Table of Contents Page 1
Table of Contents
Table of Contents...... 1
1 Introduction ...... 3 1.1 Questions Discussed in this Master Thesis ...... 4 1.2 Areas Not within the Scope of this Master Thesis ...... 6 1.3 Structure of this Master Thesis...... 7
2 IBM’s “e-business on demand” and the “New Era” ...... 8 2.1 Evolution of “e-business on demand” ...... 9 2.1.1 IBM System/360...... 9 2.1.2 IBM Personal Computer...... 11 2.1.3 IBM Midrange Systems: AS/400 & RS/6000...... 13 2.1.4 SAA - Systems Application Architecture ...... 16 2.1.5 Change of Commercial Model...... 18 2.1.6 Building on Services...... 21 2.1.7 e-business...... 24 2.1.8 Focusing on Middleware ...... 26 2.1.9 Java ...... 28 2.1.10 Linux ...... 29 2.1.11 Developer Relations and Open Source...... 31 2.1.12 Grid Computing...... 32 2.1.13 Autonomic Computing...... 34 2.1.14 Industry Insight & Business Consulting...... 37 2.2 Concepts and Technologies of IBM’s “e-business on demand” ...... 39 2.2.1 The era of e-business ...... 39 2.2.2 The “on demand business” ...... 41 2.2.3 The “on demand infrastructure”...... 49 Table of Contents Page 2
3 IBM’s transformation to “e-business on demand” ...... 54 3.1 IBM’s Product & Service Portfolio...... 55 3.1.1 Introduction ...... 55 3.1.2 Hardware Portfolio ...... 63 3.1.3 Software Portfolio...... 66 3.1.4 Services Portfolio ...... 69 3.1.5 Financing...... 78 3.1.6 Conclusion ...... 79 3.2 Transformation to an “on demand” business...... 83 3.2.1 IBM’s e-business transformation...... 83 3.2.2 IBM’s “on demand” transformation strategy ...... 90
4 “on demand” in Practice...... 93 4.1 IBM’s “on demand” today...... 93 4.1.1 IBM’s 300 mm Semiconductor Facility ...... 93 4.1.2 IBM’s Personal Computer Business...... 94 4.2 Automotive Industry...... 95 4.3 Retail Industry...... 98 4.4 Banking Industry...... 102
5 IBM’s Major Competitors...... 106 5.1 Hewlett-Packard ...... 106 5.2 Sun Microsystems ...... 110 5.3 Microsoft ...... 114 5.4 EDS ...... 117 5.5 IBM and its Competitors – Overview Table...... 120
6 Summary & Conclusion ...... 121
Attachment A - Acronyms ...... 125
Attachment B - Bibliography...... 130 Introduction Page 3
1 Introduction
On October 30, 2002, the Chairman of the Board and Chief Executive Officer of IBM, Samuel J. Palmisano, announced the beginning of a “new era” for information technology called “on demand”1.
Samuel J. Palmisano outlined the principles of “on demand” and how this new business model and strategy for running businesses would help businesses to become more competitive. He also explained the role of information technology in this “on demand business” and the necessary paradigm change that will take place in the IT industry to make this happen. IBM is calling this new era of computing “e-business on demand”.2
In the business world IBM has always been known and has always been respected for its effective marketing and sales organizations in the past3 and at present4. As a result of that, from the 1950s until the late 1980s IBM had been criticized for being less innovative and re-active to market activities when it should have been creative and pro-active. Critics reasoned that the only factor why “Big Blue”5 was able to dominate the IT industry until the mid 1980s was because of its strength in marketing and sales6.
This Master thesis will take a closer look at IBM’s “e-business on demand” and analyze it, taking IBM’s history and the current market environment into consideration. It will also analyze whether or not this enterprise strategy is primarily a public relation campaign and sales initiative, or an integrated corporate strategy that might even enable IBM to return the market-dominating position it once had.7
1 Announcement at the Annual Customer Meeting in New York’s American Museum of Natural History. 2 Cf. [IBM2] Presentation used at the “e-business on demand” announcement on October, 30th 2002. 3 Cf. [McKenna, 2]. 4 In April 2003 IBM receives following ratings from Gartner “VendorRatings”: In the category “Overall” the rating “Positive” and “Strong Positive” in the category “Enterprise Sales & Distribution” [Gartner2]. 5 IBM is often referred to as “Big Blue” based on its size and the colors used for their mainframes until mid 1980’s [McKenna, 2], but also because IBM employees were typically dressed in dark-blue suits and white shirts [Rodgers, 91-93]. 6 McKenna describes how IBM regularly picked up ideas of successful new technologies and products and translated them into IBM products which then dominated the market [McKenna]. 7 Cf. [Fisher, 98-124]. Introduction Page 4
1.1 Questions Discussed in this Master Thesis
This Master thesis will discuss and provide answers to the following five research questions:
Question 1. In the computer industry, what is the difference between the “old eras” and this “new era” called “e-business on demand”?
The modern computer industry is defined by three eras: the centralized era, which revolutionized business by automating the back office; the distributed era, which marked the beginning of departmental automation; and the current stage, the network era.8 In the year 1996 IBM named the network era “e-business”9.
IBM has defined three stages of “e-business” of which IBM believes the last will mark the next era in the computer industry: “e-business on demand”.10 This research question will analyze these three stages.
Question 2. What constitutes IBM’s “e-business on demand” and how did it originate?
IBM has built a business and a technology framework around “e-business on demand”. This research question will take a closer look at the principles of this framework and its components. It will also put them into context with current business models on the one side and with IBM’s key products, services, strategic decisions and initiatives on the other side, retracing the last forty years which eventually led to this “e-business on demand” framework.11
8 Cf. [CSCRS]. 9 Cf. [Gerstner, 165 f.]. 10 Cf. [IBM4, 1]. 11 Cf. [ZDNet1] In his article Dan Farber criticizes that e-business on demand “is a natural evolution of the current initiatives rather than the introduction of a disruptive technology or theme”. Introduction Page 5
Question 3. How does one describe an “on demand” industry?
While Question 2 discusses “e-business on demand” and its principles on a theoretical level, this question will describe and assess the implementation of these principles by discussing and outlining the “new era”, using examples in selected industries.
Question 4. Is IBM aligning and transforming its product and service portfolio and itself towards “e-business on demand”?
This question will discuss not only whether IBM is really moving towards “e-business on demand” as a company in running its business, but also whether IBM is changing and aligning its product and service portfolio to deliver what is needed to run an “on demand” business. It will provide an answer to the question whether or not IBM is performing a marketing and sales campaign or a company wide alignment and transformation towards the proclaimed “new era”.
Question 5. How is IBM positioned against its competitors?
From the 1950s until the beginning of the 1980s IBM dominated the IT industry12. With “e-business on demand” IBM is trying to return to this market-dominating position.13 This research question will discuss how IBM’s competitors are currently positioned against IBM and within the computer industry. It will likewise discuss how the market analysts are assessing the likelihood of IBM regaining the dominant market position it once claimed.
12 Cf. [Fisher, 98-124]. 13 Cf. [BW12/03, 46], Introduction Page 6
1.2 Areas Not within the Scope of this Master Thesis
Writing about the business strategy of a company like IBM entices both the reader and the author to discuss even more aspects of IBM and the computer industry, other than those presented in a holistic analysis of IBM’s “e-business on demand”.
Therefore, it is necessary to define a clear set of questions, regarding is the areas to be analyzed and discussed (see chapter 1.1 ”Questions Discussed in this Master Thesis”), as well as a definition of what will not be within the scope and, therefore, not be discussed as part of this Master thesis:
· IBM’s financial crisis and recovery from 1985 until 1993.
· IBM’s transformation from an “international” to a “global” business.
· IBM’s culture and cultural change over the last ten years.
· The “new economy” and “.com” boom and burst from 1997 until 2001.
This Master thesis will likewise not outline the technical details surrounding the technologies mentioned and referred to in the discussion and analysis of the five research questions.
Although these are all very interesting and important topics furthering a better understanding of IBM as a whole, the reader is referred to other literature to find out more about these aspects of the company.
In order to put the proper focus on this Master thesis, the reader needs to be aware of the fact that the historical analysis of IBM’s key products, services, strategic decisions and initiatives will just provide an overview and not allow enough leeway for their detailed description and analysis. Introduction Page 7
1.3 Structure of this Master Thesis
This Master thesis is divided into four major areas:
· IBM’s “e-business on demand” and the “New Era” (Chapter 2),
· IBM’s transformation to “e-business on demand” (Chapter 3),
· “on demand” in Practice (Chapter 4).
· IBM’s Major Competitors (Chapter 5)
After a short introduction to “e-business on demand”, Chapter 2 first gives a historical analysis of IBM’s key products, services, strategic decisions and initiatives beginning in the early 1960s. It will provide the reader with an overview of the compelling product and technology strategies and decisions that have been set and taken within IBM.
Furthermore, in Chapter 2 IBM’s “e-business on demand” and the “new era” will be explained and analyzed: the “on demand” business and the new paradigm in the IT industry. It will discuss how this “new era” stands in relation to IBM’s history and its recent activities.
Chapter 3 will continue with a discussion about IBM’s transformation towards “e-business on demand”: to which extent IBM is transforming its product and service portfolio, as well as how IBM is transforming itself into an “on demand” business.
Chapter 4 will describe the application of IBM’s “e-business on demand” within IBM and selected industries.
Chapter 5 assesses the status of IBM’s competitors to understand how IBM is positioned regarding its efforts in the IT industry.
The final chapter of this Master thesis will summarize and conclude the preceding chapters by offering answers to the five research questions of Chapter 1.1. IBM’s “e-business on demand” and the “New Era” Page 8
2 IBM’s “e-business on demand” and the “New Era”
IBM claims through the media that “e-business on demand” is the beginning of a “new era” in the computer industry that will mark a major milestone in the history of its corporation. The company will invest an amount of $ 10 billion per year14 - which is 12.3% of IBM’s total revenue15 - to transform its product and service portfolio, but also to become an “on demand” business itself.16
The objective of this chapter is to discuss what IBM defines as “e-business on demand”, what the principles of an “on demand business” are, and upon what kind of foundation they are built. It will take a look at IBM’s framework for “e-business on demand infrastructure” and will bring it into context with former IBM key products, services, strategic decisions and initiatives of the last forty years.
Therefore, Chapter 2 will start with a chronological overview of the key milestones in IBM’s history, which are of relevance to “e-business on demand”, and will be followed by a more detailed discussion and analysis of what IBM defines as: the “stages of e-business”, the ”on demand business”, and the “e-business on demand infrastructure”. This will highlight whether or not the initiative represents a major paradigm shift within IBM’s strategies as compared to those prior to October 2002.
14 Cf. [GGR] and [ZDnet1]. 15 Cf. [IBM2002, 45]. 16 Cf. [IBM6]. IBM’s “e-business on demand” and the “New Era” Page 9
2.1 Evolution of “e-business on demand”
This subchapter will provide a historical analysis of IBM’s key products, services, strategic decisions and initiatives beginning in the early 1960s. It will provide the reader with an overview of the compelling product and technology strategies and decisions that have been set and taken within IBM.
2.1.1 IBM System/360
In the 1950s, IBM helped shape the fledgling computer industry with a line of computers – with names like the 650, the 701, and the 305 RAMC – based on vacuum tubes. During the 1950s, IBM enhanced these products and continued development of other computer systems – each uniquely designed to address specific applications and to fit within narrow price ranges. This undisciplined proliferation of unique and incompatible computer systems caused confusion, even within IBM’s own marketing, service, and software development organizations. The lack of “compatibility” among these systems also made it difficult for customers to migrate to new generations of IBM computers.17
In 1961 a corporate task force (code-named “SPREAD”, an acronym for Systems Programming, Research, Engineering, And Development, but also to indicate a wide scope) was assembled to define a new family of mutually compatible, general-purpose computers. The task force’s final report issued at the end of December 1961 recommended the building of a new series of computer systems spanning a wide range of price and performance. IBM’s senior management accepted the recommendation, and a new development project was launched.18
17 Cf. [Hoskins, 157]. 18 Cf. [Pugh, 270-271]. IBM’s “e-business on demand” and the “New Era” Page 10
The first task undertaken by the development team was to define a set of rules – termed an architecture – to which a group of five computers would conform. This architectural-definition step was the key to ensuring that all five computer systems would be compatible with one another – a “first” for IBM. The architecture was completed and documented in the fall of 1962. After defining the architecture, the development team turned to the task of simultaneously designing the five different models that made up the family. Enhanced core memory and a new Solid Logic Technology (SLT) improved performance and reliability. Finally, on April 7, 1964, IBM held a press conference, with over 200 editors and writers in attendance, to announce the IBM System/360 family of computers. The “360” in the name referred to all points of a compass to denote the universal applicability, wide range of performance and price, and the “whole-company” scope of the development effort.19
With the exception of different costs and performances, all processors in the System/360 line were equivalent and presumably able to handle any anticipated information processing task. Likewise, forty-four different peripheral devices were announced, including several types of magnetic storage devices, visual display units, communication equipment, card readers and punches, printers, and an optical character reader. For the first time in the computer industry, computers of different sizes, performance, and features were able to be connected to the same set of peripherals, using the same technology and one single operating system to run application programs.20
Although the System/360 architecture remained unchanged for six years, just six months after its introduction IBM executives began to plan for systems that would exploit the emerging monolithic circuit (MLC) technology. By the end of 1965, a draft document defining a new family of computer systems, called “NS” for “new systems”, was complete. The new systems were to be based on MLC technology and an extended System/360 architecture, to be called System/370. In June 1970 IBM announced the System/370 Models 155 and 165. The
19 Cf. [Hoskins, 158]. 20 Cf. [Pugh, 275-276, 293-294]. IBM’s “e-business on demand” and the “New Era” Page 11
System/370 architecture preserved upward compatibility with application programs written for the System/360 architecture.21
In retrospect, System/360 was a huge gamble even for a firm of IBM’s size. In total US$ 5 billion – more than the cumulative after-tax profit the firm reported from its creation in 1914 to date – had been spent in getting System/360 to market. As it would render obsolete all of IBM’s existing machines, all existing rentals22 and service contracts would have to be written off as well. It meant adding plants to the balance sheet and executives and staff to the payroll and unifying the entire engineering staff behind one product line. System/360 and its successor System/370 ultimately became some of the best-selling computer equipment ever made.23
2.1.2 IBM Personal Computer
IBM entered the small-computer business on August 12, 1981, when an informal leg of IBM (called an independent business unit) in Boca Raton, Florida, announced the IBM Personal Computer (IBM PC). The IBM PC was an experiment conducted by twelve developers under the leadership of Philip Estridge, designed in twelve months from “off-the-shelf” components: on Intel 8088 microprocessor, 16K of standard memory, 160K diskette drives, text-only monochrome display, and a cassette port. It was primarily designed for small to medium-size businesses. As time went on, IBM developed a family of personal computers and the independent business unit became a full division, the Entry Systems Division (ESD). IBM published all of the PC’s technical information, inviting third-party manufacturers to develop and market their own hardware and software of the PC – which they did. This practice of publishing technical details about a product is known as adopting an open architecture policy. As more and more third-party hardware and software became available for the PC
21 Cf. [Hoskins, 159]. 22 Cf. Chapter 2.1.5. 23 Cf. [Mills, 30]. IBM’s “e-business on demand” and the “New Era” Page 12 family of computers, their popularity grew, prompting even more third-party development activities. This self-fueling cycle was beneficial to IBM, third-party developers, and the end-users. The success of the open architecture policy has prompted IBM to continue publishing technical details about all subsequent personal computer systems.24
The end-product of this development program was a huge initial success. IBM’s first personal computer models took the market by storm, and within two years of product launch the firm surged from nothing to a market-leading 26 percent share in personal computer revenues. In fact, IBM appeared well on its way to reestablishing its hegemony in the information technology marketplace. IBM’s personal computer put the power of a huge make behind a single design. Firms and individuals could now buy a personal computer as an extension of IBM and did so in enough volume to drive costs and prices down. As prices fell, people were willing to buy machines as an experiment, to write software, and to further refine the technology. In so doing, they sparked the so called “PC revolution”.25
In 1986, as IBM’s PC market share was being undermined by its inability to market these machines effectively in a retail environment, its decision to adopt open systems for the personal computer came back to haunt it. In pursuit of pen systems, IBM had commissioned a computer chip from Intel and a personal computer operating system from Microsoft founders Bill Gates and Paul Allen. But when IBM declined Bill Gate’s offer to buy control over MS/DOS, Compaq promptly licensed this operating system, purchased chips from Intel, and cloned IBM’s machine. The result was a heavy blow to IBM’s position in the PC market.26
24 Cf. [Hoskins, 47-48]. 25 Cf. [Mills, 35]. 26 Cf. [Mills, 39-40]. IBM’s “e-business on demand” and the “New Era” Page 13
On April 2, 1987, IBM announced a new generation of personal computers called Personal Systems/2 (PS/2) computers. Belatedly realizing how important closed architecture had been to its past success, IBM tried to introduce proprietary features on these later personal computer models, but market dynamics were now working against it: Open systems were stimulating the market.27
2.1.3 IBM Midrange Systems: AS/400 & RS/6000
In July 1969, the System/3 computer was announced at the plant site in Rochester, Minnesota. This system was totally developed at the Rochester location, and represented some significant advances in the technology of its time: it introduced the monolithic systems technology like the System/370, and a punch card one-third of normal size that held 20 percent more information – the first advancement in punch-card technology in over forty years.28
System/3 turned out to be a technological and business success. Attracted by its selection of ready-to-use software, businesses snapped it up. Subsequently, the Rochester plant was given the task of developing a “low-end” computer family, and announced six years later in January 1975 the System/32 which featured direct keyboard data entry and display that could present up to six rows of text forty characters long. It had up to 32K of memory and up to 13 MB of fixed-disk storage. Two years later in 1977, System/34, and five years later in 1983, System/36 were announced, all bringing new capabilities and more power into this product family.29
27 Cf. [Hoskins, 48] and [Mills, 40]. 28 Cf. [Hoskins, 128]. 29 Cf. [Hoskins, 128-130]. IBM’s “e-business on demand” and the “New Era” Page 14
In 1978 IBM launched a new machine that made a leapfrog jump in technology and capability: It was IBM System/38. It contained, as standard features, a host of progressive new functions, including an integrated relational database. But it was incompatible with the System/3 line. Customers could not move all the software and data they had created or bought for the System/34 over to the System/38. So the System/38 never achieved the popularity that the System/3 and its successors did.30
The announcement of System/32 came shortly before the efforts for a different internal computer development task force called “F/S” - an acronym for “Future System” - were terminated in February 1975. The major goal of this task force was to reduce the cost of developing application programs and managing computer systems. This was considered essential because of the growing shortage of programmers and the high costs involved. Customers at that time were spending twice as much money on programmers and other computing- center personnel as they were on hardware. If F/S could be structured to reduce the number of people required to program and operate computers, IBM expected to receive a higher fraction of the money spent by customers for information processing. But the complexity of computers and of the international market they served has also been reflected in the size and complexity of the F/S effort. It led to conflicting views of the many development groups which were difficult to resolve because only few, if any, understood the entire F/S architecture. For its time, F/S was overly ambitious and failed miserably.31
However, F/S also left some useful results as well. The most famous one is the Reduced Instruction Set Computing (RISC) technology. But because of the F/S failure IBM became a more risk-averse and, primarily, on mainframes focused company. It took more than ten years, until January 1986, when IBM introduced its IBM RT PC (for RISC technology personal computer) together with its own version of the UNIX operating system to run on the RT personal computer,
30 Cf. [Collar, 17-18]. 31 Cf. [Pugh, 308-309] and [Mills, 130]. IBM’s “e-business on demand” and the “New Era” Page 15 called the Advanced Interactive eXecutive (AIX) operating system. Later, IBM released versions of AIX for the smaller PS/2 and the larger S/370 mainframe computers as well. On February 15, 1990, IBM announced the second generation of RISC technology, combining the RISC philosophy with more traditional concepts, with the goal of achieving balanced performance: the RS/6000 family with AIX Version 3.32
But by then the power of RISC had already been exploited in the marketplace by Sun Microsystems, Hewlett Packard, and others – forcing IBM to catch up with its own technology.33
In the meantime, IBM was developing the next generation of its System/3x family34. On June 20, 1988, IBM unveiled the AS/400 family of products. The AS/400 had close architectural ties with System/38 while, in most cases, providing application program compatibility with the System/36 and System/38, which were not compatible to each other. In developing the AS/400 systems, designers drew from the ease-of-use features of the System/36, combined these with the advanced architecture and productivity of the System/38, and then added new functions. In addition to the many application programs developed directly for execution on the AS/400, many of the application programs developed for the System/36 and System/38 computers could be migrated to and used on AS/400 systems by applying the migration tools available.35
Although additional improvements could have been achieved with its CISC- based processor, the AS/400 moved to a RISC base as well. Since 1995 the AS/400 and RS/6000 product families were using the same RISC technology based on the POWER architecture.36
32 Cf. [Pugh, 314-315] and [Hoskins, 82-85]. 33 Cf. [Mills, 130]. 34 The System/3 and its successors System/32, System/34, System/36, as well as System/38 were known as the System/3x family of computers. 35 Cf. [Hoskins, 132]. 36 Cf. [Hoskins, 140]. IBM’s “e-business on demand” and the “New Era” Page 16
2.1.4 SAA - Systems Application Architecture
On March 17, 1987, IBM made a strategic announcement: Systems Applications Architecture, SAA, was going to be the IBM blueprint for future software development – not only for IBM itself, but also for any organization using or interacting with IBM computers. It was not just a competitive response by IBM, it was clearly a broader strategy. It was an attempt by the world’s largest computer manufacturer to bring order to the chaotic world of computer software and software development.37
SAA is a set of standards, development approaches, and software interfaces that together define a strategy for system design and development. Implementation of the SAA strategy was supposed to result in application software that is readily understandable to the computer user. System developers following SAA standards and using SAA compliant interfaces would be able to create applications that effectively use multiple hardware environments. SAA was IBM’s vision of how to create software that retains essential common elements regardless of the hardware platform it operates on or the specific functions it addresses. It forced the rethinking of the way in which users would interface with computer applications.38
There are four primary components in the SAA strategy. Three of these address the user, programming, and communications interfaces of systems. The fourth is the application that follows and uses the first three:39
· User Interface (Common User Access),
· Developer tools and strategies (Common Programming Interface),
· Communications support for systems operating on diverse hardware (Common Communications Support).
