Ivy Lessner
IBM delivers enviable profit margins on its services businesses: Its global technology services took in $35.1 billion in 2007, or 7% growth in constant currency, and had a pretax profit margin of 9.4%. Its global business services grew 9% to $18 billion, delivering a margin of 10.7%.
Those figures are well beyond a reported profit margin of 6% for EDS, although the comparison is not "fair," Foster said. "IBM is selling higher-end consulting, application-customization services where the margins are very good." IBM's higher-end business transformation outsourcing (BTO), which dramatically reduces costs by restructuring the way outsourced business is performed, is growing at a hefty 50%. That service is not a specialty of EDS, which focuses more on BPO, or standard outsourcing in which the services are handled overseas. "EDS is more BPO than BTO," Foster said. "To succeed in today's services market requires investment in the high end," IBM spokesman Ian Colley said in an interview. "It's no longer a labor-based proposition," he added, taking a swipe at EDS's outsourcing model. H-P may ultimately sell more middleware through EDS than otherwise, enabling it to take software market share from IBM, Foster said. H-P also will sell more hardware through EDS. "But more importantly, it will pull through software, where the real margin is," he said. Welch said the merger poses "strong competition for Accenture," the No. 1 applications integrator. In recommending equipment, Accenture, a competitor of IBM, has been more H-P-centric, perhaps preferring to steer business toward a noncompetitor. Now, H-P is also moving in on its territory.
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