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Another Perspective


Smack in the middle of his literary career William S. Burroughs, eponymous grandson of the founder of the company that eventually made Burroughs computers (now part of Unisys), wrote Naked Lunch.  There's a section in the younger Burroughs's book about an entertainer whose act involves speaking through his rear end.  Eventually the rear end develops its own personality and tells the entertainer it is in charge now.

William S.  Burroughs
Beat Generation writer whose odd sense of humor
explains IBM's situation in the services business

IBM didn't invent Indian computer services companies, but by offshoring its services workforce, it did foster their legitimacy in corporate America.  Now multi-billion-dollar Indian services firms are growing three, four, five times faster than Big Blue's services groups.

The Indian company that pioneered extending South Asian computer skills to American customers is Tata Consultancy Services, part of the huge Tata conglomerate that includes enterprises as diverse as steel mills, hotels, and publishing companies.  Tata's first big American customer was Burroughs, which turned to Tata for banking software during the mid-1970s and provided the introduction that enabled Tata to reach out to various American banks and banking organizations.  Today, TCS boasts a diverse customer base and generates upwards of $9 billion in annual revenue, making it the largest Indian computer services company.

Tata might seem small compared to IBM's $60 billion in services revenue, but it's growing at 29 percent a year while IBM's growth is under 10 percent and IBM's share of the total services market is diminishing.  This gives Wall Street analysts the jitters.  Critical analysts assert Big Blue has already replaced most American and European services personnel with lower-paid employees in India, and wonder how IBM could possibly boost its profit margins in this increasingly competitive field.  But IBM imposes Western overhead on Eastern technology costs, putting it at a disadvantage when it competes with firms that are mainly staffed by Indians and also mainly managed by Indians, too.  (Some services firms that are for all practical purposes Indian may have their headquarters elsewhere, but their HQ citizenship is largely an illusion.)

Services Rev
Services Revenue
In services, IBM is larger than its rivals, but at least five Indian companies
are big enough to measure revenue in billions

Tata's most significant Indian rivals are Infosys, Cognizant, Wipro and HCL.  But its biggest competitors are the U.S.  services giants IBM, Hewlett-Packard (which absorbed EDS), and Dell (formerly Perot Systems).  All are bigger than the Indian services companies, except for Dell/Perot, which is a shade smaller than Tata.  But Dell is falling behind, growing at less than half Tata's rate.  And HP, taking in $36 billion a year but hardly growing at all (and shrinking when it comes to market share), is a target within the imagination if not yet the sights of top Indian firms.  If the Indians overwhelm Dell and then dislodge HP, it may not be long before IBM's vaunted services business, the showcase achievement of former chairman and CEO Lou Gerstner, starts looking like an also-ran.

The way things seem to be developing in the computer services business might make sense to an observer looking back, particularly from afar.  But business--and most of life, for that matter--isn't easy to understand on the spot from in the middle.  William Burroughs's writing is to a considerable extent about unexpected and unintended consequences.  So, too, was his life.  Born in 1914, he enjoyed a privileged childhood in St.  Louis, a city that later became famous as the home of the very server on which you found this story.  When he first left St.  Louis, it was to attend college at Harvard.  After he graduated, he didn't have to hold down a job because his family was willing to support him.  After a while, he drifted across the Atlantic, all the way to Vienna, which was at the time a hotbed of hot beds.  If you want to know a lot more about those days in German-speaking Europe, you only have to know this: Vienna when Burroughs was there was similar to the Berlin of Christopher Isherwood, the Berlin where IBM sold tabulating equipment, some of it used to keep tabs on targets of the state.

Services share
Services Market Shares
While IBM is the big fish in the services pond, it is a very large pond
and no vendor has a commanding slice of it

Burroughs returned to St.  Louis by the time World War II had begun, joined the Army, got discharged because he was a wacko, and moved to Chicago and then later to New York, where he shared an apartment with, among others, the writer Jack Kerouac.  (Kerouac had a nephew by the same name who was a machinist at Data General two decades later, during the Soul of a New Machine era, a time when Burroughs Corporation was making mainframes with quad processors.)