37 Cf. [Grochow, 1]. 38 Cf. [Grochow, 7]. 39 Cf. [Grochow, 9]. IBM’s “e-business on demand” and the “New Era” Page 17
Common User Access (CUA) is the specification of what the computer user should see and be able to do in interacting with application software. It defines the “user interface”, how the person communicates with the computer and vice versa. Far from being a “foolish consistency”, the SAA CUA cultivates consistency in an area where inconsistency was creating needless confusion among countless computer users and developers.40 In October 1991, the SAA CUA user interface was redefined as a graphical user interface that incorporates elements of object orientation, an orientation in which a user's focus is on objects and in which the concept of applications is hidden. The CUA user interface is based on principles of user-interface design, on object-oriented relationships, and on field experience and user testing.41
An important base of the Systems Application Architecture solution is the Common Programming Interface (CPI). The various components of the CPI enable developers to create applications with minimal concern about the environments in which they will run.42 They fall into one of the two categories:
· Language Interfaces: such as Application Generator, C, COBOL, FORTRAN, PL/I, REXX43, and RPG;
· Services Interfaces: such as Communications Interfaces, Database Interfaces, Dialog Interfaces, Language environment Interfaces, Presentation PrintManager Interfaces, Query Interfaces, Repository Interfaces, and Resource recovery Interfaces.
Multiple IBM and other vendor products implemented the CPI.44 In addition to the products in the Common Programming Interface, IBM and members of the IBM International Alliance for the AD/Cycle framework were supplying other
40 Cf. [Grochow, 42]. 41 Cf. [IBM87, 16]. 42 Cf. [IBM88, 13]. 43 IBM's SAA Procedures Language interface is based on REXX, a procedural language designed for end-user personal programming for both the computer professional and the casual general user [IBM88, 53]. 44 Cf. [Grochow, 9]. IBM’s “e-business on demand” and the “New Era” Page 18 tools and an integrated approach designed to help people throughout the entire application development process – from requirements gathering, through designing, coding, building, testing, debugging, and performing re-development and maintenance on applications.45
Communications is the heart of the cooperative processing strategy. Standard, easy to use, reliable communications mechanisms are required for effective use of enterprise-wide computing resources and running distributed and cooperative applications on different hardware environments. SAA Common Communications Support (CCS) defined the, therefore needed, architecture, protocols, and strategies which were implemented across the SAA platforms.46
Applications that followed the SAA standards and used SAA standard software interfaces were called “SAA Applications” and are the fourth component of the SAA strategy. IBM’s first common application offering was OfficeVision. Independent software vendors and user organizations were also encouraged to develop applications that used a consistent architecture based on the components of SAA.47
SAA had its share of skeptics and at least some of what they said was correct. There is no doubt that IBM had a healthy degree of self-interest in mind in formulating the SAA strategy. There was also no doubt that it had a long way to go in fully implementing that strategy. But regardless of the self-interest and not-yet-completed picture, SAA was and still is exactly about what is needed: standardization, compatibility, flexibility, interconnectivity, ease of use.48
2.1.5 Change of Commercial Model
Many firms in the information technology industry have been one-hit wonders. They have ridden a single product or technology to prominence and then faded
45 Cf. [IBM88, 16]. 46 Cf. [Grochow, 89]. 47 Cf. [Grochow, 9]. 48 Cf. [Grochow, 347]. IBM’s “e-business on demand” and the “New Era” Page 19 from view when it was supplanted by the advances of others. Examples include, Ashton-Tate, Burroughs, Amdahl, Wang, Data General, and Digital. From the perspective of growth and decline cycles, each of these firms moved through one full cycle ending in failure. IBM was able to avoid the same fate based on IBM’s fundamental commitment to customer service – that, in turn, based on the decision made by IBM’s founder Thomas J. Watson, Sr., to rent rather than sell tabulating equipment and to use rented machines as a pipeline to push the supplies and service that earned IBM its real profits. This maintained a long-term presence in an industry characterized by rapid, constant, and substantial change 49
Early in the 1980s, IBM saw its only threat coming from Japanese competitors who, with the help of their government, would copy IBM’s products. To beat them, IBM had to become a low-cost producer. At the same time, IBM concluded it that should continue building itself up to support US$ 100 billion in sales by fiscal 1990. Although this target represented a doubling of then-current revenues, it was seen as an aggressive but achievable ten-year target for IBM. This meant that the company had to have a large new capacity for mainframe computers.50
John Opel, IBM’s CEO in those days, was convinced that if IBM had the best products and manufacturing, then it would win the marketplace. He saw the huge barriers to entering the semiconductor manufacturing – hundreds of millions of dollars for plant and equipment – as a big advantage to IBM, with its size and financial strength. The name of the game was low-cost manufacturing, and IBM could play through capital investment.
To fund the new capacity, IBM had to have more investment dollars. To get them, IBM accelerated its movement from rentals to sales. Specifically, IBM pushed sales financed by leases provided to its customers by IBM itself or by financial institutions. Prior to the end of the 1980s, American firms did not have to consolidate their leasing/finance subsidiaries (even if wholly owned), so
49 Cf. [Mills, 49-50]. 50 Cf. [Mills, 89]. IBM’s “e-business on demand” and the “New Era” Page 20 corporations could book leased equipment as sales. Thus, in order to raise cash for investment, the shift from rentals to leases was shown by the company as an increase in sales.51
With the reduction of its rental base IBM lost both customer loyalty and revenue stability. While in 1985, 42 percent of IBM’s revenue stream was generated by rental (12 percent) and maintenance (30 percent) contracts, by the early 1990s, rentals were only about 4 percent and maintenance about 29 percent. IBM had converted its stable revenue stream into one that fluctuated with the economy and with the intensity of competition in its industry.52
When renting gave way to selling, the rhythm of IBM’s business changed from relationship-selling to transaction-selling. In the “old” approach, IBM sold solutions – for example, a payroll system – rather than the hardware on which it ran. In consequence, the old IBM was a partner to its customer, with IBM owning the hardware that the customer used and being responsible day by day for the successful operation of the payroll system. IBM had its assets at stake just as its customers did. In this mode, IBM sold to its customer’s operating managers (or their information-system directors) and retained a strong communication link with them. Under the new system, the measure of relative progress or lack of it with each customer was gone. If IBM lost one customer, it searched for another. The field sales force pushed the iron, selling the capacity of IBM’s plants by discounts and other means, but they were no longer building relationships with customers. When IBM sold a computer to an airline, no one knew if the base with that customer was growing or not. IBM pushed products on its customers – not solutions or applications.53
In his memoirs, published in 1990 – a year before the begin of IBM’s ultimate financial crisis – Thomas J. Watson, Jr. wrote how he was “alarmed when he [Frank Cary54] and his eventual successor John Opel55 rapidly phased out the
51 Cf. [Mills, 90]. 52 Cf. [Mills, 91]. 53 Cf. [Mills, 107]. 54 IBM’s CEO from 1973 until 1983. 55 IBM’s CEO from 1983 until 1986. IBM’s “e-business on demand” and the “New Era” Page 21 rental system, shifting billions of dollars worth of business to outright sales. … But it bothered me because rentals traditionally had been crucial to IBM’s success. Rental contracts wedded us to our companies, gave us a powerful incentive to keep service top-notch, and made IBM stable and essentially depression-proof.”56.
2.1.6 Building on Services
IBM’s most basic business objective has always been to maintain a long-term presence in an industry characterized by rapid, constant, and substantial change. Watson, Sr., understood that this meant creating a service business, not a technology business. This perspective was developed at a time when information technology users did not want to sink capital into equipment that – even in the 1910s-1920s – tended to become obsolete relatively quickly. Information technology vendors made their real profits from selling supplies and providing repair services, and they considered themselves lucky if the stream of rental payments on a machine covered the costs of engineering and building its replacement. Needing to accumulate billions of dollars’ worth of machines in inventory, IBM had to keep its customers enchanted with its level of service or degree of commitment, because customers could simply cancel their rental agreements and force IBM to retrieve its property. These machines would then stop earning their keep and become a disposal headache for IBM. The fear of such developments drove Watson, Sr., to keep IBM’s people focused on customer service, driving this objective into IBM’s cultural values – particularly its values of excellence in execution and best customer service.57
56 Cf. [Watson, 408]. 57 Cf. [Mills, 57-58]. IBM’s “e-business on demand” and the “New Era” Page 22
IBM’s history of services began in 1933 with the establishment of its first Education Center in Endicott, NY (USA). Since then IBM had been in the business of providing maintenance, product support, education, and, together with the development of early computers after the Second World War, programming services. And until 1969, the rental fees for IBM systems included all these services together with its hardware and software all “bundled” in a single price. But then a new policy was introduced within IBM for separating the charging of such services. To facilitate the use of its software, IBM introduced in 1979 the first 24-hour telephone assistance for software problems. In 1982 the IBM Information Network was formed, providing a worldwide interconnected and secure data network for customer needs. Shortly after creating its own network, IBM together with Sears Roebuck formed Prodigy - an on-line service company, which was later sold. In recognition of the growing importance of services, in 1984 IBM formed the National Service Division in the United States to provide both hardware and software support services for IBM products to its customers.58
IBM entered the IT outsourcing market in 1989 when it completed together with Eastman Kodak Company an agreement by which IBM designed, built, and managed a new state-of-the-art data center for Kodak. That experience encouraged IBM to provide additional outsourcing services by exploiting the excess capacity in its own data centers. In the same year, IBM introduced Business Recovery Services, an offering that enables a business to continue operations in the event of an unplanned outage or disaster.59
In 1991 IBM restructured its Systems Services Division and formed the Integrated Systems Solutions Corporation (ISSC), a wholly owned subsidiary, to provide a wide range of IT services, including strategic outsourcing. One year later IBM Consulting Group was formed to offer customers the expertise they required to utilize their IT in the most effective manner. It reflected a shift of IBM’s services philosophy from merely an after-sales activity, such as
58 Cf. [Hoskins, 216-217]. 59 Cf. [IBM27, 2]. IBM’s “e-business on demand” and the “New Era” Page 23 maintenance, to a broader approach of assisting customers in every facet of their ongoing business operations. Two years later, in 1994, IBM Global Network was created - linking over 20 separate value-added networks managed by IBM in countries around the world - and was later sold in 1998 to AT&T.60
The historical reason for IBM being in the services business was to protect its hardware rentals and, in later years, sales, and this was also the reason why IBM’s service units were part of the territory sales organizations. This did not change until 1995 when it finally decided to establish a new business segment for IT services within IBM and to build its own business unit, calling it IBM Global Services.61
Based on extensive inputs from customers, and after several adjustments, IBM Global Services ultimately established a value framework: a logical flow on how IBM can help its customers, which also influenced the way IBM Global Services was then organized:
· First, provide services to asses a company’s business and IT needs from a strategic perspective (Business Consulting and IT Consulting);
· Then, plan, design, and implement initiatives that support their strategies (Business Transformation Services, e-business Services62, Total Systems Management Services, and Learning Services);
· Finally, run and manage their operations (Strategic Outsourcing Services)
Step by step, IBM has strengthened and adapted its service portfolio several times since then, always pursuing to keep up with current and arising market needs. But by becoming its own business segment was not without obstacles. IBM Global Services was now also providing solutions that contained non-IBM
60 Cf. [Hoskins, 217] and [IBM27,3]. 61 Cf. [Gerstner, 146-150]. 62 Cf. Chapter 2.1.7. IBM’s “e-business on demand” and the “New Era” Page 24 products as well, which sometimes resulted into conflict with other IBM product divisions.63
However, IBM Global Services is now the largest information technology services company in the world. Revenue, excluding maintenance, has grown from less then US$ 7 billion in 1991 to US$ 31.3 billion in 2002, surpassing hardware sales for the first time in the year 2001.64
2.1.7 e-business
In November 1995, IBM announced a new company-wide strategy called “e-business”. In those days, the three central themes which formed the base for this strategy were: commerce, intranet/extranet, and content management. IBM’s priorities within this strategy were not focused on being at the “commodity” side of the Internet world – web browser, client hardware/software, building simple web sites, etc. Though IBM did offer products for the commodity side of the Internet, IBM’s e-business strategy was more focused on environments that can benefit from the experience and expertise IBM can bring to solve end-to-end business problems with a combination of hardware, software, and services. Even if a project starts small, it must be designed to accommodate rapid – sometimes even extremely rapid – growth. This was a key of IBM’s e-business approach. And while business started to use the Internet for basic communications, IBM viewed it as a medium for transactions: to leverage the Internet to help businesses decrease their time to market, open new markets, attract and retain customers, connect with partners and suppliers, and abolish barriers between teams.65
63 Cf. [IBM27, 4] and [Gerstner, 149]. 64 Cf. [IBM27, 3], [IBM2002, 46], and [Gartner1]. 65 Cf. [Hoskins, 17-18]. IBM’s “e-business on demand” and the “New Era” Page 25
For IBM, Internet commerce meant marketing, selling, and servicing customers over the Internet. It involved all the interactions in support of a transaction between a company and its customers. It was more than just putting electronic brochures on a web site, which was what most of the companies did. It was about transacting business or “exchange value” through a company’s web site. Subsequently, allowing buyers and sellers to consummate sales completely online brought up issues of security, identification, electronic money, fraud, and more. But electronic commerce promised to be well worth these troubles: In those days, forecasts predicted that by the year 2000, revenue from electronic payments were to be two-thirds of all non-cash transactions in the United States. In its search to differentiate itself from its competitors, IBM did not only look at the sales transactions. IBM’s Internet commerce strategy was to enhance all aspects of the customer relationship through the application of Internet technology.66
Once Internet standards were widely adopted, businesses began to tie their own private and disparate networks together, adhering to the same Internet standards – and intranets and extranets were created. The adoption of Internet standards for electronic communications over the Internet and intranets marked the beginning of the move from relatively limited electronic communications to widespread deployment of intranets and extranets. IBM’s intranet/extranet strategies were built around the three areas or application groupings: messaging and information sharing; joint authoring and electronic publishing; and collaboration.67
IBM’s content-management offerings form the foundation upon which Internet commerce and intranet/extranet applications are built. Within IBM’s e-business strategy it was not just HTML pages, graphic files, and compressed sound recordings. The content businesses want to offer their customers, employees, business partners, and vendors is critical business information, that already exists but is only accessible by an isolated group. Presenting this existing and
66 Cf. [Hoskins, 19]. 67 Cf. [Hoskins, 26-28]. IBM’s “e-business on demand” and the “New Era” Page 26 vital information to a broader audience over the Internet/intranet is of value to businesses. Therefore, IBM’s content-management strategy had three segments: legacy system enablement – bringing existing information stored in long-used systems to a much broader audience; business extension – extending a company’s accessibility to a new online community; and business- process transformation – reinventing core business processes by exploiting new content-management offerings.68
2.1.8 Focusing on Middleware
When IBM announced System/360, it did not only offer a new generation of mainframe systems to its customers. IBM was serving its customers end-to-end solutions: from the hardware over the operating system, the middleware, up to the needed business application, and all services surrounding it. But the market environment had changed since then, and IBM slowly started to focus on middleware – a creeping transformation that just ended in recent years.69
In 1995 IBM started to bring all software activities under one umbrella: IBM Software Group was formed, whereby the development and sales of about 4,000 software products were brought together into one organization. In developing its vision and strategy, IBM determined, on the one side, that Microsoft owned the dominating operating system, and, on the other side, that at the top of the software market, companies like SAP, PeopleSoft, and JD Edwards were leading the business application market. In between were products like databases, systems management applications, applications for data processing. This was a complex and relatively hidden layer, called middleware. When IBM looked at the expected move from client/server computing to network-based computing, it realized that it would become necessary to integrate different systems and applications with each other – middleware would be needed. And since the middleware market was not
68 Cf. [Hoskins, 30-33]. 69 Cf. [Gerstner, 172-173]. IBM’s “e-business on demand” and the “New Era” Page 27 substantially dominated by any company, it saw its opportunity in this software market.70
But IBM’s portfolio of middleware, in those days, was, on the one hand, very proprietary and, on the other hand, had some gaps. Therefore, IBM bought two software companies, which were highly respected for their products within the market: Lotus and Tivoli. Lotus was selected for its collaboration product and technology called “Notes”, for which IBM paid US$ 3.2 billion. Tivoli was selected because it catapulted IBM into the systems management software market.71 Both company names, Lotus and Tivoli, still represent two out of five strategic IBM software brands next to DB2, WebSphere, and Rational - still standing for that, for which they had been bought: collaboration solutions and systems management.
One of IBM’s most difficult decisions was to end the battle between OS/2 and Windows. After the cooperation between Microsoft and IBM for the development of OS/2 ended in 1989, IBM lost market share to Microsoft’s Windows, and ended up with four percent market share by the early 1990s. But making the ultimate decision took many years for IBM. Although market share was low, coverage with OS/2 at their biggest customers was high: Deutsche Bank, Royal Bank of Canada, … were all customers of OS/2. Even though IBM is still providing support for OS/2 to its customers today, there has been no further development for years.72
Looking at the business applications, it has always been a highly specialized market segment of the IT industry: it ranges from accounting applications for small businesses to car designing software, even highly sophisticated applications to simulate gene-technology processes. This segment was always dominated by highly specialized companies, passionately focused on their area, like automation solutions for financial services institutions. First IBM tried to catch up in the different markets through several acquisitions, but without
70 Cf. [Gerstner, 158-160]. 71 Cf. [Gerstner, 161-163]. 72 Cf. [Garr, 187-201] and [Gerstner, 173]. IBM’s “e-business on demand” and the “New Era” Page 28 success. And soon it became clear to IBM, that it only irritated the leading software solution providers like SAP, PeopleSoft, and JD Edwards. IBM realized that it could have made more money through, instead of against, these companies, if they were willing to load and run their applications on IBM hardware and middleware, and have them be supported by IBM Global Services. Companies first ask for the business application, then for the appropriate hardware. But as long as IBM was seen as a competitor, HP and Sun were making business. In the year 1999, IBM finally decided to stop its business application development efforts and to put its entire focus within the software market on middleware. This allowed IBM to leave the competitive position against the leading business application providers and to become their strategic partner.73
2.1.9 Java
Prior to the Java computing model, computer programming was generally platform dependent. Different languages were developed for different operating systems. While there was some portability of languages to several operating systems, there was virtually no portability of a program from one platform to another. If a program was built and compiled on an S/390 mainframe, there was no way it was going to run on an IBM Personal Computer with a Windows operating system, much less on a cell phone.74
Java was developed by Sun Microsystems to enable companies to build software that can run on many different types of computers, even pervasive devices. This is possible, since Java runs on a piece of software called a Java Virtual Machine, a unified virtual environment. All Java programs are then written as if they were running within this virtual platform. The platform is then built into Web browsers, cell phones, etc.. This virtual machine is in charge of translating the Java virtual machine platform instructions into the instructions of
73 Cf. [Gerstner, 175-176]. 74 Cf. [Young, 29]. IBM’s “e-business on demand” and the “New Era” Page 29 the machine on which the virtual machine is running. So, if the Java program is running on an S/390, the instructions are translated into OS/390 platform instructions. If the same program is executed within a Windows environment, the Java Virtual Machine translates the instructions into Windows platform instructions, and so on. The idea becomes very obvious: “write once, run anywhere”.75
So when IBM’s Louis V. Gerstner76 articulated in November 1995 IBM’s vision of network-centric computing or “e-business”77, Java was part of that. But IBM did not only start to provide Development Workbenches for Java. It promoted Java, its technologies and concepts, to become one of the key cornerstones of IBM’s e-business strategy and the software strategy around it: e.g. the entire WebSphere architecture is built around Java, its technologies, and standards.78
However, IBM’s decision to go after Java was not only because of its portability. Of course, Java’s technology was the compelling reason for its being chosen, but it was also a business decision. IBM listened to its customers balking at having to invest too much in proprietary hardware and software, so IBM started to move towards industry standards, and Sun’s Java programming language ideally fitted into this strategic shift.79
2.1.10 Linux
In 1998 three years after the beginning of IBM’s e-business era, IBM announced that Linux would be becoming another major cornerstone of IBM’s e-business strategy. IBM then started to fully embrace Linux, the free UNIX- type operating system that was created by Linus Torvalds. Originally the province of small systems development in very back corners of computer
75 Ibid. 76 IBM’s CEO from 1993 until 2002, and Chairman of the Board until April 2003. 77 Cf. Chapter 2.2.1. 78 Cf. [Slater, 244-245] and [Young, 79]. 79 Cf. [Slater, 180]. IBM’s “e-business on demand” and the “New Era” Page 30 rooms, the operating system has evolved to become an answer to Microsoft’s hold on the non-mainframe operating systems world.80
Like its commitment to Java, this was another IBM statement on its support for open industry standards. IBM pursued the establishment of a real alternative to the existing operating systems. Therefore, IBM ported Linux to all its hardware platforms: from the Intel systems – from which Linux originates – (IBM’s Netfinity or, nowadays, eServer xSeries), over their midrange systems AS/400 and RS/6000 (now eServer iSeries and pSeries), up to its mainframe systems (S/390 or eServer zSeries today), where IBM’s initiative to support Linux initially started.81
Likewise remarkable was the importance this strategy received, especially in comparison to other key strategic initiatives at that time: e.g. the Monterey- Project, an initiative which was started before IBM’s commitment to Linux which had the objective of building one unified High-End-UNIX that runs on several processor families. It seamlessly merged into IBM’s Linux strategy: for the Monterey-Project product the market name “AIX 5L” has been introduced – “L” standing for Linux.82
But Linux has, to one extent, also changed IBM’s business model. By having Linux within its operating systems portfolio, sales within this software segment would make less revenue and less profit. But, on the other hand, IBM was now able to realize other deals: through Linux it became much easier to develop customers from xSeries systems over pSeries to zSeries systems.83 This was made possible because Linux is a genuinely open system. There is a wealth of applications written for Linux that can now be migrated with a simple recompile in most cases. This is important because the ability to move applications from one place to another gives a company the flexibility to choose where it wants to
80 Cf. [Young, 79]. 81 Cf. [Marx, 34] and [Young, 79]. 82 Cf. [Marx, 35]. 83 Cf. [Marx, 36]. IBM’s “e-business on demand” and the “New Era” Page 31 build and deploy its applications without being limited by extensive re-writes for each hardware platform.84
Since then, IBM has ported most of its products out of their broad software portfolio to Linux and is certifying them with the most important Linux Distributions: SuSE Red Hat, Caldera, and Turbo Linux.85
2.1.11 Developer Relations and Open Source
In August 1996, IBM launched its “alphaWorks” initiative for identifying and speeding emerging IBM technologies to market, and to use it as a leading force in its efforts to guide the course of software development by leveraging the Web. Since then, “alphaWorks” has distributed to developers via its Web site technologies created by IBM research and development labs around the world. By providing direct access to early versions of its technologies at no cost, IBM pursues to engage the broader developer community and to harness their energy and feedback to refine these technologies and incorporate them into market-driven products.86
Two years later on September, 28th 1999, IBM launched a second developer relations initiative called “developerWorks”, which has been designed to become the central repository for all its open source projects based on a public license approved by the Open Source Initiative. Beyond just providing access to source code, it was also designed to be a unique forum for developers to submit changes and fixes to code to all these IBM open source projects. Furthermore, it also enabled developers to access product- and platform- independent information for e-business application development, a wide blend of tools, source code, tutorials, “How to ..?” articles, news, and tips.
