Annex Bulletin 2005-08                                       March 7, 2005

Annex clients click here

IT SERVICES

Analysis of IBM Global Services’ 2004 Business Results

Smaller, Shorter - Better?

Strong Organic Growth (w/o Major Acquisitions) Will Be Hard to Come By

PHOENIX, Mar 7 – IBM Global Services (IGS), Big Blue’s erstwhile “crown jewel” and the growth engine of the 1990s, is sputtering again.  Not that its 8% growth rate in 2004 was bad, mind you, especially when compared to major competitors’, like EDS or Fujitsu.  And it matches the overall growth rate IBM reported last year.

But IGS is no longer driving IBM’s growth.  That’s the “new news.”  Its 8% revenue increase is a far cry from the double-digit annual surges to which we were accustomed in the early- to mid-1990s.

Besides, even the 8% rise is more than meets the eye.  Take away the favorable currency impact, and IGS’s real 2004 growth was about half of that amount.

[snip]

What’s IGS to do?

So what's IGS to do?

“For years IBM has stressed its ability, thanks to its large scale, to take on huge, long-term contracts that promise it steady streams of revenue for years to come,” the Wall Street Journal noted in a Feb 24 article on IGS. “But Mr. (John) Joyce (IGS’s head) said that IBM has discovered that smaller contracts are more profitable and are preferred by customers.”

Really?  That’s like discovering that the Earth is round.  Here’s, for example, what we recommended back in June 1996 to the late Dennie Welsh, the founder of IBM’s services business, on the subject of European market (the same principles, of course, apply elsewhere):

[snip]

Profit Boost from Maintenance

Furthermore, IGS, whose net margins are around 7%, is getting a profit boost from IBM maintenance.  We figure that the latter has net margins of about 19% - more than three times higher.  Which is why IBM chose several years ago to report maintenance as a part of IGS, thus making its erstwhile “crown jewel” looking better and shinier.

[snip]

Outlook

Since we’ve already done the revenue and P&L forecast for IBM, which included a segment on IGS, we incorporate it here by reference:

IBM Global Services.  After years of being the fastest growing segment of Big Blue’s business, IGS is likely to become a drag on IBM’s growth this year and next.  Unless, of course, John Joyce, IGS’s head, does something rather dramatic to turn things around. 

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (6 pages in print edition), along with all charts which back up our story.

Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin.  Or call Bob Djurdjevic at 602-824-8111 (cell) to promise not to copy it or otherwise republish it.

To find our how you can become one of our clients, and read the rest of this and other Annex Bulletins, click on . Thank you.

Annex clients click here

Happy bargain hunting

Bob Djurdjevic

For additional Annex Research reports, check out...