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Briefcase Business case studies
COURTESY OF IBM
V T. J.
Watson Research Center in
Yorktown Heights, NY, are
greeted by glass cases dis-
playing historical calculating
machines, from the abacus to Leon
Bolle s multiplier. The objects do honor
to IBM s history. They also serve as re-
minders to the people who work here
that IBM s products today are not at all
what they used to be.
IBM s track record in corporate re-
search is almost unparalleled. The com-
pany routinely nabs the greatest number
of U.S. patents in a given year. Its research-
ers have won two Nobel Prizes in physics.
Its laboratories invented magnetic stor-
age, the rst formalized computer lan-
guage (Fortran), fractals, the relational
database, and the scanning tunneling mi-
croscope. If quantum computers ever do
arrive, it will be in large part because of
developments at IBM Research.
"There is no product in the IBM com-
pany that does not start in research, with
minor exceptions," says Paul Horn, a
solid-state physicist who has run IBM
Research since 1996.
But while Hor n is proud of IBM s
achievements, he believes that the com-
pany needs to change the way it thinks
about research, for the simple reason that
its product mix keeps shifting toward the
ethereal. That started with software. Once
seen as a mere hardware accessory, soft-
ware grew in importance after the 1956
consent decree between IBM and the U.S.
government, which created the market for
packaged software. For decades thereaf-
ter, IBM sold more software than any
other company (in 2004, its software sales
totaled $15 billion, about 16 percent of its
revenues). But although software can t be
taken apart on a lab bench, the role that
R&D can play in its development has al-
ways been clear to researchers at IBM.
Computer languages, the relational data-
base, middleware, security software---they
all met obvious operational needs. But
IBM s most recent category of product---
services---has more than a few of its engi-
neers scratching their heads.
Speaking about IBM Research, Horn
says, "If we were to disappear, there d be a
sudden stop in our products side. I can t
make that statement about services."
But what, exactly, are services? Within
IBM, the word is used in two ways. First,
"ser vices" is one of the company s three
broad product categories (the other two
being physical products and software).
Most pure ser vices are sold by IBM s
180,000 consultants and range from
wholesale IT outsourcing to training,
human-capital management, and the On
Demand Innovation Services e ort, a
broad (that is, vague) e ort to make
widely disparate systems communicate
more e ectively, and in real time. These
services don t have pro t margins as high
as those of IBM s proprietary hardware
and software, but service sales often fol-
low product sales (and sometimes drive
more product sales).
The term "services" is also used by
people at IBM to mean any work that
helps improve a product or a process. The
product could be a piece of hardware or
software; the process could be the way
consultants present data to clients. But
whether ser vices are thought of as discrete
products or product enhancers, IBM sees
them as critical to its future.
Research at a Crossroads
Horn and the rest of IBM Research nd
themselves in the midst of a somewhat
awkward transition. While products that
the company makes have, as a whole,
moved across the hardware-software-
ser vices continuum, the research that un-
derlies them hasn t quite kept pace. Thus
IBM Research appears, in certain in-
stances, as if it s attempting to answer the
Its Zürich laboratory, for instance, is
close to completing work on Millipede, a
nanomechanical device that can store data
at a density 20 times higher than that of
magnetic storage. But if Millipede proves
commercially viable, it probably won t be
built by IBM, because IBM sold its storage
division in 2002 as part of an e ort to shed
low-margin businesses. This February, it
sold its once vaunted personal-computer
business for the same reason. At the time
of the sale, services already constituted
slightly less than half of IBM s $96 billion
in annual revenues. Now that the hefty---
$12 billion---but often unpro table PC
business is gone, services will likely check
in at closer to two-thirds of revenues.
Headquarters: Armonk, NY
2004 revenues: $96.5 billion
THE CASE: In 2002, IBM bought PricewaterhouseCoopers
Consulting. Since then, it has pushed its vaunted research
arm to give the same attention to services that it gives to
hardware and software. This requires soft research whose
benefits are hard to measure. But early results are promising.
CEO Samuel DiPiazza Jr.
(left) and IBM CEO Sam
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