Microeconomics Case Analysis 1

MICROECONOMICS – IBM STRATEGIC IT OUTSOURCING

PORTER’s FIVE FORCES CASE ANALYSIS

By
D Dhanasekhar
Cornell Executive Leadership Student

Presented to Jeanne Dolan

Strategic Thinking
Cornell University

July 22, 2010

Word count: 1739

 Microeconomics Case Analysis 2

Table of content

1. STRATEGIC IT OUTSOURCING – INDUSTRY OVERVIEW

..........................................................................................................................................................................3
2. PORTER’S 5 FORCES ANALYSIS
..........................................................................................................................................................................4
2.1 THREATS FROM POTENTIAL ENTRANTS..........................................................................................................4
2.2 THREAT FROM SUBSTITUTES.........................................................................................................................5
2.3 PRESSURE FROM SUPPLIERS..........................................................................................................................5
2.4 PRESSURE FROM CUSTOMERS.......................................................................................................................6
2.5 THREAT FROM RIVALS................................................................................................................................6
3. KEY CHALLENGES & OPPORTUNITIES .........................................................................................8
STOP OUTSOURCING NOW! DISCIPLINED MULTISOURCING IS THE WAY FORWARD, SAYS GARTNER. [ONLINE].
AVAILABLE FROM : HTTP://WWW.GARTNER.COM/IT/PAGE.JSP?ID=492215...............................................................9
 Microeconomics Case Analysis 3

1. Strategic IT Outsourcing – Industry Overview

Strategic outsourcing is the process of engaging the services of a provider to

manage essential tasks that would otherwise be managed by in-house personnel. This is
often done to allow a business to arrange the use of its assets to best advantage, and allow
the company to focus on its core business. An outsourcing strategy of this type may be
employed by businesses and other organizations of any size, and normally helps to reduce
the cost of operations as well as allow available resources to be allocated to the other
necessary functions that are still managed within the organization. Specifically,
Information Technology (IT) Outsourcing enables a customer to offload the operation of
IT systems and processes in order to focus on core business functions. Through
outsourcing, clients gain cost-effective and flexible IT solutions that enable them to
rapidly respond to changing business needs and freeing them from the demands of
keeping pace with technological change.

IBM's strategic outsourcing business offers application maintenance, data centre,

network and desktop outsourcing services, as well as management services for output
devices. IBM operates the clients' information technology - integrating people, process
and technology innovation. The results are measured against agreed-upon service levels,
and the accountability for delivering those results rests with the IBM project
executive. Business benefits that clients receive include: a focus on core competencies,
cost reduction, access to IBM's vast skills and expertise, and innovation and value-added
designed to enable business transformation and meet a wide range of differing needs. By
outsourcing to IBM, the client can leverage the leading business applications that can
help reduce their time-to-market or boost customer satisfaction without the usual upfront
infrastructure costs — or the ongoing implementation and management headaches.
 Microeconomics Case Analysis 4

2. Porter’s 5 Forces Analysis

Porter's five forces is a framework for the industry to analyze the organization
health by assessing competitive intensity and develop business strategy to improve the
profitability of the organization. Porter referred to these forces as the micro
environment. They consist of those forces close to a company that affect its ability to
serve its customers and make a profit. A change in any of the forces requires a business
unit to re-assess the marketplace given the overall change in industry information.

Using the above model, this papers aims to assess IBM Outsourcing Business
division’s current health and determine the opportunities and challenges.

2.1 Threats from Potential Entrants

IBM’s outsourcing business was threatened by tier-2 and tier-3 vendors from
India in the past decade. IBM responded well by starting their own base in India and
moving most of its global services operations for thousands of its client to India. That
support model has become very successful to the extent that the employee base in India
now forms 1/4th of total IBM employee base. As change is the only constant, now that
base is expected to move to either Latin America or Africa with these continents
maturing with young and educated youth population with low or comparable salary
structure to India. In a recent PwC joint study with Duke University (2010), this was
called out as the big game changer and a challenge for Indian outsourcing vendors like
Wipro, HCL, Infosys and TCS etc. As per the study, the Outsourcing companies in
North America and India, which have long dominated the industry, will be challenged
 Microeconomics Case Analysis 5

by competition from Latin America, Eastern Europe and Asia in service areas such as
contact centers, business process outsourcing, and information technology outsourcing,
the study revealed. With majority of the outsourcing business driven from US based
clients, it is expected that Latin America will do well in terms of culture and geo
proximity (Source: www.outsorucing.com). In Asia, the Chinese government has
designated 20 cities as outsourcing hubs in an effort to attract more international
investment, while the Philippine government has declared outsourcing a priority
industry.
With outsourcing as a concept becoming more appealing and maturing across the
world, organizations are now moving from single sourcing to multi-sourcing and
thereby causing the average size of the contracts to grow smaller and smaller
(Gartner). This will lead to smaller new deals as well as reduction in current base
revenue with client going for multi-vendor approach instead of single vendor. The
primary driver is the choice offered by the industry that is rich with vendors with
different levels of capabilities, lower cost & better quality and mitigation of single
point of failure due to vendor failure.

