Big Blue and the End of Time

Given the wealth of innovation IBM has originated — whether it be voice recognition, plastic transistors, or data intergration — it is perhaps startling to hear its research leader describe innovations inside the consulting revenue model as "The Big Idea." This is perhaps a superficial label, but still it's one that underscores the leadership role IBM is destined to play in the consulting profession's next evolutionary chapter, where consultancies discard the rewards of selling time for more revenue-rich asset-based business models.
Asked how the acceleration of innovation into Global Services now ranks among his priorities, Horn says: "It's probably the single most important thing I have to do." (See our Horn Q&A, page 20.)

The Coming Extinction of Time & Materials

Given that the flow of innovation from research to Global Services is relatively new when compared with the efforts already under way between IBM research and the company's product divisions, IBM management says that there is currently limited data from which to measure the success of its efforts thus far. With IBM having successfully turned its product divisions into channels of innovation, however, Horn's latest priority should strike fear in the hearts of IBM's services competitors. Or at least make them ponder its likely ramifications.
"This could trigger an incredible outcome," observes Barry Libert, an R&D strategic advisor and author of  Value Rx: How to Make the Most of Your Organization's Assets and Relationships.
"If IBM Global Services gets this right, it could kill off those consultancies competing with no intellectual property and force marriages between IT implementors and intellectual property organizations — whether they be SAP, Siebel, or Microsoft," he says. Libert, a managing director at Seurat in Waltham, MA, was until last May co-leader of a 140-member research and development team within Arthur Andersen — a unit the Big Five consultancy opted to disband.

Libert says that the traditional "time and materials" revenue model may soon become extinct, because it does not provide for the investment capital required for research and development, a component now expected to make IBM a chief innovator within the consulting sector.
 "If you're a private partnership and you're distributing all of your earnings every year to your partners, you have no capital left over to invest in intellectual property. Now, if you are a publicly traded company and you have big price-to-earnings ratios, because investors like the fact that you have protectable assets that produce recurring revenue streams, you can crush those firms that have no R&D," says Libert, who believes that the failure of Arthur Andersen, as well as other consultancies, to step up their research investments has put them at a growing disadvantage. "The question becomes: If you're a company that sells time, can you today create a valuable business for any set of investors?" explains Libert, who today questions whether firms trading at only ten times earnings can be deemed valuable, especially when S&P companies are routinely trading at 25 times earnings or higher.

So, how much revenue can a consulting firm net from a consultant? Probably a few hundred bucks an hour at best. Given the cost of finding, retaining, and maintaining the kind of consultants who can consistently deliver hour after hour, week after week, this is not a formula for big profits. But R&D, especially software R&D, appears to be. Software R&D can give the organization tools to boost the productivity of its consultants, attract clients who will pay a premium for access to that R&D resource, and turn out innovations that can be converted into profitable commercial products and a stream of new consulting engagements. Today, Alfred Spector, IBM vice president for services and software research, commands a team of 1,300. The services-oriented research efforts are focusing on four areas: (1) new and improved methodologies for doing consulting work, such as methodologies for risk management or strategic decision-making; (2) labor-saving tools and technologies for the consultant; (3) new products, and (4) face-to-face interaction with customers.

For example, a new strategic capability network helps the IBM consultant work with a top executive to visually connect and diagram resources, such as people and brands, to better achieve a strategic objective. Another tool helps IBM services deliver better maintenance. "It uses knowledge about failures to guide people through complex decision trees. It optimizes service while minimizing expenses," notes Spector. It is being applied to the management of complex Web sites hosted by IBM and can save the company millions of dollars.
"We cannot trump IBM's mission here," says KPMG Consulting CEO Rand Blazer. "But we don't feel cut off. Ultimately, that R&D has to match up with a real business need, and we believe we're the custodians of that real business need," he says. Blazer believes that his firm's access to R&D within Cisco Systems, as well as its other technology partners, will help undermine any advantage IBM Global Services may enjoy.