Still unsettled, William Burroughs continued to move and by 1948 ended up in New Orleans where he got into trouble bad enough to make him flee the country for Mexico.  He kind of settled down in Mexico City until 1951 when, drunk and pretending to be William Tell, but with a gun, he shot and killed his second wife, Jane Vollmer.  With the help of his family and a bit of bribery, the unintended consequence propelled him out of Mexico and ultimately back to the United States.

At various times Burroughs also alienated his friends, in part by writing stories whose characters were based on their lives.  These fictional characters lived scandalous lives at a time when their personal proclivities, such as homosexuality, were kept in the closet.  The ease with which some readers thought they could tie Burroughs's characters to real people made for some awkward social situations.  Outing his buddies made Burroughs a hero to some, a notable literary figure of the Beat Generation to others, and rat fink to still others.  But even his enemies generally acknowledged the uniqueness and odd charm of Burroughs's personal style in life as well as work.  Burroughs' last notable public act was an appearance at the end of the 1997 U2 music video Last Night On Earth.  And sure enough, shortly afterwards, he died.

IBM's Indian competitors in the services segment (who also compete with HP and Dell) have grown in part because they have a pretty good sales argument, one that resembled the case made by the talking backside of the entertainer in Naked Lunch when it told its host the old way of doing things had ended.

The key points go more or less like this:

Services growth
Services Market Growth
IBM isn't pulling ahead of the crowd, while HP and Dell are losing ground
because the market is growing faster than they are

The best of the Indian services companies draw on the same pool of talent that IBM does and some key people at these companies have careers that include executive positions inside IBM.

Whether you hire IBM (or HP or Dell) or one of the Indian competitors, you pay for the geeks in Bangalore.  But if you hire the IBM, you also pay for the suits in Westchester County (or, with HP, for the suits in Cupertino, and with Dell, the Texans).

But there is a lot more to this situation because the computer services business is huge and diverse.  Gartner believes the services business worldwide has grown to more than $850 billion a year.  IBM's $60 billion in revenue is only something like 7 percent of the total market.  HP's $36 billion intake is only 4 percent of the world market.  On the one hand, this means that IBM's services business can in theory grow by eating into a diverse market, that IBM isn't restricted to competition against HP or Dell or one of the Indian powerhouse companies.  On the other hand, the segment where IBM has strength and skills and experience is primarily in mainframe country.  IBM's services business is about taking over operations from its mainframe customers.  IBM is a giant in the services segment based on the IT world it invented.  It is not the industry leader when it comes to services based on more generic technology.

That's where Amazon is on top of the world.  And when it comes to Windows services, it is doubtful IBM can outperform Microsoft.  Dell may currently have a mainframe-oriented services business based on the empire Perot Systems had built, but it may well hope for a future in which it can supply the X86 hardware in its data center glass houses and unplug the iron it doesn't sell.  HP is somewhere between IBM and Dell, apparently content to service and support IBM mainframes through its Enterprise Services division (mostly EDS with some Compaq for spice) and unable to supplant the mainframes on which its business is based even if might wish to do so.

But just because IBM is the largest player in services and the sole source of the mainframes customers' software requires doesn't mean it has a particularly healthy business.  It's caught in the body count trap.  The company is unlikely to gain much in the way of productivity; its staffers are already well trained and carefully managed.  There's not much for IBM to learn anymore; it has long since mastered the craft.  So if it gets more work it needs more people.  And as jobs end, IBM must bear the cost of retaining trained personnel until they can be profitably deployed.  IBM may have a huge backlog, but it cannot perform this work faster if it has more technical personnel on hand when the work is tied to clients' calendars, which it generally is.  Moreover, IBM's competitors are just as good as IBM when it comes to spotting the services deals with the best potential.  And the customers know this.  They may well prefer hiring IBM, the most prestigious services supplier, but they also like getting the best possible value, even if it means choosing a vendor that comes from India over one that's gone to India.

— Hesh Wiener June 2012

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