3 Profitable Growth, Solution Biz Model

AchievingÊProfitableÊGrowth:ÊIBMÕsÊ

SolutionsÊBusinessÊModelÊInnovation

IBM Global Business Services

StrategyÊ&ÊChange

ExecutiveÊBrief

IBMÊGlobalÊBusinessÊServices

1

IBMÕsÊNeedÊforÊTransformation

Background

In response to market demand in 2003, IBM began offering clients complete

business solutions. IBM was widely recognized for providing technology

components, but clients were looking for more. They sought a collaborative

partner to help define business problems and develop solutions. Clients were

telling IBM that two-thirds of their IT acquisitions were based on solutions.

IBM’s own market insights also projected a high growth rate for solutions. IBM’s

clients needed a partner that understood their business rather than a vendor of

commoditized components and services. A key driver for this change was that

clients did not feel they were capturing the full value of IT components and the

piecemeal efforts to integrate them.

Customers demanded that IBM bring more to the table than materials,

experience and assets. IBM’s sales team reported that solutions create greater

value for clients, differentiate IBM’s value proposition, and create a better fit with

the way clients want to buy. IBM recognized solutions would help integrate IBM’s

full equation – hardware, software, services and industry insights. The question

was not “Are solutions good?” but rather “How good are our solutions?”

In 2003, IBM embarked on a solutions transformation with three objectives:

1. Develop a business model to enable IBM to address the emerging solutions

market.

2. Create a portfolio of powerful solutions that deliver superior value to IBM’s

clients and shareholders, including:

Better, faster, and lower risk for clients,

Market differentiation, and

Increased revenue and margins for IBM.

3. Develop a business design to allow IBM to execute both, the new solutions

model as well as the traditional product and services models.

Limitations of the existing Business Model

In 2003, IBM products, such as hardware and software, and services brands

formed the Line of Business (LOB) structure. In total, there were seventeen

major brands. These were, and remain, the primary P&L owners and control

major functions such as sales coverage, pricing, product development and

investments. Sellers in both brand and client teams are focused on a quarterly

cadence. IBM processes, systems and reporting are organized around these

brands. Client relationships are primarily focused on technology buyers –

typically the CIO.


2

Table 1: IBM’s Product and Services Business Model versus Product, Services and Solutions Model

FROMÊ-ÊSellingÊjustÊProductsÊandÊ

Services

TOÊ-ÊAlsoÊSellingÊSolutions

ValueÊProposition Products broadly targeted cross-industry

Value through “speeds and feeds” and

reduced IT cost

Customer selection based on large, sound

companies

Relationship with IT buyers – typically CIO

Solutions target key issues within select

industries

Value through delivering business value –

faster, lower risk, higher benefit

Customer selection based on innovative/

leading-edge companies

Relationship with line of business executives

OperatingÊModel Delivery means “ship and install”

Sales representatives with transactional and

consultative sales skills

Typical sales cycles are 1-6 months

R&D and Customer Needs are the innovation

engine

Delivery means months or years working with

client

Sales representatives with visionary

consultative sales skills

Typical sales cycles are 6-18 months

Client team is the innovation engine

Solution development based on cross-brand

review board is the innovation engine

FinancialÊModel Profitability from product costs and through

labor cost uplift

Pull-through revenue is not consistent

Less investment required up-front

Focus on quarterly targets

Profitability through increased pull-through

revenue

Higher likelihood of pull-through revenue as

customer buys into overall “solution”

Up-front investment required as team works

with client to identify problem and develop

solution scope

Focus on capturing client’s wallet-share

This model had been quite successful and was deeply entrenched in IBM’s

culture and infrastructure. The success of this business model needed to be

preserved to meet quarterly expectations. The challenge was defining a new

strategy that maintained the success of the existing model while redesigning the

business to accommodate the new solutions model.

ChallengesÊIBMÊEncountered

Defining Solutions

When IBM embarked on its solutions transformation, each brand and geography

had distinct variations to the same solution. For example, each group offered an

ERP solution which included accounting as part of the solution, but there was no

consistency in the level of accounting that was included. Defining each solution

in a consistent way across all brands was a major issue but was necessary to

make it easy for a client to understand, easy for a sales representative to sell and

easy for product development to identify gaps in their components.


