The fact that companies such as Louis Vuitton and Target are turning to India for answers is not a good thing for IBM. Almost half of IBM’s $96 billion in 2004 revenues came from such services (since the company sold its $10 billion personal-computer unit to China’s Lenovo this spring, services account for well over half of revenues), according to David Kirkpatrick of Fortune.
Even though the services business is less lucrative than IBM’s other lines of work—operating margins in services were 25% last year, vs. 31% for hardware (higher once you subtract PCs) and a Microsoftian 87% for software—only services promise to provide growth on the massive scale that IBM needs to make shareholders happy.
Luckily for IBM, Wipro has only 100 retail consultants. So far.
Fast-growing, increasingly sophisticated, low-cost generic competition—known in the IT world by the ugly name of commoditization—is a bugaboo that can keep a CEO awake at night. If you’re IBM CEO Sam Palmisano, it’s an old nemesis. In the form of the PC, commoditization shifted the center of computerdom away from mainframes—a hugely lucrative but now stagnant IBM stronghold—and confronted the company with fierce new rivals like Microsoft, Intel, and Dell. Nowadays commoditization threatens services too, and not just at telephone call centers—even consultants are being paid India’s low wages, the article goes on to say.
[Full article; paid subscription required]