The Urge to Partner

One of the more recent alliances purportedly designed to counter the maturing R&D capabilities of IBM Global Services is between Sun Microsystems, Inc., and IT services giant Electronic Data Systems Corp. To better amplify the growing importance of its EDS relationship, Barry McNealy, the brother of Sun CEO Scott McNealy, is now allegedly tasked with making it the technology company's most tightly integrated services alliance.
"Our teams are now engaged at the design level," says McNealy, who is today in-charge of the EDS account for Sun. Meanwhile, EDS is currently beefing up its own efforts to build intellectual capital through its EDS Fellows Program. The firm has already inducted 20 employees, who have routinely contributed to the firm's innovation resources.

Still, at the integrators' recent analyst gathering, few EDS executives could match the spirited bluster of Scott's brother, especially when it came time to speak about the virtues of shared research and development.
"We've taken the alliance model to a whole new level. We've always had relationships, but it's never been like what we now have with EDS, which I describe as 'grade A–trusted mode,'" boasted McNealy, whose posturing may suggest that Global Services' maturing R&D alignment poses a threat to more than just services companies.
"I wish them good luck," says Horn, when asked about those services rivals now seeking to leverage their technology partners' research. "Having built a lot of these partnerships, I can say that there is nothing like having an internal customer when it comes to building channels for innovation." Horn emphasizes that the construction of such channels involves a long-term process that could easily be corrupted by inconsistent commitment or management priorities.

IBM is Not Alone

While the escalation of innovation flowing into Global Services will likely help IBM become a defining force in the evolution of the profession's revenue model, Big Blue is not alone. Through a string of joint ventures, Accenture has significantly augmented its research offerings in an attempt to enhance its own revenue model. Nonetheless, Accenture Technology Labs still pales in comparison to IBM's R&D investment, a few hundred people worldwide versus IBM's thousands. The focus of Accenture R&D is on information technology. "We take leading-edge technology and put it to business use," explains Lucian Hughes, Accenture's director of research.

Accenture's preferred approach is to develop a prototype of some new technology and invite executives in to view it. "This sparks a conversation," Hughes notes, conversations that usually lead to engagements. For example, an R&D prototype dubbed Music World that took advantage of the Internet directly led to what the firm describes as a substantial amount of Internet work. Many business executives didn't latch onto the implications of the Internet for business until they actually saw an Accenture e-business prototype. Accenture researchers also will get directly involved in calls to prospects early in the sales cycle.

Meanwhile, another consultancy well known for its R&D savvy is Arthur D. Little (ADL). "Clients come to us because they feel they are getting access to cutting-edge technology," says Mildred Hastbacka, associate director of ADL's technology and innovation business group.
Or, clients will come to ADL with intellectual property they have been keeping to themselves. "Now they want to monetize their intellectual property, and they come to us because they know we understand their technology and the market for that technology," Hastbacka continues.
But ADL isn't your typical consulting firm. For one thing, the company does very little with information technology — although that is changing. "Software-enabled services is emerging as a hot area," notes Hastbacka. To that end, the consulting firm is working with a client to develop software for managing intellectual property (IP), a product with wide market potential. "You might think of it as the Microsoft Office for the IP world," she notes.
While ADL's R&D is strong, the performance of its management consulting business has been problematic at best, leading to a major shake-up last year. Conventional consulting, however, is clearly not where the future lies for ADL or other leading consulting firms.
"We see a big shift in the industry going forward," declares ADL's Christina Lampe-Onnerud, director. That shift, she believes, is toward R&D.
It's a shift no consultancy is better positioned to leverage than IBM Global Services. But the channeling of innovation into Global Services is hardly a slam dunk. Today, Horn says that IBM still needs to iron out some of its newest channel's stubborn wrinkles.
"We don't yet do it in the consistent way that we do it within the product divisions," he confesses — which means that wrinkles are now the top item on McQueeney's laundry list.

Sidebar: Research Innovations

Asset Management:
IBM Research is now helping Global Services fine-tune methodologies for funding the future growth of intellectual property assets and is working jointly with the services management to better incorporate "value pricing" into its revenue model.
 