3

Market Sizing Solutions

Reliable estimates of clients’ spend on many categories were not available from

secondary research. Data, such as application spend by industry or services

spend by business process, had to be modeled using proprietary market

research. This data was used to establish an estimate of the solutions market.

Pricing Solutions

When IBM had previously sold solutions, each brand calculated its own price and

the solution price was aggregated from the component prices. This meant IBM

was unable to capture value from the intellectual capital it provided to inform the

arrangement of components, which created extra value for the client. Risk was

calculated for each component and sometimes the risk was overestimated when

aggregated into a solution. Thus, IBM sought to adopt a solutions based pricing

approach. This approach used a centralized solutions pricing team instead of

having each brand set prices. The brands, however, did not want to give up their

price control and felt they were not being compensated for the risk they were

forced to take on the sale, resulting in resistance to the centralized model.

Managing Dual Business Model Design

Since each brand’s sales representatives were pursuing their respective

component sales, there were no resources dedicated to selling solutions. The

challenge was to ensure brand sales representatives did not lose focus on short-

term objectives while collaborating across brands to drive longer-term solutions

growth.

Tracking Solutions Sales

Sales metrics, incentives, pricing, offering development, and client management

processes were all geared toward selling brands. There were no systems in

place to measure the solutions pipeline, track its success, and compensate

sales representatives in a brand-driven product sales environment. Without these

systems, it would be challenging to quantify the brand revenue derived from the

pull-through effect of solutions, making it difficult to convince brand executives to

further invest in solutions. This issue was compounded as many solutions were

delivered over a long period of time, using multiple purchase orders, under the

original solution vision.


4

Developing Solution Sales Skills

Solution sales have much longer sales cycles and are typically not bought by the

same single-product IT purchaser. This often creates challenges because point-

product sales representatives want to approach their traditional buyers, sell their

product and move on. Solution sales, on the other hand, require deep industry

or functional knowledge coupled with a consultative sales approach. Selling

solutions also requires the ability to create relationships at much higher levels in

an organization. IBM did not have that type of sales force and was missing out

on many solution sales opportunities. Another challenge in the go-to-market area

was balancing the aggressive pursuit of point-product sales, which were still

required, while collaborating with clients to design long-tern solutions. It is hard

to convince traditional sales representatives to devote time to solution sales if

their incentives are primarily to sell point-products. Sales representatives with the

ability to sell solutions and products were highly valued by the brand teams, who

were reluctant to let them become pure solutions sales representatives.

HowÊIBMÊDidÊIt

Defined and Sized Solutions

IBM started by defining what is meant by a solution. The definition of a solution,

now consistently adopted across IBM, is an offering typically from more than

one product brand that solves a client’s business or IT problem through a

value-enabling combination of technology and high-value services. High-value

services are those which combine labor based services with other assets

such as software, frameworks, tools, techniques, industry insight and other

intellectual capital to accelerate clients’ value realization and minimize their

solution implementation risk. The next step was to select the type of solutions that

IBM would offer. IBM decided to support two types of solutions, Business and

Technology, at the corporate level. Underneath each type of solution would be

building blocks comprised of individual point-products or pre-bundled collections

of point-products (see Figure 1). Finally, IBM conducted formal research on

the selected solutions to size their market potential. Using this approach, fifty-

two solutions across seventeen industries were identified to receive corporate

funding. The rest were either subsumed under these high-level solutions or

retired.


5

Figure 1: Solutions Taxonomy

Created Solutions Sales Team

Since one of the critical challenges was a lack of dedicated specialists selling

solutions, the existing sales capability was augmented by creating three new

sales roles dedicated to selling solutions in industries with recognized solution

sales potential. This virtual organization is co-managed by Sales and Service,

with coverage based on industry critical mass. The three new roles were:

Business Solutions Professionals (BSP): Support large engagements and

have deep industry and business solutions knowledge. They are focused on

a defined set of business solutions and are compensated on services, ISV,

hardware and software revenue. Since most of IBM’s business solutions are

services-led solutions and the type of technology skills required closely mirror

those of IBM’s business services professionals, these new sales roles are

included under Services even though they are funded by the sales organization.

Technology Solutions Professionals (TSP): Assist when technology is the

solution. Individuals in this role have deep knowledge of specific areas of

technology infrastructure combined with deep industry knowledge. They focus

on technical solutions and are paid on services, ISV, hardware and software

revenue. Since most of the required skills are technology consulting sales skills,

these professionals reside under the technology professional services group.