2.2 Threat from Substitutes

The increasing political pressure against outsourcing, especially support from off-
shore, has given raise to several substitutes including rural sourcing (sourcingmag.com),
hiring college interns (Cadena, 2007) as a resource model for certain functions, and
Homeland Onshore model (itonshore.com), which helps participating firms to take
advantage of highly trained and experienced labor pools within country utilizing lower
cost jurisdictions via high-speed telecommunications vehicle. While these are people
based model, there is also technology and innovation driven changes like cloud
computing (2009), which is also changing the IT services are going to be delivered.
Cloud computing is a technology means by which high quality, scalable and flexible
services can be delivered and consumed, typically over the internet, on a pay-per-use
model. All the above will change the way the IT services are being bought and sold to
enterprises and yet deliver the targeted benefits like cost savings, reduced capital expense
and focus on building on their core business.

2.3 Pressure from Suppliers

A client information technology service team will normally consist of various

technology components including hardware, software, network, application and
consulting services from different vendors. In the case of Outsourcing, the client will
transfer all these responsibility to the outsourced vendor – to own and manage them all as
part of the outsourcing arrangement. If such an arrangement involves multiple large IT
suppliers and if their contracts are not flexible, then it becomes very challenging for the
outsourced vendor to manage. In addition, the outsourced vendor has little control over
the multiple vendor contracts. In some scenario, the vendor also increases the support or
license fee when as supplier contract is renegotiated. When the product or service from
the supplier is unique, the demand and complexity in innovation increases. It gets very
complex with proprietary IT solutions that have very less alternates.
 Microeconomics Case Analysis 6

2.4 Pressure from Customers

The increased options from tier-2, tier-3 vendors from multiple geography and
multiple resource modeling and emerging technology has lead to client demanding
bigger savings in the range of 30-35% instead of initial 10-15% in the past
(typepad.com). While cost is one challenge, the expectation on value delivered as part
of outsourcing has also increased multi-fold with clients expecting business focused
outcomes, on-demand capacity models instead of traditional baseline driven contracts.
The graph below provides a view on the various expectations or rather basics expected
from a client perspective.

Source: fersht.typepad.com
The other demands from clients include outcome based pricing (Guy, 2010) or
utility based pricing as well as adoption of more mature service models, where the
service provider is expected to take on more responsibility and more risk compared to
the traditional method of risk owned by client (luxoft.com).

2.5 Threat from Rivals

In the last 12 months, the rivals have combined forces to strengthen their position
and market share in the IT Outsourcing space. This includes HP acquiring EDS, Oracle
acquiring Sun, and Dell acquiring Perot systems to name a few. The forecast calls for
more mergers in the IT outsourcing industry and that means more aggressive push for
 Microeconomics Case Analysis 7

market share from merged vendors to fully utilize their freed-up resource due to
combined IT operations (cio.com). The merger and acquisition fever is spreading and
prevalent at all level of the tiers including Indian offshore players like HCL recently
acquiring Axon and enhancing its SAP capabilities. This combined force is going to
present a big threat in the form of renewed capabilities of existing players in the market
place.
 Microeconomics Case Analysis 8