84 Cf. [Young, 79]. 85 Cf. [IBM20] and [Marx, 36]. 86 Cf. [IBM91] IBM’s “e-business on demand” and the “New Era” Page 32
But IBM did not only establish direct relations with the developer community. The company engaged with other independent software vendors either by joining or setting up new open software communities like the “Open Source Initiative”87 or the “eclipse.org consortium”88, or by joining new open standard organizations to develop and promote internet and web technologies standards like the “W3C – World Wide Web Consortium”89 or the “Organization for the Advancement of Structured Information Standards”90.
2.1.12 Grid Computing
Grid computing is often described as distributed computing taken to the next evolutionary level. The goal is to create the illusion of a simple, yet large and powerful, self-managing virtual computer out of a large collection of connected heterogeneous systems sharing various combinations of resources. While the standardization of communications between heterogeneous systems was driving the tremendous growth of the Internet, the emerging standardization for sharing resources, along with the availability of higher bandwidth, is driving a possibly equally large evolutionary step in grid computing.91
87 The “Open Source Initiative (OSI) is a non-profit corporation dedicated to managing and promoting the Open Source Definition for the good of the community, specifically through the OSI Certified Open Software certification mark and program.” [OSI] 88 “Eclipse is an open platform for tool integration built by an open community of tool providers. Operating under a open source paradigm, with a common public license that provides royalty free source code and world wide redistribution rights, the eclipse platform provides tool developers with ultimate flexibility and control over their software technology.” [Eclipse]. It has been found in November 2001 by Borland, IBM, MERANT, QNX Software Systems, Rational Software, Red Hat, SuSE, TogetherSoft, and Webgain. 89 “The World Wide Web Consortium (W3C) both develops and promotes standard technologies for the Web. On the W3C Web site, you will find information about Web technologies such as HypterText Markup Language (HTML), the Extensible Markup Language (XML), … W3C is an international consortium with approximately 400 Member organizations and a full-time staff of more than 70 people; … W3C Members send engineers to work in W3C Working Groups, together with W3C technical staff (called the “Team”), to produce technical specifications for Web technologies.” [W3C]. 90 “OASIS is a not-for-profit, global consortium that drives the development, convergence and adoption of e-business standards. Members themselves set the OASIS technical agenda, using a lightweight, open process expressly designed to promote industry consensus and unite disparate efforts. OASIS produces worldwide standards for security, Web services, XML conformance, business transactions, electronic publishing, topic maps and interoperability within and between marketplaces.” [OASIS]. 91 Cf. [IBM21, 1]. IBM’s “e-business on demand” and the “New Era” Page 33
It was in the late-1990's that IT professionals working on advanced science and technology projects began using the term "grid" to refer to their large-scale, highly powerful distributed computing deployments. In the popular mind, perhaps the best-known grid is an effort by the Search for Extraterrestrial Intelligence (SETI) Institute: more than 2 million volunteers from all over the world have donated idle processing time on their computers to searching through the signals collected every day by the world's largest radio telescope.92
Grid computing has been gaining a lot of attention within the IT industry. Although it has been used within the academic and scientific community for some time, standards, enabling technologies, toolkits, and products are now becoming available that allow businesses to use and reap the advantages of Grid computing.93
The most common description of Grid computing includes an analogy to a power grid. When one plugs an appliance or other object requiring electrical power into a receptacle, one expects that there is power of the correct voltage available, but the actual source of that power is not known. The local utility company provides the interface to a complex network of generators and power sources and provides one with an acceptable quality of service for one’s energy demands. The vision of Grid computing is similar. Once the proper kind of infrastructure is in place, a user will have access to a virtual computer that is reliable and adaptable to the user’s needs. This virtual computer will consist of many diverse computing resources. But these individual resources will not be visible to the user, just as the consumer of electric power is unaware of how their electricity is being generated. To reach this vision, there must be standards for Grid computing that will allow a secure and robust infrastructure to be built: standards such as the Open Grid Services Architecture (OGSA) and tools like the GLOBUS Toolkit. First, businesses will build their own infrastructures (intra-grids), but over a period of time, these grids will become interconnected, which will be made possible by standards such as OGSA.94
92 Cf. [GO]. 93 Cf. [IBM22]. 94 Ibid. IBM’s “e-business on demand” and the “New Era” Page 34
One of the key benefits of Grid computing– besides virtualizing resources – is that it provides a framework for exploiting underutilized resources and, thus, has the possibility of substantially increasing the efficiency of resource usage. Machines often have enormous underutilized processors and disk drive capacity. Computational grids and data grid computing can be used to aggregate their resource capacity, e.g. unused storage into a much larger virtual data store, possibly configured to achieve improved performance and reliability over that of any single machine. Another function of grid is to better balance resource utilization. An organization may have occasional unexpected peaks of activity that demand more resources. A grid can provide a consistent way to balance the loads on a wider federation of resources. This applies to CPU, storage, and many other kinds of resources that may be available on a grid.95
Since IBM has put Grid computing on its list of strategic initiatives, it is largely contributing to the major open standards and open source initiatives related to Grid computing, like the OGSA community and the GLOBUS Toolkit. To benefit from but also to demonstrate the value of grids, IBM has implemented an intra- grid within IBM’s research and software development organizations, with the effect of better utilizing the existing infrastructure to perform calculation-intense tasks even faster, e.g. developing microchip designs.96
2.1.13 Autonomic Computing
In October 2001, IBM released a manifesto which outlined that the main obstacle to further progress in the IT industry is an emerging crisis because of the software complexity.97
95 Cf. [IBM21, 1-2] and [IBM22]. 96 Cf. [IBM23]. 97 Cf. [IBM24]. IBM’s “e-business on demand” and the “New Era” Page 35
This manifesto pointed out that the difficulty of managing today’s computing systems goes well beyond the administration of individual software environments: the integration of several heterogeneous environments into corporate-wide computing systems introduces new levels of complexity. And computing systems’ complexity appears to be approaching the limits of human capability. The move to increased interconnectivity and integration, e.g. pervasive devices – trillions of computing devices connected to the Internet –, in effect, appear to be unmanageable. Programming language innovations have extended the size and complexity of systems that architects can design, but relying solely on further innovations in programming methods will not solve the complexity crisis mentioned. As the systems become more interconnected and diverse, architects are less able to anticipate and design interactions among components. Soon systems will become too massive and complex for even the most skilled system integrators to install, configure, optimize, maintain, and merge. And then there will be no way to make timely, decisive responses to the rapid stream of changing and conflicting demands. IBM’s option to cope with this crisis is “Autonomic Computing”.98
The essence of autonomic computing systems is self-management, the intent of which is to free system administrators from the details of system operation and maintenance and to provide users with a machine that runs at peak performance 24 hours 7 days a week. Like their biological namesakes, autonomic systems will maintain and adjust their operation in the face of changing components, workloads, demands, and external conditions and in the face of hardware or software failures, both innocent and malicious. The autonomic system might continually monitor its own use, and check for component upgrades, for example. If it deems the advertised features of the upgrades worthwhile, the system will install them, reconfigure itself as necessary, and run a regression test to make sure all is well. When it detects
98 Cf. [IEEE, 41]. IBM’s “e-business on demand” and the “New Era” Page 36 errors, the system will revert to the older version while its automatic problem- determination algorithms try to isolate the source of the error.99
IBM cites four aspects of self-management100:
· Self-configuring With the ability to dynamically configure itself on the fly, an IT environment can adapt immediately – and with minimal human intervention – to the deployment of new components or changes in the IT environment. Dynamic adaptation helps verify continuous strength and productivity of an IT infrastructure.
· Self-healing Self-healing IT environments can detect improper operations (either proactively through predictions or otherwise) and then initiate corrective action without disrupting system applications. Corrective actions could mean that a product alters its own state or influences changes in other elements of the environment. Day-to-day operations to not falter or fail because of events at the component level. The IT environment as a whole becomes resilient as changes are made to reduce or help eliminate the business impact of failing components.
· Self-optimizing Self-optimization refers to the ability of the IT environment to efficiently maximize resources allocation and utilization to meet end-users’ needs with minimal human intervention. In the short term self-optimization primarily addresses the complexity of managing system performance. In the long term self-optimizing components may learn from experience and automatically and proactively tune themselves in the context of an overall business objective. Self-optimization verifies optimum Quality of Service for both system users and their customers.
99 Cf. [IEEE, 42]. 100 [IBM25, 1]. IBM’s “e-business on demand” and the “New Era” Page 37
· Self-protecting The goal of self-protecting environments is to provide the right information to the right users at the right time through actions that grant access based on the users’ role and pre-established policies. A self- protecting IT environment can detect hostile or intrusive behavior as it occurs and take autonomous actions to make itself less vulnerable to unauthorized access and use, viruses, denial-of-service attacks, and general failures. The self-protecting capability allows businesses to consistently enforce security and privacy policies, reduce overall security administration costs, and ultimately increase employee productivity and customer satisfaction. Self-protection is also about recognizing and dealing with overload conditions that could jeopardize the integrity of the system.
To make this technology vision happen, IBM has reorganized its research software divisions around autonomic computing. Its first effort was a project named “eLiza” with the objective to develop autonomic capabilities for its mainframes and its database system DB2.101
2.1.14 Industry Insight & Business Consulting
On July 30, 2002, IBM announced that it will acquire PricewaterhouseCoopers (PwC) Consulting. For IBM, with its traditional capabilities in systems integration and IT outsourcing, it fitted well with the industry trend toward more comprehensive and integrated consulting and outsourcing offerings.102
PwC Consulting was not a newcomer - neither to consulting business, nor to the information technology industry. It was a 30,000 employee strong division of PwC and represented a significant force in the business process and information technology consulting market. The combination of IBM and PwC
101 Cf. [IBM24, 33-35]. 102 Cf. [ITworld]. IBM’s “e-business on demand” and the “New Era” Page 38
Consulting eliminated a player from the market, but also created a stronger, deeper IBM Global Services when it comes to competing for market share.103
The acquisition provided IBM with PwC Consulting expertise in more than twenty industries such as pharmaceutical, financial services, automotive, and retail. Furthermore, PwC Consulting was rated number one in Consulting Monitor’s survey for “understanding client’s industry”, while IBM – according to IDC - had become the world’s number one business and IT strategy consultant. On top of that, PwC Consulting also brought broad implementation skills in ERP (enterprise resource planning), CRM (customer relationship management), and SCM (supply chain management) software into IBM.104
Little more than two months after the announced plan for the acquisition, IBM Business Consulting Services was formed, bringing together more than 30,000 IBM employees and more than 30,000 professionals from PwC Consulting - thus becoming the world’s largest consulting services organization, with operations in 160 countries.105
Deepening its industry insight and strengthening its business consulting capabilities as quickly as possible was very important for IBM, as it became, one month later, the backbone for entering IBM’s strategy for the “new era” of computing: “e-business on demand”.106
103 Cf. [Aberdeen]. 104 Cf. [CW] and [IBM26]. 105 Cf. [IBM26]. 106 Cf. Chapter 2.2.1.3. IBM’s “e-business on demand” and the “New Era” Page 39
2.2 Concepts and Technologies of IBM’s “e-business on demand”
The modern computer industry is defined by three eras: the centralized era, which revolutionized business by automating the back office; the distributed era, which marked the beginning of departmental automation; and the current stage, the network era.107 In the year 1996 IBM started to call the network era “e-business”108.
Starting in December 2000, IBM initiated several marketing campaigns around “e-sourcing” and “e-utility”. They were envisioning the idea of providing Information Technology as a utility like water, gas, and electricity.109
As these campaigns did not have a lasting effect, in February 2003, IBM introduced a new name for an even broader picture of this new vision for providing information technology. It was called “e-business on demand”.110
2.2.1 The era of e-business
IBM has identified three stages of “e-business” of which IBM believes the last will mark the next era in the computer industry111. The definitions of the first two stages conform to the more explicit classification of business-to-business applications in the Internet by Kurbel112:
107 Cf. [CSCRS]. 108 Cf. [Gerstner, 165 f.]. 109 Cf. [IBM89]. 110 Cf. [IBM90]. 111 Cf. [IBM4, 2]. 112 Cf. [Kurbel, 26.]. IBM’s “e-business on demand” and the “New Era” Page 40
IBM Kurbel
1. Provision of Information 1. Access 2. Provision of Information with option to contact 3. Triggering Processes
2. Enterprise integration 4. Interactive Transactions
5. Business Process Integration 3. e-business on demand 6. Information Cooperation
Table 1 – Comparison: IBM’s stages of e-business versus Kurbel’s classes of B2B applications
2.2.1.1 Stage 1: Access
IBM defines the first stage as the starting point for “e-business”: “Access”. Organizations transform the way they communicate by enabling access to the Internet, usage of e-mail, etc.. The external and internal Web sites evolve from being a single page with contact information to an electronic brochure that promotes products and services and enables customers and prospects to gather information. Subsequently, simple Web-transactions are made possible: e.g. customers can check balances and transfer funds between accounts; shoppers can order and track shipments online113.
2.2.1.2 Stage 2: Enterprise integration
At the second stage of “e-business”, the Internet becomes a medium for interactive business transactions: e.g. banks enable customers to move money among accounts; airlines take online reservations; etc. As companies integrate internal systems and business processes behind the scenes, transactions of all kinds are made possible.114
113 Cf. [IBM5, 4] and [Kurbel, 27-28]. 114 Cf. [IBM4, 1] and [Kurbel, 29]. IBM’s “e-business on demand” and the “New Era” Page 41
2.2.1.3 Stage 3: e-business on demand
“e-business on demand” is the end-to-end integration of business processes, not only between the different business units within a company, but also with its suppliers and customers. Kurbel refers to it as “Business Process Integration”115. It is also about exchanging information via the Internet between companies trying to achieve a common goal116. But for IBM and other Internet strategists117 it is even more: a fundamental transformation of a company’s business models and the IT infrastructure beneath it118.
100% Access Enterprise On Demand 80% Integration According to IBM 76% of all companies
60% are in the first stage, while 22% of the 40% assessed companies operate in the 20%
0% second stage. Only 2% of them have Total IT Market Co. Size 1,000+ IBM's Top 400 Cust. reached the third stage: “on demand”119. Source: e-business Adoption Tracking Study, 1Q2002
2.2.2 The “on demand business”
Because companies are searching for ways to make their organizations to respond quicker and more efficiently to changes in the economy, they are striving towards the integration of business processes “end-to-end” across the enterprise and with key partners, suppliers, and customers.120
115 Cf. [Kurbel, 29-32]. 116 Cf. [IBM5, 5]. 117 Cf. [Kalakota, 5]. 118 Cf. [IBM5, 5]. 119 Cf. [IBM2, 4]. 120 Cf. [Kurbel, 29 f.]. IBM’s “e-business on demand” and the “New Era” Page 42
Based on its work with customers, IBM has identified four necessary characteristics of an “on demand business”121:
· Focus: the ability to concentrate on core competencies and differentiate tasks and assets, requiring the use of tightly integrated strategic partners to help perform tasks that range from manufacturing, logistics, and fulfillment to HR and financial operations.
· Responsiveness: the ability to sense changes in the environment and respond dynamically, whether to unpredictable fluctuations in supply or demand; emerging customer, partner, supplier, or employee needs; or unexpected moves by competitors.
· Variability: the ability to adapt cost structures and business processes flexibly, thereby reducing risk and driving business performance to higher levels of productivity, cost control, capital efficiency, and financial predictability.
· Resiliency: the ability to prepare for and respond to changes and threats, whether they stem from a computer virus, an earthquake, or a sudden spike in demand.
Ultimately, IBM believes that an “on demand business” enables CEO’s and senior management of corporations to see and manage their company as an integrated whole, even if important parts of it are handled by others.122
121 Cf. [IBM5, 6]. 122 Cf. [IBM4, 2]. IBM’s “e-business on demand” and the “New Era” Page 43
2.2.2.1 Focus
Focus: the ability to concentrate on core competencies and differentiate tasks and assets, requiring the use of tightly integrated strategic partners to help perform tasks that range from manufacturing, logistics and fulfillment to HR and financial operations.123
The economy is characterized by an ongoing evolution and adaptation of markets, its suppliers and their products: an economical Darwinism124, which constantly erodes the competitive advantage of a company to its competitors within a given market.
Given this background, inter-organizational relationships between companies especially in the form of business networks become more important, in theory as well in practice. While the beginning of the economical network research was dominated by competitive and transaction costs-based reasoning, today the advantage of company networks is primarily based on resource and core competency-oriented arguments. Production networks are seen as strategic options for setting up, efficient usage, or for long-term security of the core competencies of the network as a whole and/or the participating network partners. Although there is a broad consensus for this fundamental argumentation schema, the various competence-based explications differ in the competitive effects of a cooperation. The spectrum spans from approaches which put the change of the individual competence-base and, therefore, the individual competitive situation into foreground (individual core-competence perspective), to approaches which put the collective competence-basis and therefore, the competitive effects of the production network as a whole into relationship to the competitors outside this network into focus (collective core competence perspective).125
123 [IBM5, 6]. 124 Cf. [JoEE1, 259-281]. 125 Cf. [Mildenberger, 384]. IBM’s “e-business on demand” and the “New Era” Page 44
An “on demand business” is focusing on its core competencies and integrates into such a production network to gain competitive advantage within a given market. IBM views the production network through a collective core- competence perspective as it advises to outsource non-core business areas and processes to tightly integrated strategic partners, while retaining ownership and control over the superior process and the output of the production network.
This is in consistence with the core of the collective core-competence argumentation, which is the potential to increase quality, flexibility, and responsiveness of the value chain processes for products and services that is created by networking organizations beyond the traditional boundaries to one value chain. Each individual company in such a production network is concentrating on its individual core-competencies, i.e. each network partner delivers specialized services for other network partners, which are coordinated by one holistic and superior process and combined to products.126
2.2.2.2 Responsiveness
Responsiveness: the ability to sense changes in the environment and respond dynamically, whether to unpredictable fluctuations in supply or demand; emerging customer, partner, supplier or employee needs; or unexpected moves by competition.127
Between May 1994 and December 1996, 2088 executives were asked to characterize the environment with which their organizations would have to cope in the future. These respondents represented a broad cross-section of global industries: manufacturing, health, utility, education, service, and finance. 51% of them described their environment as “continuous discontinuity”, i.e., one in which many of the variables known to impact organizational performance take on unprecedented, unpredictable values and where new variables not
126 Cf. [Mildenberger, 386]. 127 [IBM5, 6]. IBM’s “e-business on demand” and the “New Era” Page 45 accounted for by the existing models become important determinants of success.128
Firms are challenged by changes in the business model and the value chain and supply chain of its customers, suppliers, and competitors, and the complexity and competitive shifts in supplier and partner networks. Furthermore, increasingly complex demands from stakeholders (regulatory bodies, shareholders, employees) need to be addressed at the same time while customers empower and increasingly control terms of interactions.