Territory Sales and Solutions (TSS): Are solutions professionals who focus

exclusively on small and medium business customers in the Americas and

EMEA. They support large engagements with these businesses. They have deep

knowledge of complete service offerings and focus on solutions within their

respective territories. They are paid on services, ISV, hardware and software

revenue.

The creation of these new roles allowed existing sales teams and brand

specialists to maintain focus on the point-product sales business.


6

Lessons LearnedSolutions Governance Systems

In order to develop and manage the solutions portfolio, a cross-brand solutions

management system was created (see Figure 2).

Figure 2: Cross-Brand Solutions Management System

Funding for solutions comes from Corporate and is administered by a cross-

brand steering committee, the Solution Board. Return on investment is managed

through careful tracking of the solution’s contribution back to Brands through a

ledger managed by Finance. The Solution Board is comprised of voting members

from all brands. Field teams come forward with ideas for solution development

which are voted on by the Board. Project work streams report status on a weekly

basis to Project Leadership, and Project Leadership reports status on a quarterly

basis to the Solutions Board.

Established Solutions Pricing Discipline

Traditionally, each brand’s components within a solution were priced separately

utilizing brand pricing models. The price of the solution was calculated from the

aggregate of prices of the individual components. Geographic regions managed

deals with global brands and had final authority on pricing models. Traditional

models considered cost, risk and other factors to arrive at a component price.

Support for complex deals resided in each geography, with complex “deal hubs”

established to support solution deals. IBM did not seek to define a single pricing

methodology for an integrated solution. This would have been too complex.

However, pricing needed to capture both asset value as well as increased

solution value. Several pricing mechanisms were considered viable options and

are now administered by account/deal teams through the negotiation process.

Value pricing of the core asset content and intellectual property has potential for

higher margin.


7

Established Solutions Coverage, Sales Cadence and Metrics

To minimize impact on the core business, the solution sales management

cadence was integrated with the core business in each geography. The coverage

model is depicted in Table 2.

Established Rigorous On-Going Solutions Development Process

IBM’s fundamental belief is that ideas for solutions come from clients and

customer needs. Consequently, the decision of whether to use an existing

solution or approach the Board with a new idea resides with the client-facing

teams. Typically, the client teams first check the solution asset repository for any

existing solutions that can be modified to suit the required purpose. If this search

is unsuccessful and the Board recognizes the potential value in developing

a new solution, it will provide funding to the project team to move forward.

Preferential approval is given to developing solutions that meet an existing client’s

requirements. Once the solution is developed and piloted, it is handed over to

one of the Global Delivery Centers (GDCs), which focus on managing these

solutions. GDCs manage proposal templates, work products and deliverables in

an asset repository for use by other client teams with similar problems for which

the solution could be leveraged and customized (see Figure 3).

Table 2: IBM’s Brand-Centric Sales Model versus Brand and Solutions Sales Model

Brand-CentricÊModel SolutionsÊModel

SalesÊCoverage Limited number of appropriately skilled

solution sellers covering a commonly

recognized set of key solution plays

Highly skilled solution sales and delivery

resources aligned to selected solution plays

recognized across the business units

Enablement No defined solution sales discipline and

inconsistent skill levels

Proliferation of fragmented IBM solution

centers around the world

A defined set of solution sales roles with

supporting tools and infrastructure for

professional development

Clear organizational construct for a

rationalized set of appropriately funded

solution centers

Measures No consistent way to categorize and define

specific solutions to allow for a common

view across business units and credible

measurements

A common approach to solution taxonomy

and definitions and a tracking of solution

sales from opportunity identification to

delivery to compensation

Incentives No effective means to measure and

compensate on solution revenue and profit

Process and tools to capture and report

solutions revenue and profit as well as place

solution sellers on leveraged sales plans

Management Ineffective solution sales pipeline

management due to brand and geo-centric

sales model

A defined solution sales management system

including roles and responsibilities, cadence

and reports


8

Figure 3: Solution Development Process

Focused on Results

Clients have responded well to IBM’s solutions offerings and IBM continues to

invest in new and innovative solutions. Clients increasingly understand the value

of total solutions across their business, especially in core processes. IBM has

grown the solutions business to over $14 billion in revenue at approximately 12%

annual growth, and has been able to capture increasing margins. IBM’s results

over the past several years demonstrate success in increasing transaction size

as well as gross margins. Solution assets are now being refined and more tightly

integrated into software frameworks to “assetize” these solutions and enable

IBM to deliver additional value to clients by providing codified or semi-custom

modules.


