Analysis on revenue of IBM Global Services in Q3 2016

As transformation within GBS continues, the appointment of a former Accenture executive will accelerate the cultural shift, says Jennifer Hamel, senior analyst at TBR.

IBM’s unceasing investments in strategic imperatives pay off with modest services revenue growth for the first time since 1Q12.

IBM broke its 17-quarter streak of year-to-year services revenue declines in 3Q16, as growth in offerings around strategic imperatives, i.e., cloud, analytics, mobility, social and security, finally offset declines in legacy implementation and outsourcing areas. Global Technology Services (GTS) and Global Business Services (GBS) each remain in the midst of multiyear evolutions to cater to new client demands for hybrid IT environments and industry-focused digital solutions.

Total services revenue growth of 1.4 percent year-to-year, though modest compared to most services-led peers, represents a key turning point in IBM’s transformation, validating the company’s heavy investments in talent, IP and global delivery infrastructure over the past few years. To sustain this momentum, IBM will continue to invest across all of these dimensions as aggressive peers such as Accenture chase similar digital transformation opportunities among large enterprises.

IBM segment revenues

Cognitive Solutions $4.2 billion (+4.5 percent)
Cloud revenue + 74 percent
Solutions Software + 8 percent

Global Business Services $4.2 billion (–0.4 percent)
Technology Services & Cloud Platforms $8.7 billion (+2.4 percent)

Systems $1.6 billion (–21.0 percent)

Global Financing $412 million (–7.9 percent)

GTS revenue (comprised of the Infrastructure Services and Technical Support Services subsegments of the new Technology Services and Cloud Platforms reporting segment) grew 2.3 percent year-to-year to $7.7 billion in 3Q16. Infrastructure Services expanded 3 percent as reported, as clients continue to respond favorably to IBM’s offerings related to the transition to hybrid cloud environments, while Technical Support Services declined 1 percent.

GBS revenue was nearly flat (down 0.4 percent) year-to-year in 3Q16 to $4.2 billion. Within GBS, strategic imperatives revenue grew 13 percent to $2.3 billion, representing more than half (55 percent) of total GBS revenue. The shift away from traditional ERP application implementations toward cloud-based, digital-enabled solutions continued to negatively impact Consulting (down 3 percent), but drove growth in Application Management (up 3 percent), supported by development platforms such as MobileFirst for iOS.

New leadership will benefit GBS as it goes head-to-head with Accenture

Investments throughout 2016 show GBS continues to evolve, both to support IBM’s strategic imperatives and to improve its own industry-oriented, technology-agnostic consulting capabilities to better compete with services-led peers. IBM aimed specifically at Accenture in 3Q16, hiring former Accenture executive Mark Foster to succeed Bridget van Kralingen as head of GBS. During his 27-year tenure before his retirement in 2011, Foster led Accenture’s Global Markets and Management Consulting group, as well as the company’s industry-focused businesses, experience which aligns well with GBS’ strategy.

The infusion of expertise from outside IBM will be invaluable to GBS, not only for competitive intelligence (which will be limited by Foster’s retirement from Accenture five years ago) but for continuing to foster a culture of domain-oriented, hybrid technology solution innovation. This will likely include more acquisitions of niche consulting firms with capabilities around popular platforms such as Salesforce, Adobe, Amazon or Google, as well as open source technologies – potentially driving up sticker prices for Accenture and other peers. However, GBS’ success differentiating from peers will depend on creating industry-aligned solutions that integrate IBM IPs such as Watson with non-IBM technologies, before competitors do.

The DataFirst Method enables GBS to shift its attention from analytics evaluation to execution

Creating repeatable consulting frameworks remains a core part of IBM’s strategy to accelerate adoption of its technology solutions, exemplified by The IBM DataFirst Method, introduced as part of the formal launch of the IBM DataFirst platform in September. IBM developed the Method by distilling insights from previous client engagements to determine what different organizations need to succeed with analytics. The Method offers road maps tailored to clients’ analytics maturity level and business goals, enabling IBM Analytics teams to quickly assess a client’s situation and determine whether a need for professional services exists – either for IBM Analytics’ line-of-business services, GBS, or one of IBM’s Business Partners.

The Method aligns with emerging trends TBR observed in its 3Q16 Analytics & Insights Professional Services Customer Research. Our research suggests that as enterprises become savvier about business use cases for analytics, the role of consultants shift from advising clients on what to do with analytics (often over a several months-long consulting engagement) to providing targeted strategies to accelerate deployment and resolve organizational challenges. The Method will help to drive qualified leads from the IBM Analytics unit to GBS, which can then quickly shift discussions from exploration of the business impact of analytics and cognitive solutions to execution, change management and “what’s next” consulting.