An “on demand business” senses these changes: internal and external, continuously determining all the parameters and their values, by leveraging the organizational capacity to gather and analyze data in real-time and by continuously generating feedback and actionable insights.129
This systematic intelligence enables such a firm to quickly make decisions, driven by insight knowledge, to respond much more dynamically to unpredictable fluctuations in supply and demand. It also enables a firm to respond to emerging needs of customers, partners, supplier, and employees, and, furthermore, to unexpected moves by competition.130
128 [Stephenson, 1]. 129 Cf. [IBM5, 6]. 130 Ibid. IBM’s “e-business on demand” and the “New Era” Page 46
2.2.2.3 Variability
Variability: the ability to adapt cost structures and business processes flexibly, thereby reducing risk and driving business performance at higher levels of productivity, cost control, capital efficiency, and financial predictability.131
The implementation of flexible budgeting and activity-based costing makes the cost of process flows more visible, planable, and controllable across multiple cost centers. The combination of these two costing models allows addressing the real causes for costs, since the relationships between costs and services are worked out more clearly and analytically.132
However, as long as fixed costs are just translated but not transformed into variable costs (especially in times of smaller volumes), and as long as the business process itself and the resource capacity for performing these business processes are inflexible as well, a firm operates on an increased risk level.
An “on demand business” flexibly adapts the cost structure, the business processes, and the resource capacity to perform the process. To do so one key enabler, as explained in chapter 2.2.2.1, is to partner with third-party providers in fast and flexible production networks or “value networks” in order to carry out these processes.
The combination of outsourcing non-core business activities or processes to third-party providers within a “value network” and applying the principle of variable or activity-based costs in the interaction between these partners drives the business performance of an “on demand business” to higher levels of productivity, capital efficiency, and financial predictability. At the same time, it lowers the level of the operational risks.
131 [IBM5, 6]. 132 Cf. [Seicht, 554-576]. IBM’s “e-business on demand” and the “New Era” Page 47
2.2.2.4 Resiliency
Resiliency: the ability to prepare for and respond to changes and threats, whether they stem from a computer virus, an earthquake, or a sudden spike in demand.133
The recent attacks on the World Trade Center and the Pentagon have and will have a major impact on the US and global economy. As pointed out by many economic pundits, after an era of economic expansion and focus on the private sector, these attacks on both the military and economic centers of the United States have and will further shift focus to the public sector, especially defense and national security. Furthermore, these attacks have led to an immediate increase in economic uncertainty. In the immediate wake of a disaster, transportation, communications, and utilities may be partly or fully disrupted. Some of these disruptions may be for a matter of only hours or days, while others may last for months or years. For many companies the disruptions will be costly regardless of the duration.134
Besides the physical damages to a firm, computer viruses and hackers can impact a company in the same way by effectively shutting down critical parts or even the entire IT infrastructure, so that the firm can no longer perform its business. The computer viruses “Nimda” and the “SQL Slammer” are just recent examples.135
But there are not only threats regarding intentional or unintentional damages to a company. An unexpected peak in demand can have literally the same effect to the stability and operation of a business or its IT infrastructure. Especially for companies that have already reached the second stage of e-business “Enterprise Integration”, an unexpected peak in transactions over the Internet which goes beyond the capacity of the given infrastructure increases the risk of an outage of this overloaded IT infrastructure and its core business application.
133 [IBM5, 6]. 134 Cf. [Simich, 1]. 135 Cf. [Gartner3, 1]. IBM’s “e-business on demand” and the “New Era” Page 48
Besides the threat of an unplanned downtime of business functions and/or the different kinds of infrastructures, there is also the threat of a misuse of confidential business and privacy data.136
According to IBM, an “on demand business” is prepared for all these possible changes and threats, by leveraging its “responsiveness” and “variability” for setting up and maintaining the right business and technological operating environment which is agile and adaptable against change and new threats and risks. It is prepared for unforeseen shocks to the business to protect the firm’s assets, safeguard customer and employee privacy.
This enables such a business to deliver a consistent, reliable service which is available 24 hours a day and 365 days a year, across the entire organization in all countries of operation.
136 Cf. [Gartner3, 1]. IBM’s “e-business on demand” and the “New Era” Page 49
2.2.3 The “on demand infrastructure”
To realize the benefits of “on demand business”, IBM claims that companies will need to embrace a new computing architecture that allows them to best lever existing assets as well as those that lie outside traditional corporate boundaries. “On demand business” requires “on demand computing”.137
IBM’s “e-business on demand” requires an infrastructure with the following four essential characteristics:138
· It must be integrated: Transactions and processes are integrated end- to-end across the extended enterprise, requiring new levels of data and transaction integrity.
· It must be open: Open standards and Web services do more than enable an organization to integrate its own siloed processes and applications. They also provide the ability to integrate existing and new suppliers, to add new capabilities, to outsource processes, and to reap the rewards of these moves quickly.
· It must be virtualized: Almost every organization is sitting on an enormous amount of unused computing capacity. Server consolidation and capacity-on-demand offering have helped many customers to begin addressing the challenges of underutilization, but grid computing virtually eliminates the need for large data centers by enabling the creation of virtual clusters of servers and storage pools residing in multiple, remote locations.
· It must be autonomic: IT infrastructures have grown too complex. They are fraught with time-consuming, repetitive processes. The solution is technology that takes on the basic management itself – that is, it self- configures, self-heals, self-optimizes, and self-protects, much like the
137 Cf. [IBM4, 3]. 138 Cf. [IBM5, 6-7]. IBM’s “e-business on demand” and the “New Era” Page 50
human autonomic nervous system manages basic functions such as respiration and circulation. These autonomic systems manage software upgrades, balance workload to optimize system performance, and automatically take action against viruses or denial-of-service attacks.
2.2.3.1 Integrated
IBM’s view on integration goes far beyond connecting disparate computing assets, such as clients and servers, so they can share and exchange information. The On Demand Operating Environment must enable the integration of core business processes and systems so that business itself can flow inside and across enterprises.139
This requires the integration of vast amounts of data and of legacy and custom applications spread throughout the enterprise. It also requires transaction processing of the highest order: in real-time. The very nature of these kinds of transactions demands data integrity end-to-end – whether one end is in a government agency, a supplier, a distributor, or a PDA in the hands of an individual consumer.140
The “e-business on demand” strategy calls for a new software infrastructure, which is already emerging today in the form of Web services and new development tools that ease the integration of devices, applications, and business processes. Applications – which have always been integrated “vertically” with the operating system of their standalone computer – would now be integrated with other applications “horizontally”. Developers would then increasingly write their applications to a layer of software, called middleware141, which spans servers and systems. In essence, applications are being decoupled from the underlying infrastructure.142
139 Cf. [IBM5, 6] and [IBM8]. 140 Cf. [IBM4, 3] and [IBM8]. 141 Cf. Chapter 2.1.8. 142 Cf. [IBM5, 11] and [IBM8]. IBM’s “e-business on demand” and the “New Era” Page 51
2.2.3.2 Open
There are effectively only two choices: Either everyone uses the same technology, or all technologies can connect and integrate.
When IT was confined to its own silo or did not extend beyond the walls of the enterprise, maybe a technology architecture provided and controlled by a single company could prevail. But this is no longer realistic. Companies have made high investments in existing data, applications and transaction systems, and their very businesses depend on the infrastructure they already have in place. Simply replacing existing proprietary systems with new but open systems would not be a viable and especially not an affordable option. 143
In IBM’s view, without open standards, any internal integration would remain a huge task. Even more gargantuan is the challenge of external integration – integration with other enterprises, other business processes and applications, and with the plethora of pervasive computing devices coming online (everything from game consoles to telematics in cars). Open technical interfaces and agreed-upon standards are the only realistic option that would enable all of these to connect.144
IBM emphasizes, in consistence with current market-trend analysis, that ever since the IT industry and companies embraced Internet protocols, open standards have been gaining widespread adoption – from Java and XML to Web services and the emerging Open Grid Services Architecture. Likewise, the leading Open Source initiative, the free operating system Linux, is moving rapidly into mainstream business throughout the world.145
143 Cf. [IBM7]. 144 Cf. ibid. 145 Cf. [IBM7], and [Marx, 97-110]. IBM’s “e-business on demand” and the “New Era” Page 52
2.2.3.3 Virtualized
Almost every organization is sitting on top of enormous, unused computing capacity, but it is distributed all over the place. Mainframes idle 40% of the time, UNIX servers are actually “serving” something less than 10% of the time, and most PCs are not utilized for 95% of a typical day. This is an intolerable situation for companies, where virtualization can be of aid.146
Many companies are already getting more out of their infrastructure by means of server consolidation or capacity-on-demand offerings. And now there is an opportunity to virtualize the entire data center with an emerging technology called grid computing. Like the Internet, grid is based on open technical standards and protocols (e.g. Open Grid Services Architecture147). When implemented, grid allows a collection of distributed computing resources to be shared and managed as if they are were one large, virtual computer.148
Grids are being built first in government laboratories and universities. From there, they will most likely be implemented within companies. IBM, for example, has implemented a grid to enable engineers to design next-generation microprocessors. Servers and engineering workstations from multiple business units are pooled and shared to support compute-intensive chip design and verification simulations.149
These kinds of “intra-grids” will allow companies to increase the utilization of their computing assets significantly: e.g. the IBM microprocessor grid runs at above 80% utilization, on average. Then, as grid takes hold in more and more computing systems, it will move beyond the enterprise walls. Companies’ internal grid systems will connect to the external grid. And that will be, in essence, the virtualization of the Internet itself.150
146 Cf. [IBM9]. 147 Cf. [OGSA, 3]. 148 Cf. [IBM9] and [OGSA, 3-4]. 149 Cf. [IBM9]. 150 Cf. ibid. IBM’s “e-business on demand” and the “New Era” Page 53
2.2.3.4 Autonomic
Today complexity is one of the biggest challenges within the conventional IT landscape of enterprises. But considering an “on demand business”, the ubiquitous integration of business processes, entities, applications, and ultimately millions of devices to become an “on demand business”, computing systems will rapidly become too complex for humans to manage effectively – or to configure, secure, optimize, or repair. IBM’s solution to this is technology that manages itself – similar to the human autonomic nervous system. But in the end, autonomic computing is all about freeing the company to focus more on its business and less on its IT infrastructure.151
A company will need to be able to take for granted such things as embedded security and privacy protection, workload balancing, upgrading of software, and fending off viruses – the same way human beings take for granted the body’s management of breathing, digestion, circulation, etc. and the fending off of viruses. IBM predicts the alignment of all of the components of one’s infrastructure, servers, storage, clients and software, from both IBM and non- IBM suppliers, into a single cohesive autonomic environment. Since IBM launched its autonomic computing initiative, the company has introduced a number of products with autonomic capabilities, including a new DB2 database with self-managing and self-tuning features152 and Tivoli products that predict storage requirements and allocate resources153.154
IBM recognizes that it will take time until the full benefits of autonomic computing can be realized. It will require true invention and real and new science, at both the component and overall-system level. But like other technologies and ideas (e.g. “scalability”) which seemed to be strange and unlikely-sounding concepts in their days, IBM believes Autonomic Computing will be realized.155
151 Cf. [IBM10]. 152 Cf. [IBM11]. 153 Cf. [IBM12]. 154 Cf. [IBM10]. 155 Cf. ibid. IBM’s transformation to “e-business on demand” Page 54
3 IBM’s transformation to “e-business on demand”
The objective of this chapter is to discuss and assess, whether IBM itself is undertaking the major transformation as referred to in their marketing materials156, and how this transformation is reflected within the product and service portfolio and its business models.
First, this chapter will explain the product portfolio and offering strategy for “on demand”. Then it will take a closer look at IBM’s product and service portfolio and perform an assessment of their compliance to the different business and technology aspects and its offering structures for the “on demand” strategy.
Next, it will take a look at IBM’s initiatives in becoming an “on demand business”, starting with a review of its history of the last decade and its future steps.
This chapter will be concluded by giving two short examples illustrating where IBM has already implemented its “on demand business” successfully.
156 Cf. ibid. IBM’s transformation to “e-business on demand” Page 55
3.1 IBM’s Product & Service Portfolio
3.1.1 Introduction
As of today IBM is covering various business segments with its current product and service portfolio (Table 2).157
Business Segment Revenue Comment 158
Services 36.4 b “IBM Global Services” · Business Consulting Services (BCS) 9.3 b (incl. Q4 revenue of PwC Consulting) · Strategic Outsourcing Services (SO) 15.0 b · Integrated Technology Services (ITS) 11.7 b (incl. 5.1 b for Hardware Maintenance) · Other 0.4 b
Hardware 22.5 b · Server & Storage 12.6 b - “IBM Systems Group” · Personal Computers, Printers, RSS 11.5 b - “Personal Systems Group” · Semiconductor technology, etc. 3.9 b - “Technology Group”
Software 159 13.1 b “Software Group” · Middleware 10.1 b - WebSphere, DB2, Tivoli, Lotus · Operating Systems 2.4 b - z/OS, OS/400, AIX · Other 0.6 b
Financing 3.2 b “IBM Global Financing”
Table 2 – IBM’s business segments and their revenue in year 2002
But as described in Chapter 2.2, the “on demand” strategy is neither a specific product strategy nor solely a service strategy. Therefore, IBM has created new, or extended existing, offerings around this corporate strategy for the “new era” of computing. These offerings are, in effect, compilations of different services and products, or single services or products which stand on their own.
157 The structure of the business segments is based on IBM’s Annual Report 2002 [IBM2002, 45-50]. 158 Amounts stated in billion US dollars. 159 On February 21, 2003 IBM acquired Rational Software Corp. to extend its software portfolio as part of its e-business on demand initiative (cf. [IBM14]). This is not reflected in Table 2. IBM’s transformation to “e-business on demand” Page 56
IBM’s “e-business on demand” strategy and offerings are structured around the following areas which are – in IBM’s view – the key to a company’s successful evolution to “e-business on demand”160:
· Business Transformation: the process of defining the business models and underlying processes and applications that enable “e-business on demand”.
· The Operating Environment - made up of two interrelated components:
o The application environment – an integrated platform, based on open standards, to enable rapid deployment and integration of business applications and processes.
o The systems environment – an environment that allows virtualization and automation of the infrastructure and enables delivery of IT capacity on demand.
· Utility-like services that provide capacity and business processes on demand.
Within this structure, the various offerings that have been developed range from standalone products or single service offerings (e.g. IBM WebSphere Portal Software) to fully integrated product and service offerings (e.g. IBM Leveraged Procurement Services).
In order to analyze IBM’s spectrum of “on demand” offerings, the author will bring the different business segments covered by IBM (hardware, software, services, financing) into relation with the “on demand” offering structure. The subsequent “on demand” product and service areas’ matrix will be further used to analyze the individual products and services in more detail.
160 Cf. [IBM13, 3]. IBM’s transformation to “e-business on demand” Page 57
“on demand” Services Hardware Software Financing Offering Structure BCS ITS SO
Business Transformation Area 1
Operating Environment Area 3 Area 4 Area 5 Area 6 Area 7 Area 2
Utility-like Service Area 8
Table 3 - "on demand" product and service areas matrix
Due to the broad spectrum of services provided by IBM Global Services on the one side, and the different nature of the BCS, ITS, and SO services within this single business segment (see Figure 1) on the other side, the column “Services” in Table 3 has been divided into these three groups of services.
The “on demand” offering Business Tell Me Help Me Manage It matrix (Table 3) identifies Business Consulting eight areas. In each of these Services (BCS) Strategic areas independent offerings Outsourcing Services can be identified. More (SO) Integrated Technology comprehensive and Services (ITS) integrated offerings, which
Technology cross over these matrix areas,
Figure 1 - IBM Global Services, Value Portfolio exist as well.
This segmentation is needed to perform an end-to-end assessment of IBM’s product and service portfolio against the “on demand” strategy and offerings. It allows analyzing within each “area” whether or not IBM undertakes the transformation within each business segment of its widespread product and service portfolio.
In order to analyze the “on demand” offering portfolio itself, the individual offering elements will be assessed regarding their contribution and/or capability to enable the defined characteristics of “on demand business” and “on demand infrastructure”. Therefore, the “on demand” offering structure is also brought into relationship with the eight “on demand” characteristics (Table 4), and IBM’s transformation to “e-business on demand” Page 58 indicates – based on their definitions – to which extent each offering segment is expected to provide a contribution towards an comprehensive “on demand” offering portfolio.
Following levels of contribution have been used:
· High: This area is critical for achieving the objective of the assessed “on demand” characteristic. Therefore, a high level of contribution from this area of the offering structure is expected.
· Low: Only a low level of contribution from this area of the offering structure is expected, since this area can only have a very limited effect on the assessed “on demand” characteristic.
· N/A: There is, in effect, no relationship between the “on demand” characteristic and “on demand” offering component.
“on demand” Business Operating Utility-like Service Characteristics Transformation Environment
Focus High Low High
Responsiveness High Low High
Variability High High High
Resiliency High High High
Integrated N/A High High
Open N/A High High
Virtualized N/A High High
Autonomic N/A High High
Table 4 –Expectation of "on demand" characteristics within "on demand" offering structure
IBM’s transformation to “e-business on demand” Page 59
Since this offering segment “Business Transformation” is oriented on defining business models and applications which are supposed to enable the transformation of a company into an “on demand business”, the four characteristics of an “on demand infrastructure”161 do not apply to the offering segment. Therefore, all four characteristics of the “on demand infrastructure” have been classified as not applicable to “Business Transformation”.
Due to the fact that the “on demand business” characteristic “Focused” refers to a company focusing on its core-business and outsourcing non-core business processes and functions to third-parties, there is little than can be done within the operating environment to support an increase in this focusing, other than outsourcing this area to a third-party. Consequently the author has come to the conclusion that this area is to be classified as “Low”.
All other areas have been defined as “High” because they appear to be critical for achieving their individual “on demand” characteristic.
In order to undertake this “on demand” offering analysis, it is necessary to perform an ultimate assessment of the different products and services of IBM’s business segments in regards to their contribution to and/or capability to perform the defined characteristics of “on demand business” and “on demand infrastructure”.
Therefore, as with the offering segments, the business segments are brought into relationship with the different “on demand” characteristics within Table 5. Based on the definition of the different “on demand” characteristics, this table contains a definition as to what extent each business segment is expected to provide or contribute towards a comprehensive “on demand” offering portfolio using the same definitions for classification as in Table 4.
161 Cf. Chapter 2.2.3: Integrated, Open, Virtualized, Autonomic. IBM’s transformation to “e-business on demand” Page 60
“on demand” Services Hardware Software Financing Characteristics BCS ITS SO
Focus N/A N/A High N/A High N/A
Responsiveness N/A N/A High N/A High N/A
Variability High High High N/A High High
Resiliency High High High High High N/A
Integrated High High High High High N/A
Open High High High High High N/A
Virtualized High High High High High N/A
Autonomic High High High High High N/A
Table 5 – Expectation of "on demand" characteristics within IBM’s business segments
The analysis of the eight “on demand” characteristics are performed and based on a defined set of questions which are oriented towards identifying the main supporting factors of each single characteristic for each individual product group or service:
Question 1 – “Focus”: By using this product group/service can a company be more focused in its core-business or does this product group/service provide the necessary features and capabilities that accelerate the focus of a company within its business environment according to the terms of “on demand business”?
Question 2 – “Responsiveness”: Is a company becoming more responsive by using this product group/service or does this product group/service provide the necessary features and capabilities that accelerate the responsiveness of a business environment according to the terms of “on demand business”?
Question 3 – “Variability”: Does the offering of this product group/service enable a company to pay for it based on its usage and therefore provide the company with the flexibility to translate fixed costs into variable costs? IBM’s transformation to “e-business on demand” Page 61
Question 4 – “Resiliency”: Is a company becoming more resilient by using this product group/service or does this product group/service provide the necessary features and capabilities that accelerate the resiliency of a business environment in terms of “on demand business”?
Question 5 – “Integrated”: To what extent is the product group/service integrated – or could be easily integrated – with other products/services horizontally or vertically within to ultimately support the integration of business processes and systems inside and across enterprises?
Question 6 – “Open”: To what extent does this product group/service support open industry standards?
Question 7 – “Virtualized”: To what extent does this product group/service support the virtualization of its capabilities?
Question 8 – “Autonomic”: To what extent is this product group/service equipped with self-configuring, self-optimizing, self-healing, and self-protecting capabilities?
These questions will be provided with summarized answers and a classification of the product group’s support level, using the following definitions:
· Strong: This product group/service provides strong support to this “on demand” characteristic. It supports multiple or all aspects of this characteristic.
· Weak: Only a low or mixed level of support to this “on demand” characteristic is provided by this product group/service. It only supports single or just a few aspects of this characteristic.
· No: The analyzed product group/service provides no support to this “on demand” characteristic.
· N/A: Due to the nature of the product/service, there is effectively no support expected to be provided by this product/service.
IBM’s transformation to “e-business on demand” Page 62
While Table 4 and Table 5 document the different levels of expected contribution, the following analysis will document the current status as of June 2003, in order to provide enough insight to analyze whether or not IBM is effectively transforming and aligning its product and service portfolio towards “e-business on demand”.