9

LessonsÊLearnedÊ

Time Spent on Solutions Definition Was Valuable

Prior to this transformation, each brand and geography had a distinct set of

solutions. There was no consistent definition of solutions or what comprised a

solution. An inventory identified over thirteen hundred solutions at one point,

many of which were duplicates, with different names in different geographies,

or different solutions for similar business issues. It was critical to rationalize the

solutions portfolio and focus on a consolidated set that would be managed at a

cross business unit level. This meant discontinuing many solutions and routing

funding to the selected few.

Focusing on the ‘Front-End’ Enabled an Accelerated Launch

Two approaches were considered to enable IBM to bring these solutions to

market. The first was to develop and implement the complete organization,

processes and infrastructure to support solution sales, and the second was

to focus on establishing a solutions pipeline and develop the necessary

organization, processes and infrastructure to support it. To accelerate the launch

of IBM’s solutions, the second approach was adopted. Skilled sales resources

were identified and deployed in the field to start building relationships with

customers and developing sales leads. These resources were provided with

professional development support to hone their solution selling skills, and as they

began to develop the solution sales pipeline, the processes and infrastructure to

support them were put in place. This reduced IBM’s time to market and ensured

that a viable market existed before investing substantial resources.

Integrating Processes and Metrics throughout the Organization was Critical

To enable the continued success of the existing products and services business

model, existing metrics were maintained for brand sellers. New metrics were

developed for account teams and solution sellers charged with creating

solution-based value for clients. Prior to these new metrics being developed,

solution sales activities had been observed but they had not yielded the

expected returns. Once the solution metrics were developed, it was necessary

to implement processes to support tracking and visibility. Without this visibility,

brand executives, who were funding solutions, were simply left to guess the

return on much of their solutions investment. Creating a cross-LOB dashboard to

track actual sales and margin contribution of solutions opportunities and paying

bonuses to sales teams accordingly, proved to be challenging as legacy systems

and processes had to be preserved alongside the processes and systems to

support the new model.


10

Balancing Scale vs. Customized Fit Proved Challenging – Leading to Larger

Account Focus

Solutions by definition are a hybrid of products and services; less standardized

than products, and less customized than services. The challenge is to leverage

a collection of assets and customize them to meet customers’ unique needs.

Building solution scale means keeping customization to a minimum while

ensuring delivery of maximum value. Achieving this balance requires establishing

strict disciplines around codifying assets and focusing only on targeted

customers and business/technology issues. The initial focus of both large and

medium customers proved too broad. Eventually large enterprises and accounts

with buying behaviors indicating their preference to purchase solutions were

targeted.

Realization of Higher Margins Required Focus

Robust and consistent techniques for valuing Intellectual Property (IP), especially

the aspect which brought all solution components together, were lacking. To

resolve this issue, solution teams required education on pricing models for assets

and IP in order to capture value delivered and drive margin improvements.

Without a strong focus on pricing (and education, if required), there is risk of a

solutions bundle returning less than the sum of its parts.

© Copyright IBM Corporation 2009

IBM Global Services

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Produced in the United States of America

April 2009

All Rights Reserved

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Conclusion

From tabulating machines in the 1930s to mainframes in the 1960s to

personal computers in the 1980s to services in the 1990s, IBM has long

had a history of reinventing its business model to meet the evolving

needs of clients. Solutions transformation in this decade is no exception

and certainly not the last reinvention in store for IBM. Augmenting several

client-facing and critical support processes to support an additional

business model while maintaining the current model is challenging, but

can be accomplished if managed as a strategic initiative with needed

support from senior management.

About the Author

Anees Gopalani, an IBM Global Business Services Associate Partner,

is the Services and Solutions Leader for the Strategy & Change

practice. He consults to Fortune 500 companies in the electronics and

general manufacturing industries on growth strategies and business

transformation. Anees can be reached at [email protected]

GBE03222-USEN-00

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3 Profitable Growth, Solution Biz Model