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INSIGHT IBM's Center for Business Optimization: A New Breed of Business Solution
Anna Danilenko

F.508.935.4015

IDC OPINION
IBM's Center for Business Optimization (CBO) supports the company's strategy for becoming a leading strategic business solution provider to its clients. CBO, designed as a cross-IBM organization, aims to strengthen IBM's suite of IT-enabled business solutions provided as part of the company's On Demand vision. Furthermore, CBO's launch signifies the company's first step toward achieving its goal of capitalizing on the market opportunity that IBM defined as Business Performance Transformation Services (BPTS). Being part of the BPTS-focused effort, CBO strengthens IBM's formula for competitive differentiation and underlines the company's commitment to developing integrated solutions that incorporate the best of what the company has to offer unparalleled computing power, leading software capabilities, research and development, and depth of business process and consulting expertise. IDC believes that although several challenges may be encountered, the key benefits of CBO include the following: ! Enriching traditional consulting expertise with the asset-based component and leading research capabilities ! Alleviating IBM's organizational silos by combining into an integrated solution what used to be distinct competencies and skills around software, hardware, and services ! Providing clients with direct access to IBM's leading research and scientific expertise ! Advancing IBM's positioning as a strategic business advisor to its clients

Global Headquarters: 5 Speen Street Framingham, MA 01701 USA

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Filing Information: March 2005, IDC #33072, Volume: 1, Tab: Vendors Consulting Services: Insight

IN THIS INSIGHT
This IDC Insight outlines the value proposition of IBM's CBO. It provides a brief overview of CBO's offering and its strategic fit in IBM's competitive strategy in the IT and business services space.

SITUATION OVERVIEW
The Company
IBM and IBM Global Services
International Business Machines (IBM) is the largest IT company in the world. In CY04, IBM generated $96.3 billion in revenue and employed more than 360,000 people. The company holds the leading position in almost every market in which it competes. IBM Global Services (IGS) is the company's largest business unit and the largest global IT services vendor. Its CY03 revenue was $46.2 billion and its employees numbered almost 200,000. The organization plays in nearly every subsegment of the IT services market and all industry verticals. About 45% of IGS's revenue comes from the Americas, 32% from Europe, Middle East, and Africa (EMEA), and the remaining 23% from Asia/Pacific.

IBM Research
IBM Research is the independent research unit of IBM's research and development (R&D) function. It focuses on various aspects of technology innovation and employs about 3,000 people, the largest research workforce in the industry. In CY04, IBM's Research and Development (R&D) budget was more than $5 billion. IBM On Demand Innovation Services (ODIS) is a services-focused arm of IBM Research. It was launched in November 2002 with the charter to link IBM's R&D activities with its services business. The organization focuses on research that supports IBM's services offerings and investigates technologies that are critical to enterprise transformation to the On Demand model. It employs about 200 people and is funded by a $1 billion investment covering the next three years. (For a detailed profile of ODIS, see Achieving Competitive Differentiation Through Innovation: How Systems Integrators Are Using Research and Development Labs, IDC #31364, June 2004.)

Center for Business Optimization


In the fall of 2004, IBM launched CBO. Dr. William Pulleyblank, who led the Deep Computing Initiative at IBM Research, was named head of CBO. Richard Esposito, who has been a business transformation consulting partner, is the CBO's VP of strategy and operations. The executive charter of the new leadership is to tackle some of the most complex problems facing organizations today and deliver advanced optimization solutions to improve their business performance. CBO builds on the successful collaboration of the two organizations and bring together complementary capabilities, deep understanding of clients' needs, and leading science and

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technology knowledge into an innovative integrated offering. Currently, 50 people are fully dedicated to CBO. The organization is linked to all geographies and can engage IBM experts from different parts of the company. In line with IBM's BPTS-focused strategy, CBO's goal is to develop innovative optimization and analytics solutions aimed at helping clients solve business problems that traditionally have been handled in-house with little or no help from outside vendors. The Center's initial solution offerings include the following: ! Risk management optimization. Fraud, evasion, and abuse can cost businesses and government organizations significant amounts in lost revenue. The risk management optimization solution enables significant improvements in detecting and investigating fraudulent and abusive behavior through advanced data analysis. For example, IBM's work with Trustmark Insurance Co. helped the client identify fraudulent and abusive claims submitted by healthcare providers through advanced data analytics and profiling. Despite the insurance sector specific focus of this solution, it can be replicated across various industry verticals. ! Pricing optimization. Pricing is one of the most important drivers of revenue and profitability. IBM's work with a North Americabased supermarket helped the client improve margins by implementing an analytical optimization solution. Before engaging IBM, the client set pricing based primarily on cost-plus markups. IBM analyzed the dynamics of their sales data through a sophisticated pricing optimizer. The new solution helped the client improve their pricing strategy, gain insights into individual product performance, and achieve a noticeable increase in profitability. ! Supply chain analysis. For IBM's internal supply chain of over 33,000 suppliers, 78,000 products, and three million possible product combinations, CBO developed an Available to Sell tool using a library of optimization tools developed by IBM Research. The tool uses adaptive forecasting techniques to evaluate customer demand, identify excess component supplies, then optimizes the potential uses of that supply to recommend product configurations that should be promoted to maximize profit for the set of IBM and supplier capabilities available during the planning period. To date, the solution has delivered a significant benefit to IBM. To address business challenges around the areas listed above, the organization deploys the following capabilities: ! Management consulting. This expertise is provided by IGS's Business Consulting Services (BCS) unit, which employs more than 50,000 strategy, operations, business intelligence, and organization consulting practitioners with in-depth knowledge of clients' business challenges and vertical industries. At least 100 members of the BCS team are directly involved with CBO initiatives. ! Advanced research and scientific capabilities. CBO leverages the substantial science, mathematics, and research workforce from the IBM Research organization and the innovative work that IBM Research has done so far in the

