How India is changing IBM

A new paradigm is emerging in which a multinational such as IBM regards India as not just a source of cheap labour but also a place to create cutting edge R&D.

by The Economist
Last Updated: 23 Jul 2013

It also reckons that the India market will become more and more important. Thus Big Blue committed $6 billion of its cash to invest in its Indian operations in the coming three years. It is also an admission that companies in the IT services sector such as Infosys and Wipro are giving the western giants from Accenture to IBM a run for their money and an endorsement of the Indian outsourcing model.

Emerging markets are not only changing how multinationals think about R&D and market positioning; they are also changing the organisational logic of companies such as IBM. The latter for instance has financing back offices in Rio de Janeiro and can shift data-centre operations around the world to compensate for any problems in one single operation.

IBM has been successful in showing that an outsider can run an Indian call centre operation - IBM's is in Daksh - on the Indian low-cost model. It has done so in part by allowing the 20,000 staff to run the operation as they would want to, rather than impose an IBM methodology onto it.

Looking ahead, there are several challenges for IBM. One is that it has to contend with the decline in outsourcing mega-deals worth more than $1 billion, as clients are tending to prefer to break up the work they outsource in smaller bits. This is good for IBM's smaller rivals, and bad for IBM.

Another challenge comes from the fact that the smaller tigers such as Infosys are competing more strongly in the area of sophisticated, high-value consultancy work, challenging IBM's dominance in areas such as 'business transformation', in which it re-engineers and manages a company's whole operations.

Companies such as HCL have also started to worry IBM by designing a strategy of aiming to win $300-700 million contracts from the next 800 biggest firms, rather than go for the top 200 firms in IBM's pool.

As well as hardware and services, IBM has a big stake in selling high-value software. IBM has built a big business in software, now accounting for 40% of its revenue. The growth is in 'middleware' - software that helps firms' different software packages run together. The question is to what extent IBM can continue to innovate in this area. There has been speculation that it will try to acquire one of the Indian IT firms to help it do so.

The company is betting on being able to find a 'synergy' between hardware, services and software. The jury is out as to whether its strategy will work or not.

Hungry tiger, dancing elephant, The Economist, 7th April 2007
Review by Morice Mendoza

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