First, all eight “on demand” offerings areas162 are analyzed by assessing them using the same structure as found in Table 5, but on a more detailed level163. Subsequently, the results of this analysis within the different areas will then be summarized and translated into an offering segment analysis by assessing the results against the expectations defined in Table 4 and Table 5.
However, the following discourse will only reflect the major products and services on the one side, and the key components and areas of IBM’s “on demand” offering portfolio on the other. Therefore, it can not claim to cover the entire and comprehensive IBM product and service catalogue.
162 Cf. Table 3 - "on demand" product and service areas matrix (p. 57). 163 This more detailed analysis will be on the level of product groups and service offering segments. IBM’s transformation to “e-business on demand” Page 63
3.1.2 Hardware Portfolio
The physical layer of an “on demand” operating environment is the hardware infrastructure which is used to run the different platforms and applications. IBM’s hardware portfolio spans the entire range of hardware devices: server systems, storage systems, personal computers, and printers, as well as retail store-solutions like point-of-sale systems and kiosk systems.
IBM’s portfolio also includes semiconductors and micro-devices into the range of hardware, which take a different position within this analysis.
The product family of the “Technology Group”, which is also included in the hardware portfolio by IBM, takes a special place within the “on demand” operating environment, as it primarily consists of semi-finished goods. Therefore, it has been excluded from the “on demand infrastructure” characteristics as they can not be operated or used on their own.
Analysis - Area 3 Server Storage PC RSS Printer TG164
1. Focus N/A N/A N/A N/A N/A N/A
2. Responsiveness N/A N/A N/A N/A N/A N/A
3. Variability Weak Weak No No No Strong
4. Resiliency Strong Strong Strong Strong No No
5. Integrated Weak Weak Weak Strong Weak N/A
6. Open Strong Strong Strong Strong Strong N/A
7. Virtualized Strong Strong Strong Weak Weak N/A
8. Autonomic Strong Strong Strong Strong Weak N/A
Table 6 - "on demand" offering structure analysis: Area 3
To the nature of hardware in general: the two “on demand business” characteristics “Focus” and “Responsiveness” – which are oriented towards
164 IBM’s abbreviation for “Technology Group”. IBM’s transformation to “e-business on demand” Page 64 putting one’s company’s focus on its core-business and providing the ability to sense changes within the business environment – have been classified as “not applicable” to support this area of the “on demand” offering structure.
All other “on demand” characteristics have been assessed as follows:
· Variability: Only the “Technology Group” provides a strong support for “Variability” in a direct way through their current offerings165, while the product groups “Server” and “Storage” directly offer a less flexible and largely one-way support only166. For the product groups “PC”, “RSS”, and “Printer” no indications for “Variability” for customers have been found.167
· Resiliency: With the exception of “Printers” and “Technology”, where no offering to support this characteristic has been identified, IBM provides a comprehensive range of features and capabilities to increase resiliency to a company on a hardware level: “Servers” through their internal architecture and the different clustering and failover technologies168, “Storage” through the technology used and the different systems for data and system backup and recovery169, the “PC” product family through the integrated security architecture implemented in most of the new products170 - as well as the system restore technology used171 - and “RSS” with the built-in recovery and fail-over technology172.
· Integrated: With the exception of the RSS product group173, all others only offer integration on a hardware system level, but not on a business management level.
165 IBM enables its customers to buy microelectronics flexibly based according to demand on a weekly basis - cf. [IBM03] and [IBM35]. 166 The offerings range from “QuickShip” to “Hot Standby”, but mostly allow only for upsizing and not downsizing an environment. Offerings beyond this range are handled as service offerings: e.g. “managed capacity”. Cf. [IBM36] and [IBM32]. 167 Cf. [IBM18] and [IBM37]. 168 Cf. [IBM38], [IBM39], [IBM40], [IBM41], and [IBM42]. 169 Cf. [IBM19]. 170 Cf. [IBM43]. 171 Cf. [IBM44]. 172 Cf. [IBM45]. 173 Cf. [IBM46]. IBM’s transformation to “e-business on demand” Page 65
· Open: The entire product range provides very strong support for open industry standards like Linux174, etc..
· Virtualized: The “Server” product groups have been supporting virtualized computing175 for many years already. This capability has been extended by grid computing176 which is also supported by “Storage” and “PC”. “RSS” and “Printer” only provide limited support, as their capabilities cannot be virtualized throughout the network, although the products still can access other virtualized systems and devices through grid computing applications and servers.
· Autonomic: Although the potentially highest level of support for Autonomic Computing for all of the product groups has not yet been reached, there is already a broad and comprehensive range of features and capabilities available today for “Server”177, “Storage”178, and “PC”179, and “RSS”180 in combination with the operating systems used. Within the product group “Printer” there is a very different level of support for Autonomic Computing, ranging from “No Support” to “Strong Support” depending on the size of the printing system, which ultimately led to an assessment of “Weak”.
Overall IBM’s hardware portfolio strongly supports the “on demand” operating environment and its “on demand infrastructure” strategy, while its current level of support for the “on demand business” strategy is only “Medium”.
174 Cf. [IBM47], [IBM48], [IBM49], [IBM17], and [IBM38]. 175 Cf. [IBM16] and [IBM50]. 176 Cf. [IBM51]. 177 Cf. [IBM52], [IBM53], [IBM54], [IBM55], and [IBM56]. 178 Cf. [IBM57]. 179 Cf. [IBM58]. 180 Cf. [IBM45]. IBM’s transformation to “e-business on demand” Page 66
3.1.3 Software Portfolio
All five brands of IBM’s software portfolio: WebSphere, DB2, Lotus, Tivoli, and Rational have a different and, in some cases, even very complementary scope. But the overall directive is to provide an optimal software portfolio enabling and supporting the “on demand” offering strategy for the “new era” of computing within an “on demand” operating environment.
Together all five brands of IBM’s software portfolio – WebSphere, DB2, Lotus, Tivoli, and Rational – build IBM’s foundation for the logical layer of its “on demand” operating environment running on different systems and devices.181
Analysis - Area 4 WebSphere DB2 Lotus Tivoli Rational
1. Focus N/A N/A N/A N/A N/A
2. Responsiveness N/A N/A N/A N/A N/A
3. Variability Weak Weak Weak Weak Weak
4. Resiliency N/A N/A N/A Strong N/A
5. Integrated Strong Strong Strong Strong Strong
6. Open Strong Strong Strong Strong Strong
7. Virtualized Weak Strong Weak Weak N/A
8. Autonomic Strong Weak Weak Weak N/A
Table 7 - "on demand" offering structure analysis: Area 4
As explained in Chapter 2.1.8, it is important to understand that IBM is not positioning itself as a provider of business applications as SAP, Ariba, Siebel, or Oracle do, but rather as a provider of the middleware beneath it.
Therefore, the two “on demand business” characteristics “Focus” and “Responsiveness”, which are oriented towards putting one company’s focus on its core-business and providing the ability to sense changes within the business
181 Cf. [IBM59]. IBM’s transformation to “e-business on demand” Page 67 environment, have been excluded from this assessment, and have been classified as “not applicable” to support this area of “on demand” characteristics and, ultimately, of an “on demand” operating environment.
All other “on demand” characteristics have been assessed as follows:
· Variability: All software products support the “Variability” on a limited level only, as they continue to use the traditional “per CPU”, “per seat”, etc. pricing approaches rather than a more variable andcompany business condition-attached approach, e.g. average number of concurrent users per month.182
· Resiliency: All capabilities regarding “Resiliency” derive from the wide and strong support coming from the Tivoli product family in general, but also in support for the other brands. The support range spans from comprehensive online backup and restore functionalities to security management and other systems management capabilities.183
· Integrated: All product groups have a strong focus for the integration into other products, both horizontally and vertically, through their strong support for middleware184 and Web services185 on the one side, and the wide range of supported devices: from mainframe and midrange servers, to PC’s, and to pervasive devices like telephones, PDA’s.
· Open: The entire software portfolio supports a wide range of open industry standards within the different technology areas: application development platforms186, operating systems187, Web services188, etc.. Furthermore, IBM also contributes to the development of different industry standards.189
182 Cf. [IBM60]. 183 Cf. [IBM61] and [IBM62]. 184 Cf. [IBM63]. 185 Cf. [IBM64]. 186 Cf. [IBM66]. 187 Cf. [IBM65]. 188 Cf. [IBM64]. 189 Cf. [IBM67] and [IBM68]. IBM’s transformation to “e-business on demand” Page 68
· Virtualized: As of June 2003, only DB2190 supported the highest level of virtualization “grid computing”, while WebSphere, Lotus, and Tivoli only provided a lower level of virtualization through application load- balancing and equivalent technologies. Due to the nature of the Rational product family191 it has been excluded from the analysis of this “on demand” characteristic.
· Autonomic: Only WebSphere192 supports all four aspects of autonomic computing: self-configuring, self-optimizing, self-healing, and self-protecting. Within the architecture of the DB2, Notes, and Tivoli product families, only selected areas of autonomic computing are featured193. While DB2, Lotus, and WebSphere have these aspects integrated for the benefit of DB2, Lotus, and WebSphere itself194, Tivoli also provides these capabilities not only for its own components, but also for the other product families195.
Overall IBM’s software portfolio indicates a medium support for the entire “on demand” strategy: the strategy for “on demand business”, for “on demand infrastructure”, and the “on demand” operating environment.
190 Cf. [IBM73]. 191 Cf. [IBM74]. 192 Cf. [IBM71]. 193 Cf. [IBM69], [IBM70], and [IBM72]. 194 Cf. [IBM70], [IBM71], and [IBM72]. 195 Cf. [IBM69]. IBM’s transformation to “e-business on demand” Page 69
3.1.4 Services Portfolio
Looking at the services portfolio, the eight characteristics of “on demand” need to be – when compared to the different hardware and software products out of IBM’s portfolio – assessed in a slightly different manner.
While the assessment of the hardware and software products was oriented towards the features and functions provided by the products themselves, IBM’s services will be assessed according to whether they have the right offerings and concepts in place, thus enabling customers either to become an “on demand business” or to implement on, or even manage, their “on demand infrastructure”.
3.1.4.1 Business Transformation through BCS
At IBM all Business Transformation service offerings are led and delivered by Business Consulting Services, the company’s own consulting organization within IBM Global Services, with a staff of approximately 60.000 consultants196. As previously lined out in Chapter 2.1.14, through IBM’s acquisition of “PricewaterhouseCooper Consulting” and its merger with their existing consulting services unit, formally known as Business Innovation Services, it has built a very strong and industry-focused consulting organization which is recognized for its industry insight and consulting knowledge throughout the industry197.
As described in Chapter 2.2.2, becoming an “on demand business” is not primarily a matter of technology, but rather of business models and their processes. Therefore, IBM has built several service offerings around “Business Transformation”, the first of the three components of the “on demand” offering
196 Cf. [IBM75, 4]. 197 Cf. [Aberdeen], [CW], and [Gartner1, 3]. IBM’s transformation to “e-business on demand” Page 70 structure. This portfolio spans from traditional business consulting up to business transformation outsourcing.198
But providing these services to their customers as they exist was not enough for IBM within their “on demand” strategy. It also developed and framed the principles of an “on demand business”. It describes in detail how this new business model works, the principles and models of integrating other companies into one firm’s business processes, as well as what the business benefits for a corporation can be and how they emerge.199 Furthermore, it has also started to translate this general business model with its fundamentals for the different industries, like “Financial Markets”200, “Automotive”201, etc..
This led to the conclusion that, in the area of “Business Transformation”, IBM’s Business Consulting Services provides strong support and ultimately delivers to their customers for all four characteristics of an “on demand business”.
Analysis - Area 1 BCS
Focus Strong
Responsiveness Strong
Variability Strong
Resiliency Strong
Integrated N/A
Open N/A
Virtualized N/A
Autonomic N/A
Table 8 - "on demand" offering structure analysis: Area 1
198 Cf. [IBM75, 8] and [IBM76]. 199 Cf. [IBM85]. 200 Cf. [IBM30] and [IBM31]. 201 Cf. [IBM28]. IBM’s transformation to “e-business on demand” Page 71
3.1.4.2 Operating Environment through BCS
Within an “on demand” operating environment BCS provides a portfolio of services which are not oriented on implementing the business models and processes within an “on demand infrastructure”, but is focused to the level of planning, designing, implementing, and integrating standard and customer business applications.202 Caring for the planning, designing, implementing, and integrating of the technical environment and beneath is within focus of ITS, which is assessed later in Chapter 3.1.4.3.
Within the operating environment IBM’s Business Consulting Services portfolio is primarily focused around Application Management Services and ranges from simply providing and managing “global resources” up to consulting and developing the entire set of all business and technical applications of one company. It also provides system integration services to interlock customer and/or standard business applications with other systems inside and outside the company.
IBM is also wrapping these services with various existing IBM products into packaged offerings: e.g. IBM’s “Collaboration Portal Offering”203 which contains the, therefore, required IBM products204 and services to design, implement, and integrate the solution into one customer’s operating environment.
With the exception of Autonomic Computing, which is primarily within the focus of IBM’s Integrated Technology Services through their Systems Management Services offerings, with the BCS’s services portfolio IBM strongly supports the achieving of “on demand” characteristics for their customers.
202 Cf. [IBM76]. 203 Cf. [IBM77]. 204 In this case: IBM’s WebSphere Portal Express Intranet Plus for Multiplatforms V4.2 with Lotus Collaboration Capabilities and a server out of IBM’s eServer family running on Linux. IBM’s transformation to “e-business on demand” Page 72
Analysis - Area 5 BCS
Focus Strong
Responsiveness Strong
Variability Strong
Resiliency Strong
Integrated Strong
Open Strong
Virtualized Strong
Autonomic Weak
Table 9 - "on demand" offering structure analysis: Area 5
3.1.4.3 Operating Environment through ITS
As described in the introduction to this chapter205, IBM’s Integrated Technology Services are focused on consulting, designing, and implementing the technical infrastructure of an “on demand” operating environment, while Business Consulting Services focuses on the application layer (incl. middleware)206.
Due to the nature of this technical infrastructure layer, there is, in effect, hardly any service that can be provided to improve or enable one company’s focus, responsiveness, or variability within its business environment. But it does provide a broad range of services and has comprehensive capabilities to increase the resiliency of a firm from an infrastructure perspective through its existing Business Continuity & Recovery Services, Infrastructure & Systems Management Services, and Security & Privacy Services. 207
205 Cf. page 55. 206 Cf. Chapter 3.1.4.2. 207 Cf. [IBM76]. IBM’s transformation to “e-business on demand” Page 73
These service offerings, as well as the network, wireless, and training services, all embrace the “on demand infrastructure” characteristics: IBM is providing the entire range of services around products and technologies supporting open standards and open source technologies (e.g. Linux) and integrating them with existing systems and infrastructures.
ITS also provides services for implementing the different levels of virtualized environments: from supporting customers in setting up LPARs208 within their systems up to training209, design and implementation of grid computing environments for the different purposes (data grid, computing grid, etc.)210.
As mentioned in Chapter 3.1.4.2, ITS also has a strong focus on providing services to implement automated solutions based on products which lever existing autonomic computing technologies, such as Tivoli.
Analysis - Area 6 ITS
Focus N/A
Responsiveness N/A
Variability N/A
Resiliency Strong
Integrated Strong
Open Strong
Virtualized Strong
Autonomic Strong
Table 10 - "on demand" offering structure analysis: Area 6
208 Cf. [IBM78]. 209 Cf. [IBM79]. 210 Cf. [IBM76]. IBM’s transformation to “e-business on demand” Page 74
3.1.4.4 Operating Environment through SO
As described in Chapter 2.2.2.1, the key enabler for a company to focus on its core-business is to outsource all non-core business activities to third parties. IBM’s Strategic Outsourcing Services is all about enabling customers to do so: managing for them the applications and the information technology, which may even include the transfer of IT people and IT assets.211
IBM’s outsourcing service portfolio encompasses a broad range: from outsourcing and managing distinct components like high-end servers, midrange systems, distributed systems, or desktop systems, up to managing entire data centers and entire support organizations.
By means of “Transformational Outsourcing” IBM also provides a systematic approach towards running and managing the existing infrastructure on the one side, and delivering project-based services for transforming the managed IT infrastructure to meet current and future requirements on the other.212
When looking at the “on demand business” characteristic of being responsive, one must consider that this depends on a firm’s business model on the one side and the level of integration between its business applications within and across enterprises, on the other. An improvement within this area is achieved through “Business Transformation Outsourcing”, which is part of BCS’s service portfolio.213 However, the target solution and infrastructure is then managed by SO. Therefore, as in the case of Tivoli in the area of Resiliency within the software product family, the Strategic Outsourcing Services portfolio embraces Business Consulting Services to ultimately realize this kind of service.
211 Cf. [IBM76]. 212 Cf. [IBM80, 3]. 213 Cf. [IBM81]. IBM’s transformation to “e-business on demand” Page 75
Due to the structure and setup of the outsourcing agreements, IBM also directly supports the aspect of “Variability”: through the transfer of IT people and IT assets on the one hand, and, by agreeing on volume and usage-based service contract, former fixed costs are then translated into variable costs.
Because the Transformational Outsourcing offering also includes the design and implementation aspects for IT infrastructures, for the remaining five “on demand” characteristics, the same rationale for assessing the service portfolio used in Chapter 3.1.4.3 for Integrated Technology Services applies to Strategic Outsourcing Services as well.
Analysis - Area 7 SO
Focus Strong
Responsiveness N/A
Variability Strong
Resiliency Strong
Integrated Strong
Open Strong
Virtualized Strong
Autonomic Strong
Table 11 - "on demand" offering structure analysis: Area 7
IBM’s transformation to “e-business on demand” Page 76
3.1.4.5 Utility-like Service through SO
“Utility-like Services” are the ultimate “on demand” services offered by IBM. Their principles and objectives are entirely oriented towards the “on demand business” model, in which IBM becomes a third-party partner to a firm, transparently integrated within the firm’s business processes. In this scenario, IBM no longer provides traditional information technology. It provides a company with complementary and necessary business processes, which are primarily based on information technology and, therefore, enable the same company to focus on its core-business. 214
IBM has introduced a portfolio of different utility-like service offerings. However, this portfolio has not reached the same scale as the “Business Transformation” and “Operating Environment” offerings as of today. Besides the Application Management Services and Business Continuity & Recovery Services, which are effectively the same offerings mentioned in Chapter 3.1.4.2 and 3.1.4.3, IBM currently only offers “IBM e-business hosting” service215 in all its various “flavors”, as well as some business process oriented offerings, like the “IBM Leveraged Procurement Services”.
This is an offering in which IBM provides the entire procurement solution, supporting various key procurement applications, delivering pre-established pricing-relationships to the advantage of the customer, as well as financing – IBM is, in effect, taking care of the entire procurement process, which can be transparently integrated into one firm’s business processes and operating environment.216
As this example has just demonstrated, IBM’s utility-like services offerings support all eight characteristics of “on demand”. However, as stated earlier, the range of its offerings is currently relatively small217.
214 Cf. [IBM5, 13-14]. 215 Cf. [IBM82] and [IBM83]. 216 Cf. [IBM84]. 217 Providing fourteen specific “on demand” offerings [IBM86] out of sixty-two service offering categories [IBM76] has be considered as small. IBM’s transformation to “e-business on demand” Page 77
In order to reflect this lack of scale for the “Utility-like Services” offerings, the result of the assessment for this area of the “on demand” offering structure will be down-leveled by one ordinal scale unit, without changing the “on demand” characteristics.
Analysis - Area 8 SO
Focus Strong
Responsiveness Strong
Variability Strong
Resiliency Strong
Integrated Strong
Open Strong
Virtualized Strong
Autonomic Strong
Table 12 - "on demand" offering structure analysis: Area 8
IBM’s transformation to “e-business on demand” Page 78
3.1.5 Financing
Entering the IBM Global Financing organization: it is a key ingredient in the “on demand” strategy. IBM’s superior credit rating and size – A+ and US$ 37 billion in assets – allows it to borrow at lower costs than its competitors Hewlett-Packard Finance (A-), Sun Microsystems (BBB), Dell (A-), and EDS (BBB). Only Microsoft has a better credit rating (AA), but is not in the financing business.218
The group’s equipment and project financing expertise has already resulted in one “on demand” offering call: “Total Usage Financing219”. Currently available in the United States only, the package allows the usage of an e-business solution to fluctuate, but smoothes out payments over time. Companies benefit from variability in usage but maintain predictability in their payment schedule. Therefore, IBM Global Financing will serve as a driving motor that will move “on demand” from a computing capacity-outsourcing model to one in which businesses buy software and services as needed with less risk.220
Analysis - Area 2 IBM Global Financing
Focus
Responsiveness
Variability Strong
Resiliency
Integrated
Open
Virtualized
Autonomic
Table 13 - "on demand" offering structure analysis: Area 2
218 Cf. [S&P]. 219 Cf. [IBM15]. 220 Cf. [AMR]. IBM’s transformation to “e-business on demand” Page 79
3.1.6 Conclusion
The overall assessment of this analysis has been performed in two stages:
In stage one, an evaluation of the overall result for each individual “on demand” characteristic within each business segment and area of the “on demand” offering structure has been performed. Therefore, the ordinal scale used has been translated into a rational number scale using the following values:
· “Strong” has been given the value 1,
· “Weak” was valued with 0.5, and
· “No” with 0 (zero).