3. Key Challenges & Opportunities

The assessment of five forces using Porter’s model has unleashed that all is not
well with the industry and it is going through consolidation and turning more cost
sensitive, value driven and open for new capabilities. While this presents a big challenge
to a leading service provider like IBM, which holds a big share in IT Outsourcing market
share that the new and existing players are after, it also presents an opportunity for IBM
to constantly innovate and bring the best to its clients and keep the competition at bay.
IBM’s global spread and constant focus on strategy at the level 4 has given a significant
edge to establish multiple global delivery centers – 14 to be exact and take advantage of
all the benefits any market has to offer to its business. Though they’ve a huge base in
India, they are on the constant look out for next best market to run the operations that will
give them the best cost advantage in a stable and quality environment. In addition, IBM’s
breadth in IT field covering hardware, software, consulting, R&D gives it an advantage to
factor in any changes in any of these and package it the way industry would like to adopt.
Be it cloud computing or virtualization or on-demand, IBM was the early adopter of
every one of this strategy prior to this became a popular approach in rest of the industry.
IBM always stays a step ahead of competition by introducing new business
models, concepts, approach, technology or a combination of many of them to solve
industry and general public needs. While the industry is looking at cloud computing as IT
model, IBM launched Smart Planet as its own view of the next generation IT model,
using technology to solve real issues that matters for government and common people
.Such complex issues not only needs huge hardware like high-end servers and storage but
also software and data analytics and business intelligence capabilities. When the whole
industry was moving towards multi-sourcing and other “pick and choose” approach, this
bold move from IBM has once again created a need for large and mega organizations and
governments to look for an integrator who can provide such services and solutions for a
better planet earth. With constant innovation, future vision, real time planning, global
presence, commitment to social responsibility and hundred year industry presence, IBM
has all it takes to survive this wave as well as the future ones and emerge as the winner
and leader in the industry.
 Microeconomics Case Analysis 9

4. Bibliography

Porter, M. E. (2009, March 20). The State of Connecticut: Strategy for Economic
Development. Harvard Business School . Boston, MA, USA: Harvard Business School
Publishing (9-703-426).

Porter, M. E. (1998). On Competition - Undated and Expanded Edition (10 ed.). Boston,
MA, USA: Harvard Business Publishing.

Ascolese, Mike (2010). Expansion Seen for Global Outsourcing Market. [Online].
Available from : http://www.pwc.com/gx/en/press-room/2010/expansion-global-
outsourcing-market.jhtml.
[Accessed on 22nd July’2010]

Stop Outsourcing Now! Disciplined Multisourcing is the Way Forward, Says Gartner.
[Online]. Available from : http://www.gartner.com/it/page.jsp?id=492215
[Accessed on 22nd July’2010]

The Outsourcing Institue – The Latin America Marketplace (2010). [Online].

Available from : http://www.outsourcing.com/latin_america_marketplace/index.html
[Accessed on 22nd July’2010]

9 Alternatives to Indian Outsourcing (2009). [Online]. Available from:

http://www.cioinsight.com/c/a/Outsourcing/9-Alternatives-to-Indian-Outsourcing-
411423/?kc=CIOQUICKNL03262009FEA1
[Accessed on 22nd July’2010]

Rural sourcing (2006). [Online]. Available from:

http://www.sourcingmag.com/dictionary/Rural_sourcing-158.htm
[Accessed on 22nd July’2010]

Cadena, Christine, (2007). How U.S. Companies Are Examining Outsourcing Today.
[Online]. Available from:
http://www.associatedcontent.com/article/218623/outsourcing_pros_cons_and_alternativ
es_pg2.html?cat=37
[Accessed on 22nd July’2010]

Flexible Staffing Model - The Solution: Homeland Onshore Model (2010). Available
from: http://itonshore.com/
[Accessed on 22nd July’2010]

The Homeland Onshore Model Allows U.S. Based I.T. Workers To Compete With
Offshore Resources (2004). Available from:
http://www.squidoo.com/AlternativeToOffshoreOutsourcing
[Accessed on 22nd July’2010]
 Microeconomics Case Analysis 10

Ed, Reynolds (2009). Cloud vs. Outsourcing. Available from:

http://h30507.www3.hp.com/t5/The-Next-Big-Thing/Cloud-vs-Outsourcing/ba-p/78649
[Accessed on 22nd July’2010]

The Industry Speaks, Part III: Demand for outsourcing is reaching new heights, but will
vendors disappoint?(2010). Available from:
http://fersht.typepad.com/the_outsourcing_bloghorse/2010/01/newnormalsurvey3.html
[Accessed on 22nd July’2010]

Clapperton, Guy (2010). Outsource evolution. Available from:

http://www.information-age.com/channels/it-services/features/1261003/outsource-
evolution.thtml
[Accessed on 22nd July’2010]

Global Outsourcing Leader, Luxoft, Announces 2010 Industry Predictions (2009).

Available from: http://www.luxoft.com/press/press_release_article.html?id=9612
[Accessed on 22nd July’2010]

Overby, Stephanie (2009). Outsourcing Industry Mergers Spell Bad News for IT.
Available from:
http://www.cio.com/article/505558/Outsourcing_Industry_Mergers_Spell_Bad_News_fo
r_IT?page=2&taxonomyId=3154
[Accessed on 22nd July’2010]