services, which together account for more than half of IBM's $85.9 billion (Rs 420,910 crore) revenue. However, there are concerns that growth in both these businesses may have slowed, going purely by the performance of IBM's competitors. Still, most analysts believe that IBM's positioning as a one-stop shop for technology solutions will give it an edge over competitors in the long run. And that's pretty much true of its Indian business too.

In India, Thomas, who is rumoured to be moving out to IBM's Asia Pacific region, is hardselling a new kind of business proposition to his customers. He's promising to take them from plain-vanilla outsourcing to ''end-to-end'' outsourcing, which IBM labels e-Sourcing. Explains Govindan Sridharan, Country Executive, IBM Global Services-an it services arm of IBM India: ''In traditional it outsourcing, the benefits were largely practical rather than technological. Transformational outsourcing, which was the next stage, was the logical step forward, but did not cover the end-to-end requirements of customers. E-sourcing is the answer to that.''

Competitors like Oracle, however, scoff at IBM's fancy description of the outsourcing model, claiming that it is the old ''apps on tap'' model. Even so, there is little doubt that the slowdown in the economy, and the increasing complexity involved in configuring, implementing, and maintaining expensive it infrastructure is encouraging companies to farm out the task to specialists. The biggest incentive for customers, of course, is cost. The e-sourcing model allows customers to pay only for what they actually use, thereby saving them not only huge capital investment but also the risk of obsolescence.

The result: IBM Global Services is on a roll. As recently as 1997-98, the division fetched a bare Rs 80 crore in revenue and employed about a thousand employees, a lot of whom worked on in-house projects. Today, its revenue is pushing Rs 700 crore and there are more than 3,000 employees on the rolls. While IBM India (which essentially is the hardware part of the business) trebled its sales in that time from Rs 500 crore to more than Rs 1,700 crore, growth is now slowing. Compared to the 21 per cent jump in revenue in 2000-01 over the previous year, last year fetched just 8 per cent growth. (Although the company denies it, BT learns that nearly 500 executives have been laid off in the last 12 months.)

Even IBM's competitors realise that the name of the game is e-sourcing, although the way they define it depends on which piece of the it jig-saw puzzle they fill. Oracle is touting its ''software as a service''; Microsoft is pushing its .Net (pronounced 'dot net') initiative as an architecture around which it hopes to build all its other services. Sun is following a similar approach with its ''Sunone'' platform. Even Accenture has teamed with Telefonica Data (a subsidiary of Spanish Telecom) for its global ''netsourcing'' initiative.

All of them are trying to catch the e-sourcing gravy train, which Gartner estimates will be worth $102 billion (Rs 500,055 crore) by 2004. Merrill Lynch is even more gung-ho, projecting e-sourcing revenues of $342 million (Rs 16,676.65 crore) by 2004. Like most projections, these will likely miss the mark. But the underlying trend is undeniable. Like Gartner says in a recent ''it Utility: Outsourcing'' report, ''increasingly customers are looking at it utility through e-sourcing, as outsourcing shifts from assets to access."

K. Unnikrishnan, Country Head (Marketing) Sun Microsystems "In the high-end Unix server market, we are the leaders with more than one-third of the marketshare"

Figuring out how much IBM's competitors like Wipro, Accenture, or Infosys make from e-sourcing kind of business is difficult. But it's easy to see where IBM scores over them. It is in being, well, IBM. The company has had a hand in all the major computing breakthroughs, and even today is the most integrated technology company. Therefore, there is a high level of comfort among customers. Agrees Ravi Uppal, Managing Director & Country Manager, ABB India: ''IBM is a technology leader, and an outsourcing deal not only helps us to gain operational efficiencies but also enables us to remain at the cutting edge of it.'' Still, every deal has to be fought for. Says Suresh Vaswani, President of Wipro Infotech: ''In areas like system integration, we cooperate. In other areas, we compete fiercely. ''

Interestingly, Big Blue is winning a large number of small and medium-sized customers, which account for 60 per cent of the hardware, software, and services market in India. Four years ago, just a quarter of IBM India's revenue used to come from SMEs. Today, it is a staggering 70 per cent. What did it do right? For one, IBM expanded its focus from corporates to SMEs. It set up a very focussed business unit to address this market, and simultaneously worked to offer cheaper hardware. The setting up of an assembly plant in Pondicherry in 1999 allowed IBM to churn out cheaper versions of PCs and low-end servers. ''Once we realised the potential of SMEs, we aggressively expanded into it,'' says Ashish Kumar, Vice President (Sales), IBM India.

A Long Haul

Things weren't always this happy though. After being forced to quit India in 1978, ending a 27-year presence, Big Blue returned in 1992 through an equally-owned joint venture with the Tatas. But what followed was years of missed opportunities. At the top, it was a revolving door, with four MDs changing between 1992 and 2001. Finally, in 1999, the two partners decided to part ways (the Tatas still hold a symbolic 1 per cent stake), and IBM India fully integrated with its Asean/South Asia structure.

Even today, there are parts of business where IBM India is struggling to catch up with competitors. The PC business, for one. While globally IBM is No. 3 in the PC market, in India it is a distant No. 5. A weak portfolio, wrong pricing, inadequate channels, and poor promotions have dogged the company. In the home and small business segment, Compaq and HCL have beaten the company hollow. Starting third quarter of 2000, however, it brought in a clutch of competitively-priced PCs, with an entry-level tag of Rs 40,000.

In the server market, IBM has been able to reverse its slide-both globally and in India-by consolidating its server business under the E-server banner and offering multiple operating systems (Linux, Wintel, and Unix). With the result, it now has 22.9 per cent of the overall server market, compared to 18.2 per cent two years ago. Boasts M. Ganesh, Vice President (Enterprise Systems Group), IBM India: ''We offer the entire server range-from entry level Intel-based servers to high-end mainframes.'' Sun, hp-Compaq, and Dell, however, continue to be fierce competitors. Says K. Unnikrishnan, Country Head (Marketing), Sun Microsystems India: ''In the high-end Unix servers market, we are the leaders with more than one-third of the marketshare.''

In a bid to win the server wars, IBM is betting big on Linux-a low-cost, scalable operating system that is based on open standards. It is building an entire range of systems-from PCs to servers-around the Linux platform. Incidentally, the Linux sales and marketing initiative in the Asean/South Asia region is to be orchestrated from India. The IBM Linux Development Center in Bangalore, one of the only seven worldwide, supports the entire Asean/Asia Pacific region.

BT learns that some time soon in the future, IBM India will even have an Indian MD (until now all of them have been foreigners or expat Indians). No matter who takes the top job, his or her work is cut out. And that's to not only maintain the new momentum, but grow it. Armonk's new boss will be watching.