These numerical results have then been weighted against the percentage of the business segment revenue contribution by the different product groups221, and then summed up into one final figure. These numbers were then used for all following assessments.
For the purpose of displaying a result figure within the three final assessments, they ultimately have been translated back into an ordinal scale by using the following ranges for each ordinal:
1 · 0 £ x < Þ Weak 2
1 3 · £ x < Þ Medium 2 4
3 · £ x £ 1 Þ Strong 4
221 Since IBM is not publishing the financial results of the individual product groups, Gartner’s estimates for the different revenue contributions have been used (cf. [Gartner1, 5]). IBM’s transformation to “e-business on demand” Page 80
In the next stage, the numerical results of stage one have been used to perform the following three analyses:
1. To what extent do the products and services of the different business segments comply and support the “on demand” characteristics? Since the three groups of services – BCS, ITS, and SO – have been analyzed throughout the different areas of the “on demand” offering structure more than once, the average results within a service family across these areas have been used. The average is based on an equal weighting of all three components of the “on demand” offering structure. Based on this approach, the final results of the different business segment analyses from stage one have been summarized and compiled into Table 14.
“on demand” Services Hardware Software Financing Characteristics BCS ITS SO
Focus N/A N/A Strong N/A Strong N/A
Responsiveness N/A N/A Strong N/A Strong N/A
Variability Weak Medium Strong N/A Strong Strong
Resiliency Strong Strong Strong Strong Strong N/A
Integrated Medium Strong Strong Strong Strong N/A
Open Strong Strong Strong Strong Strong N/A
Virtualized Strong Medium Strong Strong Strong N/A
Autonomic Strong Medium Medium Strong Strong N/A
Table 14 - Support of "on demand" strategy characteristics within IBM’s business segments.
2. To what extent do the products and services of the different business segments support the requirements of the “on demand” offering structure, based on supporting the “on demand” characteristics? Here, the results of stage one have been summarized along the “on demand” characteristics’ axis. In order to respect the different levels of revenue contribution by the different business segments, they have IBM’s transformation to “e-business on demand” Page 81
been weighted by their contribution factor, before being compiled in Table 15.
“on demand” Services Hardware Software Financing Offering Structure BCS ITS SO
Business Transformation Strong
Operating Environment Medium Medium Strong Strong Strong Strong
Utility-like Service Medium
Table 15 - Support of "on demand" offering strategy within IBM’s business segments.
3. To what extent does the “on demand” offering structure, based on the products and services offered, support the “on demand” characteristics? Based on the results of stage one, the different “on demand” characteristics within the three components of the “on demand” offering structure have been summarized in Table 16. By doing so, the different level of revenue contribution by the different business segments has been considered as well, as in Table 15.
“on demand” Business Operating Utility-like Service Characteristics Transformation Environment
Focus Strong Strong Strong
Responsiveness Strong Strong Strong
Variability Strong Medium Strong
Resiliency Strong Strong Strong
Integrated N/A Strong Strong
Open N/A Strong Strong
Virtualized N/A Strong Strong
Autonomic N/A Strong Strong
Table 16 - Support of "on demand" characteristics within "on demand" offering structure. IBM’s transformation to “e-business on demand” Page 82
Based on the results documented in Table 14, Table 15, and Table 16, the following conclusions can be made:
1. With few exceptions222 IBM generally strongly supports its “on demand” strategy and initiative through its product and service portfolio.
A number of findings have been identified, in which IBM’s implementation of its “on demand” strategy requires some improvements:
2. IBM’s product-pricing policy is not aligned to support the “Variability” aspect of “on demand”. Although it can, to a certain extent, be compensated by its strong financing services, it still represents a weak point of the “on demand” strategy implementation.
3. Autonomic computing appears as the right strategy and a future-oriented principle, for which IBM Research – together with Tivoli – has already developed fundamental technologies. However, there is still a lack of integration of autonomic computing capabilities within the different products themselves, especially since one cannot expect that there will always be a Tivoli solution implemented along with the different products.
4. The product portfolio of the Utility-like Services is currently much too narrow to integrate IBM into a firm’s business processes on a larger scale, with the exception of procurement, application-hosting and web- hosting, as well as semiconductor production.
222 Cf. “finding list” points 2-4 on page 82. IBM’s transformation to “e-business on demand” Page 83
3.2 Transformation to an “on demand” business
3.2.1 IBM’s e-business transformation
Before looking at the IBM’s initiatives to become an “on demand business” itself, this Chapter will provide an overview on IBM’s transformation prior to the beginning of IBM’s “on demand” era, starting in 1993.
By the year 1993, IBM’s senior management had created 24 independent business units, which was the last step of its preparation to split IBM up into 24 independent companies.223 But after Gerstner became CEO of IBM in April 1993, he decided to keep IBM together as one company. He believed that IBM’s most valuable asset for customers was its ability to provide end-to-end solutions to business problems. The weight and burden created by having redundant processes and disconnected information systems had to be eliminated. But this transformation also had the objective of simplifying the processes and the IT infrastructure from which IBM suffered in the late 1980s. Therefore, simply Web-enabling IBM’s processes would not have been enough. Gerstner’s “One IBM” strategy required an intense focus on recreating, and not restoring, the former IBM. Therefore, it was first necessary to integrate the disconnected IBM internally. An approach was needed to deliver the standardization - which was the key for a seamless integration with customers, partners, suppliers, and employees - while still allowing the individual brands to win head-to-head with competition in the marketplace.224
223 Cf. [IDC1, 2] 224 Cf. [IDC1, 2] and [Gerstner, 70-75]. IBM’s transformation to “e-business on demand” Page 84
Realizing that complexity was the root for many of its problems, IBM adopted a strategy of streamlining its core business and driving core processes across the company. While the first cost reductions in the beginning of 1994 were achieved through consolidation and standardization, they were followed two years later by a global deployment of automated and reengineered processes. This simplification yielded in tremendous benefits: e.g. financial operations expenses fell to US$ 1.3 billion in 1996 from US$ 2.1 billion in 1994, even as total revenue grew, and IBM’s financial operations’ expense-to-revenue decreased from 3.2 percent to 1.5 percent. Prior to this transformation, IBM needed 18 days for closing the books on a financial quarter, because their financial analysts were spending at least 50 percent of their time collecting information, due to the lack of commonality in financial data.225
Fragmentation was also apparent within IBM’s application portfolio and its IT infrastructure, as well as in the governance or management structure: an audit conducted at the start of the consolidation effort revealed that approximately 16,000 applications were running within the company, and, for one-third of those, IBM could not pinpoint an organization that was responsible for application maintenance. In just under ten years, IBM was able to reduce this portfolio to about 5,200 applications by embracing a standardized application architecture built around “best of class” products such as SAP for Enterprise Resource Planning (ERP) and Siebel for Customer Relationship Management (CRM). IBM’s foundation for e-business solutions is now provided through a common Web architecture that incorporates products such as DB2 Universal Database, a number of WebSphere and Tivoli offerings, and a common Domino/Notes architecture that leverages the scalability and capabilities offered by Lotus Domino and Notes products.226
225 Cf. [IBM6, 6-8]. 226 Cf. [IDC1, 2-3]. IBM’s transformation to “e-business on demand” Page 85
Furthermore, at the beginning of its transformation IBM was operating 155 data centers around the world, along with 31 separate, private networks, and hundreds of different PC configurations. Since then, IBM has reduced the number of data centers to 12 worldwide227, networks were reduced to one and outsourced to AT&T, and PC configurations cut down to four. Over the last decade, IBM has been cutting IT spending by 31 percent, even as its IT infrastructure grew to support new applications and processes, additional workload volume, and enhanced functionality.228
Like many of its customers, IBM has outsourced IT services – including application development and integration, as well as infrastructure and deployment and management – to IBM Global Services. This approach has allowed IBM to focus on strategic issues and helped enforce standards and reduce redundancies, resulting in both process and cost efficiencies.229
By integrating its new infrastructure with the reengineered processes across the company, IBM has fundamentally changed the way it does business. By taking IBM’s infrastructure through the first two stages of “e-business” – from a fragmented legacy infrastructure over the “Access” stage to “Enterprise Integration” – the nature of its relationships and interaction with customers, partners, suppliers, and employees has changed.230
3.2.1.1 Customer Relationship
In 2001 IBM’s e-commerce revenues generated US$ 26.8 billion - up 15 percent from 2000 - from sales to large enterprises, small and medium-sized businesses and consumers, as well as direct sales to IBM Business Partners and OEM partners.
227 The number of data centers mentioned refers to data centers used for IBM internal systems. Due to its outsourcing contracts, IBM, of course, manages many more data centers. 228 Cf. [IBM6, 9]. 229 Cf. [IDC1, 3]. 230 Cf. [IDC1, 6]. IBM’s transformation to “e-business on demand” Page 86
When “ibm.com” was first introduced, it provided information about IBM’s products and services. This first stage of e-business was driven by the different business unit and not by a customer centric view. Today “ibm.com” is an integrated place of business, where customers can learn and shop for IBM products and services through dedicated portals on the public Web site, or through specific “territory” Web sites that aggregate relevant customer set products, resources, and services in a single location. Large enterprise customers are served through personalized, private portals, which provide pricing, product information, special offers, and company standards. IBM’s largest customers buy directly through their own electronic procurement systems. Integrated telephone and Web capabilities, such as “Call Me Now” and “Text Chat” interfaces, make this integration seamless.231
3.2.1.2 Business Partners
As Business Partners have steadily grown in importance to IBM, serving them with the right tools to maximize their productivity as a channel and to enhance customer satisfaction became an important part of IBM’s transformation effort.
IBM has used the Web to strengthen the programs and services offered to Business Partners, including:
· PartnerWorld: IBM’s Business Partner Web portal providing consolidated access to IBM support and resources for Business Partners worldwide. Benefits include education, technical support, co-marketing opportunities, sales tools, incentives, and financing for a broad audience - including developers, resellers, distributors, service providers, consultants, and integrators. This CRM-based program has been designed to allow IBM’s internal telesales employees to work seamlessly with Business Partners in the management and execution of leads. For
231 Cf. [IDC1, 7]. IBM’s transformation to “e-business on demand” Page 87
the first time IBM employees and Business Partners have had the same customer “view”. 232
· PartnerCommerce: An Internet-based ordering tool that allows Business Partners to check supply status, buy products, and track orders on the Web. IBM processed more than 418,000 orders via this portal, a 96 percent increase from year end 2000.233
· QuickShop: A self-service order entry portal with 24 by 7 availability that guarantees delivery within three days.234
· B2B: Business to Business capabilities have been implemented between IBM and partners to move high volume, manual processes to an integrated electronic solution via the Internet, with early results showing reduced order error rates and improved cycle times.235
3.2.1.3 Supplier Relationship
Before IBM’s transformation, supply was handled individually by each brand. Today, it is being synchronized and standardized across the company, which provides a more cost-effective way to procure goods. IBM’s supplier-facing initiatives have been specifically aimed to improve the effectiveness and efficiency of procurement operations, supply chain, and accounts payable. IBM’s focus remained on the streamlining and integrating collaborative processes from early design through customer shipment. Since the mid-1990s, the importance of transforming the procurement process has gained momentum and shifted from solely hardware to align with IBM’s shift to selling solutions.236
232 Cf. [IDC1, 8]. 233 Cf. [IDC1, 8]. 234 Cf. [IDC1, 8]. 235 Cf. [IDC1, 9]. 236 Cf. [IBM6, 10]. IBM’s transformation to “e-business on demand” Page 88
Enabling suppliers to e-business extends the benefit of improved effectiveness and efficiency throughout the supply chain. With e-procurement, suppliers are able to receive forecasts and orders, process invoices, and receive payment – all without the use of paper. The span of e-procurement covers all aspects of the purchasing process from up-front collaboration, through source selection and the fulfillment phases. For IBM, the value of procurement transformation has resulted in year-over-year declining procurement expenses, lower commodity costs, and increased buying efficiencies. In 2001 IBM avoided US$ 405 million in costs through e-procurement and process-related improvements237:
· Less than one-half percent of transactions bypass the procurement process, compared to 30 percent in the mid-1990s.
· Procurement cycle times have fallen from an average of 30 days to a matter of hours.
· More than 90 percent of all IBM purchasing transactions were conducted “hands-free” – without the intervention of procurement buyers – thereby freeing resources to focus on more strategic, value-added procurement activities.
In 2002 the “MIT Sloan e-business award” for business transformation was granted to IBM. While the award recognizes overall e-business transformation, IBM specifically was cited for its streamlining and integration of the procurement and accounts payable process.238
237 Cf. [IDC1, 10]. 238 Cf. [MIT]. IBM’s transformation to “e-business on demand” Page 89
3.2.1.4 Employee Relationship
IBM is using the intranet as the foundation for its employee collaboration initiative that integrates e-business and knowledge management capabilities and falls into the following core groupings239:
· Expertise: IBM aims to leverage the knowledge and skills of its employees through expertise location. IBM’s worldwide employee directory provides searchable employee-created “Persona Pages” that facilitate the identification and location of a subject-matter expert based on an individual’s projects, teams, expertise, and business interest.
· Content: Employees can access profile-driven, customized portals through the intranet’s “On Demand Workplace”, which enable them to receive personalized internal, industry, and competitor news, as well as to collaborate, learn, find knowledge and/or experts, and share and access productivity-enhancing tools.
· Collaboration: With ICM (Intellectual Capital Management) Asset Web, Knowledge Cafés and TeamRooms, IBM provides a centralized system for information sharing, as well as intellectual capital management to their employees. Web Conferencing provides a virtual space for collaboration with other employees or customers, with over 30,000 worldwide participants joining more than 6,000 internal and outbound Web conferences each month.
· e-learning: IBM is conducting about 43 percent of its entire employee training via e-learning, avoiding more than US$ 395 million in related costs in 2001.
239 Cf. [IDC1, 11-12]. IBM’s transformation to “e-business on demand” Page 90
3.2.2 IBM’s “on demand” transformation strategy
IBM is working simultaneously in three areas to drive its own transformation towards “on demand”240.
1. In business process transformation, IBM is aiming to raise the level of integration of key processes, shifting from standalone vertical processes to processes that are horizontally connected across the enterprise and beyond the company’s border to customers and suppliers.
2. In IT enablement, IBM’s objective is to move its technology infrastructure forward so that it is fully equipped to support that move, creating an “on demand” operating environment.
3. One fundamental element of this transformation is cultural change – breaking down the silos within IBM to encourage collaborative, dynamic cross-organizational working across divisions and processes. Since this aspect of IBM has been excluded from the scope of this Master thesis, it will no longer be discussed.
Besides levering from the benefits of becoming an “on demand business”, another driver for this transformation is credibility with customers ensuring them that IBM is “practicing what it preaches” in transforming itself into a leading company of this new era.241
3.2.2.1 IBM’s “on demand” Business Model
During the early stages of e-business, IBM focused on the transformation of individual vertical processes and applications. In the era of “on demand”, the focus shifts to building much tighter linkages and relationships among core business processes, and the applications that support them.
240 Cf. [IBM6, 13]. 241 Cf. [IBM6, 13]. IBM’s transformation to “e-business on demand” Page 91
One of IBM’s first questions was how to fund this shift to “on demand”. IBM had to both selective and creative in how it leverages the efficiencies it gains while moving along the path towards “on demand”. By means of the yearly generated efficiency and productivity gains achieved through the outsourcing of the IBM Global Account to IBM Global Services, IBM can reinvest these savings in its transformation initiatives. Since this is not funding every initiative, the remaining funding is coming from larger business transformation initiatives. These savings allow IBM to invest more resources in IT initiatives.242
In order to drive its transformation to an “on demand” enterprise, IBM has put a management team and structure to lead this initiative in place. First IBM selected four initial process areas for the “on demand” transformation243:
1. Integrated Supply Chain,
2. On Demand Workplace,
3. IT Enablement,
4. Total Buyer Experience.
Each process area has been assigned a “champion”, an executive with operational know-how, and a senior executive sponsor. Their results are reviewed on an ongoing basis by IBM’s CEO, Sam Palmisano, and the corporation’s operating team. Likewise engaged are small groups of leaders from IBM’s customers, partners, suppliers, and employees who raise the issues with which they are dealing.244
242 Cf. [IBM6, 15]. 243 Cf. [IBM6, 17]. 244 Ibid. IBM’s transformation to “e-business on demand” Page 92
IBM’s overall aim and business case is straightforward: to drive IBM to
· #1 in the IT industry in customer satisfaction,
· #1 in employee satisfaction,
· achieve commanding market share in each of its major businesses.245
By bringing together the business transformation effort together with corporate IT, in the last decade IBM was able to leverage IT to drive revenue and profit across value chains and end-to-end across the enterprise. As it steers toward “on demand”, IBM is gradually achieving an integration across the extended enterprise including customers, partners, suppliers, and employees.246
3.2.2.2 IBM’s “on demand” operating environment
To realize the benefits of its “on demand business”, IBM will need to migrate its current computing infrastructure and architecture to a new one – becoming an “on demand infrastructure” complying with all four essential characteristics247.
IBM’s “on demand” operating environment comprises two aspects:
1. the application environment, as an open, approachable, software infrastructure platform, built on IBM’s middleware; and
2. the data center of the future, taking advantage of virtualization and grid technologies.
245 Ibid. 246 Cf. [IBM6, 24]. 247 Cf. Chapter 2.2.3. “on demand” in Practice Page 93
4 “on demand” in Practice
This chapter will provide an overview of the different challenges currently facing various industries and how the “on demand business” strategy could be implemented to overcome today’s obstacles and to improve one company’s position in the marketplace.
The overview will first begin with the “automotive” industry, which is a very mature industry – especially when regarding, on the one hand, the business trends the companies are following, and the characteristics of an “on demand business”, on the other.
The two other industries discussed (“retail” and “banking”) have not achieved the same level of maturity as the “automotive” industry to date. Therefore, they will provide more insight into the potential changes within the business model accompanied by concrete examples for implementations.
4.1 IBM’s “on demand” today
4.1.1 IBM’s 300 mm Semiconductor Facility
An example illustrating IBM’s advances in getting closer to a complete “on demand” environment is its new 300 mm chip-manufacturing plan in East Fishkill, NY (USA) – an “on demand” manufacturing facility.
Its manufacturing process is “touch less” and largely automated by systems running under Linux. The supply chain processes and solutions likewise can sense and respond to changes in orders and chip configurations and are able to accept a new batch of materials and build to order.
“on demand” in Practice Page 94
4.1.2 IBM’s Personal Computer Business
IBM’s Personal Computer business is yet a different example for IBM’s transformation towards becoming an “on demand” business. In this case, IBM is not part of a company’s business model as a supplier. Here, IBM is outsourcing non-core competencies to partners, seamlessly integrating them into IBM’s supply chain.
Challenged by an industry where 95 percent of the price of a product is the cost of components, responsiveness and variability become very important factors. On the average, the price of components drops about one percent in a week. Holding a PC in inventory is costing IBM 66 US cents a day248. Factor the amount of components needed to ship millions of PC’s per year, this adds up to total inventory costs of about US$ 100,000 per day.
IBM has outsourced all non-core business activities (e.g. assembling PC’s) and has developed a network of alliances and built a solution that adopts the variable cost model that permits touchless manufacturing. IBM is transacting business directly with customers’ and business partners’ procurement organizations (through custom portals or direct application integration), and shipping the product without touching it. All associated processes – manufacturing, distribution, etc. – are provided by IBM’s partners.
248 Cf. [IBM6, 28]. “on demand” in Practice Page 95
4.2 Automotive Industry
In the past, automotive companies have utilized mergers, alliances, and consolidations to expand and compete in an increasingly global and challenging marketplace. In fact, the top nine global OEM’s currently control more then 80 percent of global light vehicle sales. At first, results seemed to indicate that these acquisitions and consolidations were making companies bigger, better, and more competitive. However, these changes have not altered the fundamental obstacles automobile manufacturers face today:249
· Time-to-market: For a new vehicle it takes an average of 32 months from the idea of the new car until it is eventually can be sold on the market.
· Forecasting: Currently, manufacturers check back on what was sold from inventories to determine production levels, rather than aggregating data to forecast what customers actually want.
· Production overcapacity: The overcapacity for car manufacturing is currently estimated to be around 20 million excess units worldwide, which represents the production capacity of approximately 95 plants in total.
· Inventory management: Locate-to-order processes are becoming increasingly necessary to drive down costs and increase sales.
· Quality: Warranty costs average more than US$ 700 per vehicle in the U.S. only.
· Profitability: Technical complexity and innovation are increasing the cost of development, yet dramatic cost reductions in bringing new products to market are imperative to remain competitive.
249 Cf. [IBM28, 2]. “on demand” in Practice Page 96
· Government regulations: TREAD, Block Exemption, CAFÉ standards, safety requirements, Asia Free Trade Agreement (AFTA), and vehicle end-of-life management are increasing the cost and complexity of doing business.
In order to remain relevant and viable in an environment of constant change, automobile companies are currently implementing different business models of which two distinct roles are emerging:250
· Vehicle Brand Owner (VBO): They are focused around core competencies in customer experience and product innovation, having a comprehensive understanding of customer wants and needs.
· Vehicle Integrator (VI): They are focused on vehicle order and delivery and value net collaboration, concentrating on production and assembly and distribution processes, like Magna International Inc.251. VIs also have the ability to interchange suppliers and partners in their value net.