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area of business optimization. IBM Research employs more than 3,000 researchers worldwide, 300 of whom possess the skills that are directly relevant to CBO's focus areas. ! Business performance management (BPM) software. BPM experts from the IBM Software Group develop advanced technologies aimed at enabling real-time business optimization applications. ! Deep computing. The advanced computing component is contributed by IBM's global network of On Demand supercomputing centers: Poughkeepsie, New York; Houston, Texas; and Montpellier, France. CBO can approach a business challenge through both labor- and asset-based offerings, from deploying highvalue consulting expertise and building replicable solutions to developing software assets, "productizing" solutions, and providing hosting services. CBO sees the evolution of its offering as a multiphase process of moving from solely labor-based solutions to blended ones and ultimately to asset-based offerings. Organizationally, CBO resides within IBM's BCS business. Its success is measured by a multitude of targets, including revenue and new business development, client references, and development of revolutionary and extraordinary capabilities.

FUTURE OUTLOOK
The launch of CBO coincided with IBM's announcement of its intention to mobilize its business around the BPTS opportunity. As defined by IBM, the BPTS market captures the shift in enterprise business spending on critical but noncore services such as sales, general and administrative, finance and accounting, and others, from internal business units to external vendors. IBM stated that the launch of CBO is the company's first step toward addressing the BPTS market, as it aims to change the way enterprises go about risk management, pricing, supply chain and, in the future, other areas, thereby increasing the overall value achieved through outsourcing processes that are currently part of internal operations. Furthermore, CBO is another step in IBM's strategy of building a new breed of strategic advisory services incorporating the asset-based offerings in a traditionally labor-based consulting delivery. In the past five years, IBM has made significant progress in enhancing its footprint in the strategic business solution space through the following initiatives: ! Development of a robust business vision: IBM's Business On Demand. On Demand takes an integrated approach to hardware, software, and services, offering end-to-end solutions to help businesses become agile. The On Demand vision is the overarching theme of IBM's entire suite of business and IT solution offerings and is a core of the firm's value proposition. ! Strategic acquisition of management consulting, business services, and business process expertise. This included Aragon Consulting (2000), Mainspring (2001), and PwC Consulting (2002). ! Shifting IBM Research's focus to tackling strategic business issues and supporting IBM's services business. Besides advanced technology development, IBM Research now focuses on creating new ways to solve clients'

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business problems and build innovative tools for business process management and improvement. The key elements of IBM's business solution offering that came out of collaboration between IBM Research and IGS/BCS include, among others, the component-based modeling (CBM) methodology and the Web Fountain information mining and analysis tool. ! Rapid growth of IBM's business process outsourcing (BPO) business. According to the IDC Worldwide Quarterly Services Tracker, IBM's CY03 BPO revenue grew 163% to $1.1 billion (besides new business wins, the growth was primarily attributable to the PwC Consulting acquisition). IDC believes that despite the magnitude of the strategic efforts mentioned above, IBM's current market image and primary brand equity still revolve around IT expertise as opposed to strategic business advisory. In order to close this gap and conquer the business solutions space, the company chose to leverage what it is best at its leading IT expertise coupled with the unparalleled scope of its IT solution offering, substantial R&D investment, and focus on innovation to build a foundation of its ITled business vision and differentiate itself from the competition. By combining what used to be distinct competencies of IBM's various organizational and operational silos into an integrated solution to a critical challenge of business optimization, CBO's value proposition enhances IBM's growing high-value business solutions roster. Successful enhancement and productization of innovative IT-enabled business solutions through centers such as CBO will enhance IBM's positioning as a market marker and a strategic business advisor. IDC expects IBM to continue building its positioning in this space by attacking clients' business challenges with its comprehensive solution offering, including hardware, software, IT and business services, financing, and R&D. Focused business solution development efforts are expected to spring from the collaboration of IBM Research with BCS and other parts of IBM. IDC believes that although IBM has made significant progress in changing its business model and reshaping the way it is positioned and perceived in the marketplace, the company still has a number of challenges it must actively address. These challenges include the following: ! Changing IBM's traditional business model by adding a new cross-functional dimension of operational and governance systems that support its operations as distinct hardware, software, and services units ! Merging the different business cultures, goals, and career aspirations of consultants, scientists, and software and hardware experts who join forces at CBO and forthcoming centers ! Defining the role of IBM's external partners and their participation in the CBO-led initiatives ! Further enhancing the perception of IBM as a strategic business advisor in the competitive environment populated by seasoned business advisory and business process expert firms with strong brand recognition and decades, if not centuries, of business consulting experience

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! Taking innovative thoughts and abstract ideas generated in the research environment and turning them into products with well-defined value and ROI

LE ARN MORE
Related Research
! IBM's Next Big Bet: Business Performance Transformation Services (IDC #32666, December 2004) ! U.S. IT Consultants and Systems Integrators 2003 Vendor Shares: Top 10 Vendors by Select Vertical Industry (IDC #31940, October 2004) ! Worldwide Services 1Q002Q04 Vendor Analysis: Bookings Update for 2Q04 and 1H04 (IDC #31932, September 2004) ! Achieving Competitive Differentiation Through Innovation: How Systems Integrators Are Using Research and Development Labs (IDC #31364, June 2004)

Copyright Notice
This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Copyright 2005 IDC. Reproduction is forbidden unless authorized. All rights reserved.

Published Under Services: Consulting Services

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