TRENDS EXECUTIVE SUMMARY

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1 TRENDS IBM Delivers Innovation On Demand ODIS Transforms IBM Inventions Into Client-Valued Innovation Network Services by Navi Radjou with Christine Ferrusi Ross and Ian Schuler EXECUTIVE SUMMARY IBM s On Demand Innovation Services (ODIS) a collaborative effort between IBM Research and Business Consulting Services (BCS) helps IBM clients innovate faster and better so they can become process-efficient and maximize the profitability of their new products, services, and even business models. By delivering client-valued innovation services, ODIS is steering IBM away from the lowmargin IT business and transforming Big Blue into a strategic Innovation Network services provider. RESEARCH CATALYST Clients asked which services providers can help them innovate. 1 This document outlines the innovation service capabilities of one provider: IBM. IBM S ON DEMAND INNOVATION SERVICES HELP CLIENTS INNOVATE FASTER AND BETTER In IBM s 2004 annual report, in which innovation is mentioned 28 times, CEO Sam Palmisano states that IBM is all about innovation. Palmisano believes that IBM s innovative capacity does not lie in the inventions cranked out by its famed R&D labs with a nearly $6 billion annual budget but in transforming IBM s inventions into client-valued innovations. These innovations are no longer just new hardware or software, but also services since services now account for more than 50% of IBM s revenues. In a move to connect IBM s ivory-towered labs directly with IBM s service clients, Palmisano created On Demand Innovation Services an entity that draws resources from a team of up to 3,000 experts within IBM Research who work closely with clients to devise tailored solutions that address clients complex business problems. To better understand ODIS business model, we recently spoke with Peggy Kennelly, vice president, ODIS. We learned that ODIS is a collaborative partnership between two IBM groups: IBM Research and Business Consulting Services. ODIS is typically brought into a client engagement by BCS partners when they need extra brainpower to solve a client s complex business issue. After examining the client s problem, ODIS researchers work closely with BCS consultants to devise a tailored solution by either: Transforming IBM s existing inventions... Rather than reinvent the wheel, ODIS researchers begin by reviewing existing research skills, assets, and patents to find a possible solution for the client problem. IBM s vast patent portfolio alone added 29,021 new patents in the past 12 years, ranging from hardware design to software algorithms to business process workflows. 2 If a resolution Headquarters Forrester Research, Inc., 400 Technology Square, Cambridge, MA USA Tel: / Fax: /

2 Trends IBM Delivers Innovation On Demand 2 can be derived from the existing pool of research-related resources, ODIS scientists will work with BCS consultants to transform the invention(s) into a solution adapted to the client s unique business environment. According to Kennelly, participating in such transformational activities gives IBM researchers a unique opportunity to test their ideas in the real world.... or inventing new technologies from the ground up. In some exceptional cases, when no prior art exists, ODIS researchers will go back to the drawing board and create new technologies from scratch and collaborate with BCS to transform them into a custom solution. ODIS Helps Clients Drive Competitiveness By Accelerating Their Invention-To-Innovation Cycles Kennelly told us that ODIS clients are global and cut across industries and company sizes. But they all want to harness ODIS brainpower to achieve competitive differentiation in their markets. IBM clients are eager to combine ODIS researchers technology and domain expertise with BCS vertical and regional knowledge to develop: 1. Innovative products that outsmart competition. ODIS researchers help IBM s manufacturing clients which are facing stiff competition from low-cost countries differentiate their capabilities in global markets through innovative new products. Client success: Large Asian consumer electronics manufacturer. This up-and-coming Asian consumer electronics vendor rapidly gained market share over larger incumbents using aggressive pricing and a copy-and-improve product innovation strategy. But as its consumers became more quality-conscious and less brand-loyal, the firm recognized the need for launching breakthrough product innovations. It hired ODIS to re-engineer its R&D and operational processes which were initially designed to support incremental innovation. The result? The client is now able to more rapidly design and launch breakthrough products. 2. Innovative services that boost customer loyalty. IBM s clients in consumer-facing industries like healthcare and transportation use ODIS capabilities to transform their customer service. Client success: BostonCoach. BostonCoach a midsize limousine operator struggled to manually balance supply and demand for each service city. It asked ODIS for ways to boost utilization of its drivers and curb its refusal rate. IBM Research had developed mathematical methods for scheduling airline crew members. Drawing on that experience, ODIS researchers invented a Fleet Optimization System (FOS) using optimization algorithms and wireless technologies. The FOS which BCS integrated into BostonCoach s existing applications and infrastructure automatically and optimally assigns drivers and limos to reservation requests. The result? BostonCoach increased its sales 10%, improved productivity by 20%, and now maintains a 99% on-time pickup rating.