In order to lower costs and increase competitiveness, both VBOs and VIs optimize the value net by forming relationships with key partners and suppliers and exiting and/or divesting non-strategic (or non-core) facets of the business. For example, some auto manufacturers have spun off their components businesses, while others have outsourced their assembly operations – retaining the design and engineering functions as their core competencies. These actions move companies along the road to an “on demand” operating model by helping the automotive enterprise to become more flexible and respond rapidly to customer demands, market opportunities, and external threats.
250 Cf. [IBM28, 3]. 251 Cf. [Magna] “on demand” in Practice Page 97
Due to the intense pressure to reduce costs and cycle times, organizations started to look at outsourcing as a major lever in shifting fixed costs to variable costs within the enterprise. An examination of their core-competencies has led many manufacturers to outsource increasingly larger components of the vehicle, including the manufacture and assembly of major components. All kinds of tasks - including everything from design and engineering to component assembly - are now outsourced, many having been transferred to low-cost labor pools offshore.252
Building strategic partnerships is another approach companies are using to optimize the value net and, therefore, to improve their position. Strategic partners and suppliers are essential to the new value net. Without these players automotive manufacturers cannot be successful. Once companies have defined their core-competencies and which tasks and activities they are going to outsource, they can then identify the strategic partners and suppliers best capable of helping them round out their ecosystem. As early adopters begin to take these key actions, industry differentiators emerge: customer experience, product innovation and cycle time, vehicle ordering/speed of delivery, and value net collaboration and coordination become differentiators – creating new roles and players in the automotive partner network.253
These new imperatives emphasizing the “on demand business” characteristics are driving specialization and changing the automotive blueprint from the traditional siloed view to a dynamic, networked ecosystem. In this new ecosystem, virtual value nets will lead to new partnerships which will be formed quickly in response to market needs. Competencies and players in other industries will become integrated as parts of the automotive ecosystem.254
While technology has always had a key role in running automotive operating models, in an “on demand business” technology becomes the key catalyst in enabling collaboration, integration, and personalization. Technology is needed
252 Cf. ibid. 253 Cf. [IBM28, 4]. 254 Cf. [IBM28, 5]. “on demand” in Practice Page 98 to provide these new ways of facilitating business integration and reconfigurations so that information can always flow in real-time throughout the entire value net, as well as helping companies to better adjust to the rising complexity of managing IT infrastructure itself.255
4.3 Retail Industry
Consumers today are different from their predecessors, due to the fact that they are more knowledgeable, savvy, and just plain demanding. They have access to more information and know how to use it to their advantage by putting pressure on retail prices and profit margins. Today’s shopper is looking for convenience and, sometimes, prefers to browse without any assistance. And while self-sufficiency is high, customer loyalty is low. Even in an IBM survey - “Making CRM Work” - that targeted consumers who frequent specific retailers on a regular basis, nearly half the respondents classified their loyalty by disagreeing with the statement: “I am a loyal shopper.”.256
Retailers are confronted with an increasing financial scrutiny, as the public is demanding a greater financial transparency to help ensure fiduciary responsibility, and stakeholders are holding corporate management responsible for the impacts of its business and financial decisions. Shareholders are demanding more predictable results, with the financial markets rewarding those businesses that can deliver steady returns. Lack of steady sales growth has forced retailers to focus on the cost side of the equation to produce expected shareholder value. Therefore, investments must prove their merit in terms of quick and real returns, usually in the form of productivity gains. Every aspect of the business has become a potential target for improvement – workforce effectiveness, store performance, or back-office efficiency.257
255 Cf. [IBM28, 8]. 256 [IBM33, 12]. 257 Cf. [IBM29, 2]. “on demand” in Practice Page 99
While spending is slow and nearly unpredictable, retailers have channeled their intense focus on revenue growth into a aggressive battle for market share. Faced with saturated markets, competitors are crossing over into new segments for growth, blurring historical lines of competitive demarcation: e.g. in the year 1980 over half of U.S. retail food sales occurred in supermarkets; by 2000, food sales dispersed across a variety of other formats – such as supercenters, convenience stores, warehouses, and drug stores – leaving supermarkets accountable for only 19 percent of the market. And this is expected to drop even further, to a mere 14 percent by 2005.258
These competitive and financial pressures have led retailers to focus on the following three business imperatives:
· Take out costs: Optimizing the supply chain and automating interactions with trading partners, sharing infrastructure, and integrating applications and data across business functions.
· Enable employees: Increasing employee productivity and operational efficiency through access to real-time information and broadening employee expertise through relevant, just-in-time training.
· Transform the customer experience: Building a differentiated market position through customer interaction, influencing customers throughout the entire shopping process, applying emerging technologies selectively when and where they will make the most profitable impact.
Although many retailers have triggered initiatives to improve these three areas, substantial untouched opportunities still exist. In the recent IBM/National Retail Federation (NRF) “Store of the Future” survey, for example, 71 percent of respondents rated “faster merchandise scanning” as extremely valuable, although less than 40 percent planned to implement this capability in the near future. And even though 55 percent voted “providing employees with access to customer purchase records to improve returns process” as extremely valuable,
258 Cf. [RF]. “on demand” in Practice Page 100 less than a quarter of the respondents had stated plans to provide this information to employees. On the customer-facing front, 45 percent of the respondents believed that alerting a manager or sales associate to the presence of a high-value customer would be extremely valuable, yet only ten percent had any plans to realize this.259
Although the challenges imposed by these three imperatives related to customers, employees, and supply chain operations are familiar, technological advances are enabling retailers to respond in entirely new ways. For instance, kiosks and self-checkout solutions are growing in popularity, allowing retailers to capitalize on the consumers’ willingness to serve themselves: 63 percent of the retailers that participated in the IBM/NRF study plan to be using kiosks within the next two years, and 24 percent had similarly-timed plans for self- checkout terminals.260 Retail businesses are also actively experimenting with other emerging technologies, such as:261
· Mobile devices: For both consumers and employees, to aid in personalized shopping and enable higher levels of service.
· Wireless payment alternatives: To reduce transaction costs and provide added convenience for customers.
· Dynamic displays: To tailor promotional efforts by store, time of day, and even the passing shopper.
· Radio frequency identification (RFID) tags: To gain access to information in real-time, such as detecting a customer’s presence or tracking inventory.
· Advanced data analytics: To optimize pricing decisions, improve local market assortment planning, and increase accuracy of forecasts.
259 Cf. [IBMNRF]. 260 Cf. ibid. 261 Cf. [IBM29, 4]. “on demand” in Practice Page 101
The growing availability and acceptance of these technologies, along with increased bandwidth, greater levels of connectivity among enterprises, and more defined standards, are providing retailers with the means to fine-tune and better integrate processes, creating opportunities to elevate business performance to new levels. Many retailers are already migrating to open source environments and packaged applications to increase their business agility.262
Customer Employee Enterprise/vendor
… on understanding the … on selecting, training, … on delivering high-value experiences context for each shopping retaining, and empowering and increasing return on all assets – Focused occasion to deliver with employees to make timely including processes, employees, and
immediacy what is most and effective decisions that property – through collaboration and important to the consumer deliver value to customers shared processes
… to changing customer … to changing scheduling … to market shifts, adjusting assortment Responsive interests, requirements, requirements, sharing and inventory levels, as well as demands, and market knowledge, and replicating activating processes and capabilities dynamics employee best practices based on consumer and market demand
… by investing incrementally in … by maintaining flexible … by reducing fixed costs and assets customer relationships based hiring and training capabilities through adoption of utility (pay for use) Variable on factors such as value, profit that have the right people on models for commodity-oriented potential, and ability to hand at the right time, processes and purchases influence patterns of behavior completing differentiating tasks
… through development of systems and processes that provide a self-healing, highly-available environment Resilient for consumers, employees, and the entire enterprise
Table 17 - Value of "on demand" retailers263
The “on demand business” characteristics are forming the foundation on which retailers can create value in these three critical areas: customer, employee, and enterprise-vendor. As retailers learn to operate “on demand”, they can carefully orchestrate an outstanding customer experience through proactive interactions at many “touch-points” across the buying cycle. They create this customer experience by equipping their employees with targeted, real-time information and by establishing highly automated, tightly integrated, collaborative processes that span the enterprise and their entire network of vendors.
262 Cf. [IBM29, 5]. 263 Cf. [IBM29, 6]. “on demand” in Practice Page 102
4.4 Banking Industry
In the 1990’s, banks were relying on three primary strategies to create shareholder value264:
· Reducing risks: securitizing a greater number of the loans they originated, as well as other assets sitting on their books,
· Diversifying revenue: expanding their revenue base through additional sources of non-interest income,
· Consolidation: securing economies of scale and scope through acquisitions and mergers.
Initially these strategies were showing the expected results, but they have flattened, and a few undesirable consequences have emerged. The sale or securitization of assets to alleviate risk had the unpleasant side effect of putting even more distance between banks and their customers.265 At the same time growing revenue through the introduction of service charges worked against the need to cultivate customer loyalty. Now after a period of mergers and acquisitions, banks are left with organizational, process and system complexity, placing enormous pressure on operational efficiency and financial performance.266
But despite all these changes, banks still operate largely within the same traditional business structures: distribution occurs by product silo and operations are biased toward internally manufactured products. It seems that even leading banks cannot decrease the cost level within this structure anymore, while facing a situation in which customers generally see very little or no differentiation among banks. The financial pressure under which banks are operating: it appears that they cannot afford to have capabilities duplicated across product silos, with each product operating its own processes, systems
264 Cf. [IBM34, 2]. 265 Cf. [IBM30, 2]. 266 Cf. [IBM30, 2]. “on demand” in Practice Page 103 and product-specific channels. And although they offered increased efficiency, vertically integrated supply chains limited customer choice – leaving firms with an undifferentiated value proposition. Working in an environment where the dynamics of the future are so unclear, the “on demand business” imperatives apparently provide a direction with which banks can overcome these obstacles.267
There are two paths towards such an “on demand” banking business. One involves the industry as a whole and entails moving away from a set of independent, vertically integrated institutions toward a network of affiliated financial institutions. The other is about individual enterprises reconstructing themselves by breaking product silos into small, encapsulated business components that can be shared across the enterprise.268
The flexibility of operating “on demand” comes as banks begin to restructure themselves into component-based businesses and learn to leverage best-in- class components from potential sources throughout the networked industry. The seamless connectivity and efficiencies of the component-based business are combined with the specialization and scale made possible by a fully networked industry, where internal components then compete on equal footing with external providers. And as the provision of a particular component becomes transparent, choice of provider will eventually migrate to the best value. By taking advantage of best-in-class components, regardless of source, banks are better positioned to react quickly to opportunities and threats.269
The benefits of moving towards “on demand” operations are in many ways reflected in the form of financial returns. But even incremental steps toward “on demand” might offer a considerable economic impact270:
267 Cf. ibid. 268 Cf. [IBM30, 3]. 269 Cf. [IBM31, 6-8]. 270 Cf. [IBM30, 11-12]. “on demand” in Practice Page 104
· As fixed costs transition to more variable structures, “on demand” banks have an opportunity to lower their cost-to-income ratios. The efficiency ratio of an average US bank falls in the 55 to 60 percent range, while some leading banks have reduced their ratios to less than 50 percent.
· Today banks tap into only a fraction of their customers’ total revenue potential and often lose a notable percentage of their customer base annually. But, as an “on demand” bank focuses on the customer segments it is equipped to serve and becomes more responsive to those customers’ needs, customer defection will likely dissipate.
· “on demand” banks are expected to spend less on routine IT support, either through a higher utilization of existing assets, more self-managing features, or even utility computing. U.S. banks are currently spending around 90 percent of their IT budgets on maintenance and management of existing systems, leaving only 10 percent of their funds for new investments.
· Many retail banks experience significant challenges arising from an annual employee turnover of around a third of their staff in specific areas of their businesses (mostly call center representatives or tellers). This subsequently increases the risk of staff giving out information that’s invalid or unauthorized, failing to adhere to policy and procedure, or even falling prey to fraud. By specifically designing their businesses to be more resilient, on demand banks anticipate and are prepared to address a full range of operational risks, including those presented by staff attrition.
· Banks are large procurers of products and services in the marketplace. Often, significant cost is incurred in managing the procurement process, monitoring compliance and addressing exceptions. An “on demand” bank has an enterprise-wide focus to reduce maverick spending, digitize most procurement processes, and limit the number of vendors. “on demand” in Practice Page 105
Although a single firm has little direct control over the progression of banking toward a more networked industry structure, individual firms do play a role. New entrants with disruptive technologies or substantially improved value propositions are often the drivers of industry-wide change. Maintaining awareness of such threats might even prompt a firm to introduce a game- changing trend itself. Because industry restructuring is occurring at different rates for different parts of the business, banks should evaluate threats and opportunities at the business unit level – attempting to pinpoint the specific areas of their business that are likely to be high-value creators as the industry evolves. Those components would then be prime targets for optimization and, potentially, differentiated market offerings.271
271 Cf. [IBM30, 13]. IBM’s Major Competitors Page 106
5 IBM’s Major Competitors
This chapter will assess the status of IBM’s competitors to understand how IBM is positioned regarding its efforts in the IT industry.
5.1 Hewlett-Packard
Hewlett-Packard (HP) is a global provider of products, technologies, solutions, and services to consumers and businesses. The company’s offerings span IT infrastructure, personal computing and access devices, services, and imaging and printing products.272
In May 2002 its merger with Compaq Computer Corporation formed a “new HP” with approximately 141.000 employees. This transaction increased HP’s revenue by 60 percent to US$ 72.3 billion and resulted into a loss of US$ 948 million in the year 2002.273
HP is organized around four core business groups274:
· Enterprise Systems Group (ESG): with focus on providing the technology components of enterprise IT infrastructure, including storage, server, and management software and other solutions.
· Imaging and Printing Group (IPG): including printer hardware, all-in- ones, digital imaging devices such as cameras and scanners, and associated supplies and accessories.
· HP Services: offering guidance, know-how, and a comprehensive portfolio of services to help customers realize business value from their IT investment.
272 Cf. [HP1]. 273 Cf. [HP2002, 31]. 274 Cf. [HP1]. IBM’s Major Competitors Page 107
· Personal Systems Group (PSG): focused on providing simple, reliable, and affordable personal-computing solutions and devices for home and business use, including desktop and notebook PC’s, workstations, thin clients, smart handhelds, and personal devices.
In addition to the four business groups, “HP Labs” provides a central research function for the company, focused on inventing new technologies that are supposed to change markets and create business opportunities.
HP’s equivalent to IBM’s “on demand” strategy is its “Adaptive Enterprise Strategy”. But, in comparison to IBM, HP’s strategy is limited to IT solutions, infrastructure, and utility services only. As HP has established and maintained several alliances with management and business consulting firms275 like Accenture, Bearing Point276, Cap Gemini Ernst & Young, and Deloitte Consulting, it can be concluded, that it did not have and does not plan to develop the management consulting and business process capabilities required to initiate projects for building more agile companies. It would instead partner with these global systems integrators – one of which was PwC Consulting before its acquisition by IBM – which would provide the up-front consulting and then partner with HP for the Adaptive Infrastructure on which new agile businesses would be built.277
HP’s design principles for its entire “Adaptive Enterprise Strategy” are:278
· Simplification: Simplified applications and systems would be easier to adopt, use, connect, manage, and modify. Simplified architectures with reduced resource requirements would be easier to change and would provide flexibility for implementation.
275 Cf. [HP5]. 276 Formally known as KPMG Consulting. 277 Cf. [Summit1, 1]. 278 Cf. [HP2, 7-8]. IBM’s Major Competitors Page 108
· Standardization: Standards would extend the benefits of simplification across multi-vendor, multi-OS solutions. They simplify the context in which IT assets are deployed and used. Standardized changes could be applied across different processes, procedures, technologies, or applications.
· Modularity: Building a system in modules would allow one aspect to be changed without an impact on other components. Modularity would increase flexibility when applied to hardware configurations, business needs and opportunities, and requirements for on demand services.
· Integration: When systems are composed of modules, they would have to be well integrated to function effectively. Integration would facility greater ease and range of change through a uniform system of relationships that is easy to understand, manage, modify.
HP provides a portfolio of solutions consisting of products, services, and technologies. The ability to predictably anticipate, accommodate, and manage change with reduced costs would be performed through their “enterprise integration”, “IT consolidation”, and “management solutions” enabling companies to rationalize, automate, and manage their infrastructures while delivering increased levels of automated interoperability.279
Such an infrastructure would then be taken to the next level of dynamic resource allocation with HP’s virtualization solutions280. The foundation for continuous and secure operations would be found through their business continuity and security solutions. Another component of the “Adaptive Enterprise Strategy” is to enable a proactive approach to change that lends itself to implementing new company processes and strategies in a dynamic fashion. This is covered through HP’s offering portfolio for “on demand”, managed services, integrated support, and financing solutions. Also the technology used to become “adaptive” is similar to IBM’s “Autonomic
279 Cf. [HP4]. 280 Cf. [HP3]. IBM’s Major Competitors Page 109
Computing” approach (dynamic resource optimization, automated and intelligent management, and continuous and secure operations).281
Since the announcement of its “Adaptive Enterprise Strategy”, HP has already made a number of important strides in developing some critical infrastructure and services offerings – especially its Utility Data Center (UDC) platform, OpenView management environment, and its Microsoft .NET services. Among other things, it is now prepared to launch its “Darwin Reference Architecture” 282 framework, which includes a portfolio of HP adaptive infrastructure and management offerings comprising solutions, services, products, and technologies.283
Overall, HP’s strategy appears to be similar to IBM’s “on demand” strategy with the following differences:
1. HP is focusing on delivering products and services for the IT infrastructure of an Adaptive Enterprise, relying on business partners to perform the initial business consulting work.
2. HP is more likely to be oriented towards and to support solutions and technologies of their strategic partners (e.g. Microsoft), rather than committing to open industry standards like IBM does, which could limit its second design principle “standardization” to proprietary standards like .NET.
281 Cf. [HP2,9]. 282 Cf. [HP2, 4]. 283 Cf. [Summit1, 3]. IBM’s Major Competitors Page 110
5.2 Sun Microsystems
Sun's business is singularly focused on products and services around network computing, and is based on the premise that the power of a single computer can be increased dramatically as it is interconnected with other computer systems for the purposes of communication and sharing of computing power. Its product line consists of computer systems and workstations, storage, software and associated services.284
For the fiscal year which ended June 30, 2002, Sun Microsystems had revenues of US$ 12.5 billion and a loss of US$ 587 million, and employed approximately 39,400 employees.285
Sun Microsystems is organized around the following core business groups:286
· Enterprise Systems Products: The Enterprise Systems Products group provides a family of mid-range and high-end enterprise servers systems for mission critical and high-performance computing environments.
· Volume Systems Products: This group provides entry enterprise servers, blade computing287, and workstations with low price point and high computing density for horizontally scalable environments (large computing environments composed of clusters of smaller servers).
· Processor and Network Products: This group develops UltraSPARC microprocessors, associated companion application specific integrated circuits (ASICS), and network and cryptographic products and technologies.
284 Cf. [SUN2002, 3]. 285 Cf. ibid. 286 Cf. [SUN2002, 8]. 287 Blade computing is the management of a pool of modular, single board servers, as one computing environment, which allows companies to dynamically allocate and re-allocate resources. It distinguishes itself from Grid computing as a “grid” is based on the principle of virtually providing resources through a network connection (cf. Chapter 2.1.11), while a “blade” is based on the principle of physically allocating and providing hardware resources out of one single pool of hardware resources through system hardware internal communication channels. IBM’s Major Competitors Page 111
· Network Storage: Directly and through third party relationships, this group provides complete storage solutions for an end-to-end IT infrastructure, from the operating system to servers, storage, software, services, and support.
· Software: The Software group designs, develops and brings to market Sun’s “Sun ONE” software offerings, including the Solaris Operating Environment, the Java platform, and Sun ONE middleware. It also provides core technologies for consumer and embedded markets in the form of software development tools, Java technology, Jini network technology, and Sun’s StarOffice application software - all based upon open source standards, including XML technology.
· Sun Services (formerly Enterprise Services ): The Sun Services group provides a range of services for Sun’s network computing environment. These services include design, implementation and operation of enterprise and Internet computing environments, systems integration and support, professional services and education.
As the organization already indicates, Sun’s responses to the “new era” - “Sun N1” and “Sun ONE (Open Net Environment)” - are built around providing hardware, and to some extent also software, solutions for utility-based computing, and advising and supporting services needed by companies to implement Sun’s products and technologies.
“N1”, Sun’s vision, architecture, and products for the next-generation data center, addresses the challenges of just-in-time computing, by providing technologies for virtualization and provisioning, and a method for simplifying the deployment and management of computing resources288.