Knowledge Management:
Having completed extensive research involving knowledge-based portals and data integration, Global Services is now poised to reap operational efficiencies for itself as well as its clients.

Autonomic Computing:
Technologies that help computer networks adapt to meet changing demand and subsequently reduce the costs of managing large datacenters — an innovation that could potentially offer Global Services a substantial cost advantage over its outsourcing rivals.

Practice-Building:
Software product designed to help companies integrate data from various computing applications is expected to drive the formation of new service offerings within Global Services, helping it establish new practices within the data integration arena.

Innovative Institutes:
A powerful concept for closing sizable business deals, IBM Research is now partnering with a number of large Global Services clients to form joint research institutes and build innovative applications.

IBM's Research Chief Says Consulting Model Needs to Change to Accomodate Assets

Few IBM senior vice presidents are, perhaps, more visible these days across the giant technology company's many product divisions than Paul Horn. As the executive tasked with running IBM's vast research organization, Horn is now responsible for not only overseeing the creation of innovation, but also for helping it flow into IBM's various divisions. Horn recently talked to Consulting about how IBM's services and consulting arm is quickly emerging as a primary test bed for innovation.

CM: It's been reported that IBM has become more aggressive lately in leveraging its own innovation. Is this accurate?
Horn: One of the more significant things that has changed within IBM Research over the last few years is that we are much more focused on channels for our innovation. We first built the conduit for the flow of innovation into our product divisions and I think it's beginning to pay off rather nicely, and so we now see Global Services as this huge opportunity.

CM: How is Global Services changing to accommodate innovation from IBM Research?
Horn: Global Services cannot grow and the whole services industry cannot grow strictly based on people. You look at the size of Global Services or any big services organization and you just assume it is going to have some significant compound growth. You can just extrapolate out a few years and you have an absurdly large number of people, but that's the only way you're going to differentiate yourself with growth. So what we now have from Global Services is a huge pull for innovation that will allow them to provide higher value and become more value-priced and more an asset channel for the market rather than just an organization that sells time and enjoys a little added margin on top.

CM: How are you measuring your efforts to channel innovation into Global Services?
Horn: We go to the general managers within Global Services and have the heads of the large practices evaluate us. We ask: Are we helping them set their strategic direction? Are we providing them with underlying technologies that are important? Do we have the right people relationships? We measure all these and we pay ourselves according to the type of feedback we get. So if we get dinged by our partners for not being good partners, we ding our pay.

CM: Is Global Services today capable of growing assets?
Horn: I think we've started down the path. Now, that doesn't mean we don't have more to do in terms of value-pricing and how you manage and house and evolve assets. This is a concept used widely in our product divisions, where a division has a software asset and they expand it. Look at Websphere and the technology that's been added to it. Every year it gets more function, and it gets more advanced and that's a model that we're working to refine with Global Services, and we're working to determine how they price what they get for it.

CM: When you bring an asset to Global Services, what are we normally speaking of? What form does it exist in?
Horn: What I tend to be thinking of is a methodology or a piece of software which allows Global Services to do something cheaper, or do what no other consulting firm can do or provide. It could be anything, like a tool that allows you to analyze network performance. Now, let's imagine I have such a tool and went out to Global Services customers and asked if this tool was of value. The answer would likely be "Yes, it's of value." But then the customer asks whether it will grow to accommodate more types of networks, and whether it will gain more advanced functions over time.

CM: So you need to ensure that Global Services has the mechanisms to grow the asset?
Horn: Yes. Research can't really own the asset — we can create something, but over time the asset needs to be housed within an organization with all the qualification capabilities that allow it to become fully developed, mature software. We can do this now, but we need to sharpen up our methodology for how we do it, because we don't do it in the consistent way that we do it in product divisions.

CM: Do people from research and Global Services work in tandem?
Horn: We're part of their teams now. My people are participants along with general managers, and the way these joint projects work, there will be an executive in research who is responsible for research resources and they work towards the problems defined by Global Services. So there are a handful of executives who have responsibility on different levels, and they drive the internal programs within our organization.