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Fred Balboni

It is difficult to believe that Armonk, where the global headquarters of the $106-billion IBM Corporation is located, is just a 45-minute drive away from New York City.

The green, wooded environment gives you a feeling of being in the middle of a forest. Unlikely as it may seem, it is from these sylvan surroundings, where bobcats and deer roam and even the occasional bear drops by, that Big Blue is now working to change the planet or, to be precise, turn it smarter.

The Smarter Planet initiative, or shall we call it strategy, has taken consulting to a different level and added a layer of fat to IBM's overall profit margin in the last few years.

What exactly is Smarter Planet?

“Smarter planet, at its core, is an initiative that is based on the digitisation of the world. As transistors have exploded, everything is becoming digitised in the physical and the natural worlds. The Smarter Planet is about how you do that to drive productivity, improve society and move us forward,” says Frank Kern, Senior Vice-President, IBM Global Business Services.

At the core of the Smarter Planet initiative is Business Analytics and Optimisation (BAO). As the world gets increasingly digitised, massive amounts of data are generated.

“There is more data being created than the resource libraries of the world can hold. Now you have the ability to use that data in ways that we could never do before,” says the amiable Kern who reports directly to Sam Palmisano, Chairman, President and CEO.

BAO is all about taking advantage of this data and help clients to use it in ways that help optimise their business and predict and project the future to make better decisions.

The BAO initiative combines the strengths of software, consulting and IBM's famed research might.

The research group develops algorithms for complex projects and gives the software and consulting groups the cutting edge. IBM calls it an example of a differentiated solution.

It has launched an entirely new service line in BAO, the first since the nineties when IBM set up the CRM (customer relationship management) service line.

And it has invested significantly, in terms of both money and manpower, to build up the BAO business.

The company has spent $12 billion on software development and acquisition to support the BAO line. This includes the recent $1.2-billion acquisition of SPSS Inc, which specialises in predictive analytics. IBM has deployed 4,000 people since the launch of this service line in April.

Frank Kern

Towards predictive solutions

While Big Blue has been a leader in data warehousing and business analytics areas, it is the move into predictive solutions now that is exciting.

As Fred Balboni, Global Leader, Business Analytics and Optimisation, Global Business Services, says: “We are now moving from an environment where companies sense and respond, to an environment far more predictive… where you predict, you act and make mid-course corrections.”

The move to predictive solutions received a boost with the acquisition of SPSS Inc in October and Singapore-based RedPill Solutions, a specialist customer services management firm, a month before that. IBM's core strategy for BAO is based on the belief that fundamentally the way companies are run is going to change, says Balboni. The technology environment is going to move more and more towards analytical, predictive capability.

As companies extract actionable insights by studying massive amounts of data warehoused by them, they will increasingly apply such insight in new ways into the business. “They will use the information to change the fundamental process and make mid-course corrections, which requires a whole new level of integration and change in the automation systems,” says Balboni.

He says companies that moved to analytics are already changing the way they operate. “Many companies operate the way they do today because they have always operated that way. Not because of any grand vision but because that's how they have always done things. With analytics, that is changing,” Balboni says.

The BAO market size has been estimated by IBM at $105 billion (hardware/software and services) and growing at 8 per cent per annum. A survey of 200 CEOs and CIOs by the company showed that over half of those who make decisions don't have the tools to make them and one out of three decisions they make is without facts. Companies are, therefore, identifying analytics as a greater priority for investment.

Strategy falling into place

IBM's strategy in the BAO service line is gradually falling into place. While the acquisition of SPSS and RedPill gave it access to predictive analytics, IBM is in the process of setting up six analytics solutions centres around the world. Based in Tokyo, Beijing, Berlin, London, New York and Washington DC, these centres will link up with each other and form a global network.

The Beijing centre, for example, will focus on rail systems and transportation. While the solutions centre will look at how to set up the rail systems of the future, the analytics group will look at how to optimise the passengers, tracks, and so on.

Similarly, the New York and London centres will focus on financial risk modelling. The analytics will focus on fraud, risk, how you can predict risk and track risk through the system.

“We have done a lot of modelling on this, we can actually predict risk before the whole system goes down,” claims Kern.

Ask him whether IBM would have been able to predict the CDO fraud that brought down the financial markets last year and he says that it might have been possible had the company been warehousing data on all deals well before the market collapsed.

Early this month, the company announced the establishment of a Centre of Competence in Bangalore to be staffed by over 200 consultants with advanced analytics skills.

These experts will focus on areas such as Web 2.0 analytics, risk and fraud analytics, financial analytics and customer analytics apart from supporting the six analytics solutions centres around the world.

IBM's biggest strength as it moves into predictive analytics is the Mathematics Department of IBM Research which employs 200 Ph.Ds in math.

“We have the largest math dept of any private company in the world,” says Kern.

Indeed, IBM has been investing as much as $6 billion every year in research, which is equal to the annual turnover of Tata Consultancy Services. IBM Research, with its flagship Thomas J. Watson Lab at Yorktown, a 30-minute drive from its Armonk headquarters, focuses on long-term research and boasts over 4,000 patents.

The company likes to talk about its ongoing work with the New York Police Department (NYPD) and the Fire Department of New York (FDNY) as examples of BAO. IBM's business analytics unit has warehoused and analysed massive amounts of data for the two public departments aimed at curbing crime and fire accidents in the city of New York. (see article below).

“Analytics is the hallmark of our consulting business. Part of the Smarter Planet initiative,” Kern proudly proclaims. And the pride is not misplaced.

A brief scan through Big Blue's financials of the last few years will show that profit margins have improved significantly. For instance, pre-tax margin in 2000, which was 12 per cent, jumped to 16.1 per cent in 2008 largely due to the company's conscious focus on services.

In the last four years (2005-08) the share of services in pre-tax earnings rose from 30 per cent to 42 per cent while that of software fell from 42 to 40 per cent; hardware earnings dropped from 15 per cent to 9 per cent in this period.

Clearly, the focus on higher margin services business is beginning to show on the bottom line.

The bobcat from the woods of Armonk has tasted fresh blood and is on the hunt.

rags@thehindu.co.in

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