288 Cf. [SUN1]. IBM’s Major Competitors Page 112
Sun’s N1 vision describes a data center that appears as a single system instead of a collection of disparate hardware and software. Here the network does become the computer as it is built from the network and the individual compute, storage and network switching and routing elements - turning once- isolated resources into a pool of virtual resources.289
The foundation of the N1 architecture consists of resources - the components which are currently in place in the data center, e.g. servers, storage and network devices, load balancers, and firewalls.290
The first layer of the N1 architecture is virtualization, which takes place through the N1 control plane. The N1 control plane is similar to a computer system bus into which processors, memory, or networking cards are plugged. In the N1 control plane, however, these “cards” are not physical hardware, but a collection of compute, storage, and network resources, virtually wired together. In such an environment, the data center operates as a single system of virtualized resources, rather than as individual boxes.291
Once physical resources have been pooled, the next phase is to map business services onto the virtual resource pool. This is the provisioning level of the N1 architecture. A provisioning server will capture all service requirements - network topology, processor types, software, and storage -, describe them in software, and then implement the design from pooled resources. Once the server farm is created, the service can be mapped onto it. The software monitors its health and availability to help assure that the service is meeting the business’s needs.292
Policy and automation make up the third level of the N1 architecture. With policy-based automation, a company can create a rule defining performance objectives for a given service. Based on set policies, N1 technology manages
289 Cf. [SUN2]. 290 Cf. [SUN3]. 291 Cf. ibid. 292 Cf. ibid. IBM’s Major Competitors Page 113
the environment, adding and removing resources as needed to maintain the particular service level objectives. 293
To help organizations in their effort to implement N1 products and technologies, Sun provides a range of services: from architecture workshops and architecture assessments, to delivery of customized blade and N1 servers - assembled, configured and tested prior shipment to customer -, and services that help customers to deploy, monitor, and maintain large numbers of blade systems.294
“Sun Open Net Environment (ONE)” is Sun’s standard-based software vision, architecture, platform, and expertise for building and deploying what Sun calls “Services on Demand”. It provides a foundation for traditional software applications as well as current Web-based applications for distributed computing models such as Web services.295 It relies on an open and standard- based software architecture to ease integration today, providing a solid foundation for future service integration such as Web services.
Comparing IBM’s “on demand” strategy with Sun’s N1 and ONE strategy, the following conclusions can be made:
1. Sun Microsystems first response to the “new era” - N1 - is, in effect, limited to providing very mature hardware and software to implement a virtual data center, which appears to be ahead of IBM’s technologies and products. However, its grid computing capabilities - although made public through its own open source initiative - is based on a proprietary solution that only runs on Sun systems.
2. Like IBM, Sun is approaching the middleware and software development businesses to provide the platform for integrating systems - an area in which, as the developer of Java, it owns key technologies and innovations.
293 Cf. ibid. 294 Cf. [SUN4]. 295 Cf. [SUN5]. IBM’s Major Competitors Page 114
3. Other than services to improve sales initiatives and the implementation of Sun products, Sun is not providing any further services relating to business consulting, IT infrastructure services, or Utility-like services.
5.3 Microsoft
Microsoft Corp. is primarily a provider of business desktop and enterprise software and the services around them, as well as technologies and architectures for software development. On top of that, it also offers consumer products like the Xbox, PC and Online Games, learning and productivity software, and the MSN network service.296
For the fiscal year which ended June 30, 2002, Microsoft reported revenues of US$ 28.4 billion and a profit of US$ 7.8 billion with approximately 50,500 employees.297
Microsoft is organized in much the same way in which the corporation groups its product portfolio298:
· Windows Client: a business unit encompassing Windows XP desktop operating system, Windows 2000, and Windows Embedded operating systems.
· Information Worker: including Microsoft Office, Microsoft Publisher, Microsoft Visio, Microsoft Project, and other stand-alone desktop applications.
· Business Solutions: including Great Plains and Navision business process applications and bCentral business services.
296 Cf. [MS2002, 18]. 297 Cf. [MS2002, 34]. 298 Cf. [MS1]. IBM’s Major Competitors Page 115
· Server Platforms: encompassing the Microsoft Windows Server System integrated server software, software developer tools, and MSDN299.
· Windows CE & Mobility: featuring mobile devices including the Windows Powered Pocket PC, the Mobile Explorer microbrowser, and the Windows Powered Smartphone software platform.
Microsoft is looking at the future of network computing with a high focus on providing technologies and architectures primarily to software developers, which is reflected in both “future” initiatives and strategies: Microsoft’s “.NET” and Microsoft’s “Dynamic Systems Initiative”.
Microsoft .NET is a set of proprietary software technologies for connecting information, people, systems, and devices. Based on Web services technologies using XML, this will enable a high integration of applications with each other, as well as to others, within a single network or over the Internet. It consists of the following components:300
· Smart Clients: “smart” client application software and operating systems enable PCs and other smart computing devices to act on Web services, allowing access to information anywhere, anytime.
· Web Services: Like other Web services provider, Microsoft is developing a core set of Web services that can be combined with other Web Services or used directly with smart client applications.
· Servers: Microsoft also provides the infrastructure needed for deploying, managing, and orchestrating Web services.
· Developer tools: Together with Visual Studio .NET and the Microsoft .NET Framework, Microsoft provides a complete solution for developers to build, deploy, and run Web services.
299 Abbreviation for Microsoft Developer Network - an offering to provide software developers with software and support in their effort to write applications based on Microsoft technology [MS4]. 300 Cf. [MS2]. IBM’s Major Competitors Page 116
In describing a real-time infrastructure with its “Dynamic System Initiative” (DSI) initiative, Microsoft joins IBM (Autonomic Computing), HP (Adaptive Infrastructure), and Sun Microsystems (N1). But with its .NET strategy, Microsoft is only supporting its Windows technology and Windows developers.
However, DSI will shift the focus on Windows from a “one application - one operating system - one server” mentality toward virtualization - characterized by mixed workloads with a single operating-system image, dynamic hard partitions, virtual machines, virtual storage, meta-directory services for virtual identity management and rapid image deployment. Microsoft will drive the realization of this initiative first through its Windows Server 2003 operating system and further releases of its development tool-suit Visual Studio.301
Like Sun Microsystems, Microsoft’s service portfolio is limited to supporting companies in their efforts to implement Microsoft solutions, as well as development of Microsoft technology-based applications.
Overall, Microsoft’s initiatives and strategies to respond to the next generation of computing represent a mere subset of IBM’s “on demand” strategy, while .NET is a very strong component of it:
1. With its .NET strategy, Microsoft offers an end-to-end portfolio for developing and providing Web Services. However, its limitation to Windows represents a major difference to IBM’s open platform support in this arena.
2. Microsoft’s DSI vision appears to be not as broad as IBM’s “Autonomic Computing”, nor will it deliver significant immediate value like Sun’s N1 virtual data center, as self-healing and self-protecting aspects are not considered.302
301 Cf. [MS3] and [Gartner4]. 302 Cf. [MS3] and [Gartner4]. IBM’s Major Competitors Page 117
5.4 EDS
EDS - Electronic Data Services - is global provider of business consulting and IT services, as well as Product Lifecycle Management products.303
With approximately 130,000 employees, EDS reported in 2002 revenues of US$ 21.5 billion and a net profit of US$ 1.1 billion.304
EDS operates through four lines of businesses:305
· Operations Solutions: EDS’ largest line of business manages IT and business process solutions to help companies and governments to reduce complexity, create efficiencies, and manage risk. Its portfolio ranges from IT Outsourcing (Desktop and Hosting Services), over Communications Services, to Business Process Outsourcing.
· Solutions Consulting: This line of business combines the global consulting capabilities for “e-solutions” and application services. Its services encompass the management and deployment of disciplines, competencies, and capabilities within the areas Application Services, Applied Value Chain Services, Business Process Innovation Services, and Business Accelerator Services.
· A.T. Kearney: This subsidiary provides clients with management consulting services, including strategy and organization consulting, and operations and business technology consulting, as well as executive search services.
· Product Lifecycle Management Solutions: This line of business was formed through the consolidation of two former public companies, Structural Dynamics Research Corp. (SDRC) and Unigraphics Solutions
303 Cf. [EDS1]. 304 Cf. [EDS2002, 12]. 305 Cf. [EDS2002, 2-7]. IBM’s Major Competitors Page 118
Inc. (UGS) and provides software and related services for product lifecycle management.
In May 2003, EDS announced its real-time infrastructure strategy called “Agile Infrastructure”, a comprehensive set of initiatives and services for delivering on- demand, utility services to companies on their terms.
EDS’s agile infrastructure architecture encompasses services at three levels: Hardware Infrastructure, Web Services & Applications, and Business Transaction & Process Services.306
On the level of the hardware infrastructure, EDS’ services provide the capability to delivery utility computing to clients in a secure and recoverable way, through the usage of third party software vendors as partners. Ejasent software facilitates enabling real-time metering of the amount of processing power and allocating processing power based on client needs, and Opsware technology is used to automate management of complex environments.307
The Web services and Applications layer is providing a standardized way to develop and deploy enterprise software applications, allowing applications on different platforms and in various enterprises to interact with minimal effort.308
The third layer “Business Transaction and Process Services” - EDS’ version of IBM’s Utility-like Services - are oriented towards performing business transactions like check processing, credit card processing, claims processes, and invoice processing at the transaction level. EDS provides a wide range of business process services that, in effect, help clients to better manage costs associated with non-core processes. These services include customer relationship management, financial process management, and administrative and enterprise shared services, which includes human resources, finance and accounting, and procurement services.309
306 Cf. [EDS2]. 307 Cf. ibid. 308 Cf. ibid. 309 Cf. ibid. IBM’s Major Competitors Page 119
Maybe because of the recent change of EDS’ CEO in March 2003310, the “Agile Infrastructure” strategy has not been lined out more in detail publicly 311 since its announcement on May 6, 2003 - other than the extension of Avista’s outsourcing agreement to leverage EDS’ Agile Infrastructure312.
Overall, EDS encompasses the entire service portfolio that matches with IBM’s server portfolio of the “on demand” offering structure - having some strengths and weaknesses in comparison to IBM:
1. As of June 2003, EDS’ service portfolio of “Utility-like Services” is wider than IBM’s current one313.
2. Together with its subsidiary A.T. Kearny, on the one side, and its Operations Solutions line of business with its Business Process Outsourcing services, EDS is strongly positioned within the area of “Business Transformation Outsourcing” as well.
3. EDS Agile Infrastructure partly depends on third party software products for which there are no indications that they rely on open standards, so its technology becomes vendor or EDS proprietary.
4. EDS does not offer a representative service portfolio for the implementation of an Agile Infrastructure as such - except through outsourcing agreements.
310 Cf. [EDS4]. 311 On July 17, 2003 a search request at http://www.google.at for ‘ +EDS +”agile infrastructure” ‘ only returned 187 entries, in comparison to ‘ +IBM +”on demand” ‘ with approximately 560,000 entries, and ‘ +SUN +N1 ‘ with around 105,000 entries. 312 Cf. [EDS3]. 313 Cf. Chapter 3.1.4.5. IBM’s Major Competitors Page 120
5.5 IBM and its Competitors – Overview Table
Hewlett- Sun 2002 Data Microsoft EDS IBM Packard Microsystems
Hardware Hardware Hardware IT Sector Software Software Software Software Services Services Services Services Services
Revenue US$ 72.3 b. US$ 12.5 b. US$ 28.4 b. US$ 21.5 b. US$ 81.2
Loss of Loss of Profit of Profit of Profit of Profit/Loss US$ 948 m. US$ 587 m. US$ 7.8 b. US$ 1.1 b. US$ 7.5 b
Number of ca. 141.000 ca. 39.400 ca. 50.500 ca. 130.000 315.889 employees
Dynamic on demand Adaptive Sun N1 System Agile e-business strategy Enterprise Sun ONE Initiative, Infrastructure on demand and .NET
Scope of individual on demand’ strategies versus IBM’s scope for its on demand strategy
Focus Not in scope Not in scope Not in scope In scope In scope
Responsiveness Not in scope Not in scope Not in scope In scope In scope
Variability In scope Not in scope In scope In scope In scope
Resiliency In scope In scope In scope In scope In scope
Integrated In scope In scope In scope N/A314 In scope
Open Limited Java only Limited N/A In scope
Virtualized In scope In scope Limited N/A In scope
Autonomic In scope In scope In scope N/A In scope
314 As EDS is a service provider, it is not expected to delivery hardware and software technologies to enable these infrastructure aspects. Summary & Conclusion Page 121
6 Summary & Conclusion
The core of IBM’s “on demand” strategy is a “business model” and not primarily a new generation or new segment of systems or products315, architectures316, or revolutionary technologies317.
Within its “on demand” strategy, IBM describes how companies can benefit from being an “on demand business” by concentrating on the four “on demand business” imperatives of being: focused, responsive, variable and resilient. Instead of looking at how IBM products and services can bring value to their customers, IBM has developed a value proposition for a business model, and not for its products and technologies.
In a second step, IBM has defined the characteristics of IT environments that support and enable such a business model. By doing so, IBM is not putting an aligned composition of products into the foreground, but rather principles and characteristics to which products should comply in order to become a value- contributing part of the IT environment of the new business model.
By combining the elements of an “on demand business” and an “on demand infrastructure”, IBM pursues to become part of a company’s new business model by providing Utility-like services, which may be considered the next generation and merging of IT and business process outsourcing.
The core of this business model has not been developed by IBM, but has been discussed, analyzed, and improved within the academic world and been practiced in the business world for several years already, also at IBM.
315 Cf. System/360 [Chapter 2.1.1], IBM PC [Chapter 2.1.2], and Midrange Systems [Chapter 2.1.3]. 316 Cf. SAA [Chapter 2.1.4]. 317 Cf. Grid computing [Chapter 2.1.11] and Autonomic Computing [Chapter 2.1.13]. Summary & Conclusion Page 122
Likewise from a technology perspective, none of the four “on demand infrastructure” characteristics - integrated, open, virtualized, and autonomic - are new imperatives to IBM. It already supported open standards and open source initiatives for a long time through its membership at and contribution to IEEE, W3C, etc. even before its commitment to Java in 1995 and Linux in 1998318. Grid computing and Autonomic Computing were also not new to IBM prior to the “on demand” strategy announcement319.
IBM developed a strategy that is based on a concrete business model which is supposed to generate business value to its customers. At the same time, it directly linked its entire product and service portfolio with this value-generating business model. IBM’s products now define their value not through themselves, but by supporting aspects of this new business model.
This is not only changing the picture of IBM’s products and services within the marketplace and amongst the customers – the external view. Likewise within “Big Blue” the “on demand” strategy – as it is a principle lead strategy – provides a blueprint for all emerging and future product and service offering developments.
Since the “on demand business” model is playing such a major role within this strategy, it becomes clear why the acquisition of PwC Consulting was so important to IBM. On the one side, PwC Consulting’s industry insight and strategy consulting experience was needed. On the other side, it was a question of having enough resources available to lead this business strategy consulting-oriented approach forward.
Aside from all the benefits a company can reap from integrating Utility-like Services into its “on demand business”, it will also benefit from such a “rental- like” model320 as it drives IBM to building relationships with their customers and not just selling products.
318 Cf. Java [Chapter 2.1.9], Linux [Chapter 2.1.10]. 319 Cf. Grid Computing [Chapter 2.1.11], Autonomic Computing [2.1.13]. 320 Cf. Chapter 2.1.5.. Summary & Conclusion Page 123
Since the beginning of network computing era321, IBM is transforming itself – including its product and service portfolio – to fully respond to this evolution. It has even spent US$ 5.6 billion for the acquisition of two companies from September 2002 to May 2003, which have been strategic for its “on demand” strategy: PricewaterhouseCoopers Consulting322 and Rational Software323.
In comparison to the competition, IBM’s strategy offers the most complete approach in response to the third stage of the network era324, because it provides a holistic view of business issues and challenges and how they can be approached through business and IT transformation. Because of that, it is currently in the unique position of being able to theoretically provide all the needed products and services.
But there is a weakness and, at the same time, a challenge for IBM: neither its hardware environment is as far advanced as Sun’s N1 strategy, nor its Utility- like Services portfolio as broad and established as EDS’ service portfolio. On the other side, in direct comparison, IBM is better positioned to Microsoft as it does have a very strong software development environment and a complete middleware platform – all based on open standards – to offer to its customers. And in comparison to HP, IBM is leading in all product groups and services related to “on demand”.
Despite the above-mentioned weaknesses against its competitors, IBM can take advantage of the fact that its competitors mainly offer proprietary solutions. This enables IBM not only to embrace a customer with its entire product and service portfolio, but also with just parts of it, since its reliance to open and industry standards enables its customers to select from IBM what they perceive best conforms to their businesses and IT infrastructures.
321 Cf. Concepts and Technologies of IBM’s “e-business on demand” [Chapter 2.2]. 322 Cf. [IBM2002, 78]. 323 Cf. [IBM14]. 324 Cf. Chapter 2.2.1.3. Summary & Conclusion Page 124
Whether these two competitive advantages - being the only end-to-end provider of “on demand” businesses and infrastructures and relying on open and industry standards - will be sufficient to regain the dominant market position it once claimed is still uncertain. It will depend on whether or not IBM can regain ground against Sun Microsystems within its hardware portfolio and against EDS with its Utility-like services.
Achieving this would be the proof of concept for IBM’s “on demand business” strategy as well as its internal transformation. The internal transformation to the “on demand” business model has been helping IBM to become more responsive in the area of personal computers and semiconductors - representing 20 percent of IBM’s entire product and service portfolio. But IBM will also have to be successful in transforming their business model for the remaining 80 percent of its business, which includes IBM’s current weak points: the area of physical virtualization for IBM server and storage systems (IBM Systems Group), and providing Utility-like Services (IBM Global Services).
Acronyms Page 125
Attachment A - Acronyms
AFTA ASEAN Free Trade Area
AIX An IBM operating system family and acronym for: Advanced Interactive eXecutive
AS/400 An IBM midrange computer family and acronym for: Application System/400
ASEAN Association of Southeast Asian Nations
ASICS Application Specific Integrated Circuits
AT&T American Telephone and Telegraph Corporation
B2B Business To Business
BCS A business unit of IBM Global Services and acronym for: Business Consulting Services.
C A computer programming language
CCS A component of SAA and acronym for: Common Communications Support
CEO Chief Executive Officer
CISC Complex Instruction Set Computing
COBOL A programming language and acronym for: Common Business- Oriented Language
CPI A component of SAA and acronym for: Common Programming Interface
CPU Central Processing Unit
CRM Customer Relationship Management Acronyms Page 126
CUA A component of SAA and acronym for: Common User Access
DB2 An IBM database management software and acronym for: Database 2
DSI A Microsoft initiative and acronym for: Dynamic System Initiative
EDS Electronic Data Systems Corporation
ERP Enterprise Resource Planning
ESD A former business unit of IBM and acronym for: Entry Systems Division
F/S An IBM task force assembled in 1975 and acronym for: Future System
FORTRAN A programming language and acronym for: Formula Translation/Translator
GLOBUS An independent research and development project focused on enabling the application of Grid concepts to scientific and engineering computing.
HP Hewlett-Packard Corporation
HR Human Resources
HTML Hypertext Markup Language
IBM International Business Machines Corporation
ICM Intellectual Capital Management
IDC International Data Corporation
IEEE Institute of Electrical & Electronics Engineers
ISSC A former business unit of IBM and acronym for: Integrated Systems Solutions Corporation Acronyms Page 127
IT Information Technology
ITS A business unit of IBM Global Services and acronym for: Integrated Technology Services.
LPAR Logical Partition
MLC Monolithic Circuit
MS/DOS Microsoft Disk Operating System
MSDN Microsoft Developer Network
N/A Not applicable
N1 Sun Microsystems’ codename for its vision, architecture, and products for the next-generation data center.
NRF National Retail Federation
NS An entirely developed but never commercialized IBM computer family and acronym for: New Systems
OASIS Organization for the Advancement of Structured Information Standards
OEM Original Equipment Manufacturer
OGSA Open Grid Services Architecture
ONE A Sun Microsystems software offering and acronym for: Open Net Environment.
OS/2 An IBM operating system for its PS/2 computer family and acronym for: Operating System/2
OS/390 An IBM operating system for its S/390 computer family and acronym for: Operating System/390
OSI Open Source Initiative Acronyms Page 128
PC Personal Computer
PDA Personal Digital Assistant
PL/I A programming language and acronym for: Programming Language One
POWER An IBM CPU and acronym for: Performance Optimized With Enhanced RISC
PS/2 An IBM personal computer family called: Personal System/2
PwC PricewaterhouseCoopers International Limited
REXX A programming language and acronym for: Restructured Extended Executor Language
RFID Radio Frequency Identification
RISC Reduced Instruction Set Computing
RPG A programming language and acronym for: Report Program Generator
RS/6000 An IBM midrange computer family called: RISC System/6000
RSS An umbrella term for IBM’s point-of-sale systems and kiosks and acronym for “Retail Store Solutions”.
RT PC RISC Technology Personal Computer
S/370 An IBM mainframe computer family and acronym for: System/370
S/390 An IBM mainframe computer family and acronym for: System/390
SAA An IBM blueprint for software development and acronym for: Systems Application Architecture Acronyms Page 129
SAP “SAP Aktiengesellschaft” and acronym for: Systeme, Anwendungen, Produkte in der Datenverarbeitung
SCM Supply Chain Management
SDRC Structural Dynamics Research Corporation
SETI A scientific research institute and acronym for: Search for Extraterrestrial Intelligence
SLT Solid Logic Technology
SO A business unit of IBM Global Services and acronym for: Strategic Outsourcing services.
SPREAD An IBM task force assembled in 1961 and acronym for: Systems Programming, Research, Engineering, And Development
SQL Structured Query Language
TG A business unit of IBM and acronym for: Technology Group.
TREAD Transportation Recall Enhancement, Accountability and Documentation
UDC A HP platform and acronym for: Utility Data Center.
UGS Unigraphics Solutions Incorporated
UltraSPARC A Sun Microsystems CPU and acronym for: Ultra Scalable Processor Architecture
VBO Vehicle Brand Owner
VI Vehicle Integrator
W3C World Wide Web Consortium
XML Extensible Markup Language Bibliography Page 130
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