3 Trends IBM Delivers Innovation On Demand 3 3. Innovative processes that increase efficiency and agility. In addition to vice presidents of operations who are drawn to ODIS given its very strong supply chain process expertise ODIS helped invigorate IBM s internal supply chain Kennelly told us that CIOs are hiring processsavvy ODIS scientists to re-engineer their IT management processes. Client success: Bank SinoPac. The IT organization of Taiwan-based commercial bank SinoPac needed a better way to accelerate its banking application development and deployment process. Researchers in IBM s China Research Lab analyzed and re-engineered SinoPac s application development process by migrating it to a model-driven business integration platform. This platform makes it easier for SinoPac s distributed IT teams to develop software collaboratively and tightly links the business and IT view increasing the cost-effectiveness, speed, and agility of SinoPac s application process. The result? In 2003, SinoPac was able to develop and launch its CrossPacific Account (CPA) system a state-of-the-art cash management platform for SMBs operating throughout Asia within months Innovative business models that sustain top-line growth. Worldwide, more C-level execs identify new business models as a greater source of competitive advantage than new products and services, according to a survey by The Economist. 4 Firms are tapping ODIS strong financial modeling and strategy simulation capabilities to review and optimize their business models. Client success: Food wholesaler. To meet its five-year growth and profitability targets, a national food wholesaler needed new strategies for pricing, account management, and customer profitability. After conducting a thorough review of the wholesaler s current operations and its historical sales data, ODIS researchers recommended new revenue management strategies that would target underserved segments, optimize channel selection, and improve pricing decisions. When implemented, ODIS recommendations on pricing and customer segmentation are expected to yield the client $100 million and more in revenue improvement and boost its profitability. ODIS TRANSFORMS IBM INTO AN INNOVATION NETWORK SERVICES PROVIDER More than 100 IBM clients have benefited from ODIS since its inception two years ago. Even though ODIS received an initial cash infusion of $1 billion, it s becoming more self-funding bringing in more than $300 million in revenues for IBM in 2004 alone. 5 ODIS is turning Palmisano s vision of IBM delivering client-valued innovations into reality. ODIS timing is perfect. Increasingly, firms realize they can t innovate by relying on the old do-it-all-yourself model. Growth-seeking firms are migrating to Innovation Networks a collaborative market ecosystem that balances global innovation demand with worldwide talent supply. 6 In this fluid environment, firms no longer need to invent to innovate. Rather they consume externally available innovation services from vendors like IBM. By enabling IBM s evolution to an Innovation Network service provider, ODIS creates win-win opportunities for IBM and its clients as:

4 Trends IBM Delivers Innovation On Demand 4 Clients maximize the profitability of their new products, services, and business models. Clients complement their internal innovation capabilities thus conserving resources and time with IBM s 3,000 experienced scientists who can help them rapidly bring to market a new product or service or innovate their business model. Because ODIS inventors tag-team with BCS transformation consultants, clients who engage the IBM researchers are reassured that ODIS brainy inventions are pragmatic and tailored to their unique innovation requirements. IBM evolves from a low-margin IT vendor to high-end business transformation service provider. IBM s sales of its PC business to Chinese transformer Lenovo and its aggressive adoption of open source software standards is evidence to IBM s ambition to shed low-margin hardware and software businesses to free resources that can be redeployed for delivery of highend services. Ginni Rometty, head of BCS, estimates that the market for these and other such business performance transformation services (BPTS) is worth as much as $500 billion. 7 Kennelly s goal is to each year help BCS hatch two new business transformation practices which exploit ODIS client-tested technology inventions. In 2005, ODIS helped BCS launch WebFountain a data analytics service and Center for Business Optimization which uses sophisticated supply chain modeling tools to transform and optimize clients operational processes. Additional practices on the drawing board include an Innovation Management practice that will help clients improve their own innovation processes. 8 ENDNOTES 1 Companies, particularly those that focus on growth, are starting to focus on innovation. Evidence includes the high percentage of IT budgets shifting from ongoing operations to new investments. Smart firms will seek out third parties to bring in new ideas and validate users predispositions rather than trying to go it alone. They ll turn to consultants that have made investments in technologies and business ideas to address strategy, process, and product innovation. See the December 13, 2004, Trends Innovation-Hungry Firms Need Consultants. 2 For each of the past 12 years (1993 to 2004), IBM has been granted more US patents than any other company. During that period, IBM received 29,021 US patents. In 2004, IBM received 3,248 US patents. Source: 3 Efficient business process integration allows Bank SinoPac to reduce labor costs and improve speed-tomarket for new products. Source: 4 Business model innovation trumps new products and service innovation, according to a recent article by The Economist. Source: 5 ODIS generated more than $300 million in revenues for IBM in 2004, as stated in the MIT Technology Review. The $300M revenue figure comprises incremental additional signings that BCS got as a direct result of having ODIS researchers contribute to BCS consulting engagements. Source: technologyreview.com/articles/05/05/issue/brief_ibm.1.asp.

5 Trends IBM Delivers Innovation On Demand 5 6 As firms look to serve markets beyond national borders and source ideas across national boundaries, they are ditching their rigid, self-centered innovation approach in favor of a fluid market ecosystem called Innovation Networks. This dynamic market structure matches global demand for innovation with worldwide supply. Forward-thinking companies have begun to map internal and external resources to the four value-delivery services in the Innovation Networks model: Inventor, Transformer, Broker, and Financier. See the June 17, 2004, Forrester Big Idea Innovation Networks. 7 Ginni Rometty, managing partner at IBM-BCS, told InformationWeek magazine that the BPTS market was worth half a trillion dollars. Source: ODIS new Innovation Management micro-practice is aimed at helping IBM clients institutionalize innovation management best practices. Source: board.07.html. Forrester is an independent technology research company that provides pragmatic and forward-thinking advice about technology s impact on business. Business, marketing, and IT professionals worldwide collaborate with Forrester to align their technology investments with their business goals. Established in 1983, Forrester is headquartered in Cambridge, Mass. 2005, Forrester Research, Inc. All rights reserved. Forrester, Forrester Oval Program, Forrester Wave, WholeView 2, Technographics, and TechRankings are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please resourcecenter@forrester.com