IBM Viewpoint: Understanding BPTS: Engineering & Technology Services A New Model for Creating Value in a Commoditizing World.

ARMONK, N.Y. -- Innovation has become the defining management challenge of our times. Knowledge is flowing through the global economy at a quickening pace, diffusing technology and know-how instantly. Low-cost global competitors are springing up, challenging existing business models with cheap, high-quality goods and services. As choice and competition proliferate, product development and life cycles continue to shorten, turning goods and services into commodities with bewildering speed.

At the same time, the ways in which innovation occurs are changing. Closed and proprietary innovation systems are giving way to open, flat and collaborative innovation networks. In a growing number of fields and industries, companies are discovering they can innovate more quickly and with more responsiveness to market demand by harnessing resources (partners, suppliers, customers and the public) that lie outside as well as inside the firm. Increasingly, businesses are speeding up innovation by building communities of common interest and purpose around shared technology platforms and ways of doing business.

The consequences of these changes are clear. More and more companies will seek trusted outside partners to help them innovate. To meet this growing demand, IBM has created a new and important class of services, called Engineering & Technology Services.

IBM: AN INNOVATION PARTNER

Engineering & Technology Services (E&TS) turns the internal expertise of IBM's engineers and technical professionals outwards to help its clients innovate. These engineers and technicians work with IBM's clients to rework their approach to research and development, create new products and services, bring those products to market faster and cheaper and - ultimately - create opportunities for growth.

Since its creation in October 2002, E&TS has grown from a small group of engineers involved in one-off assignments to a 1,300-strong practice, with clients in all industries, from financial services to healthcare, consumer goods, telecommunications, and microelectronics. E&TS has recorded eight consecutive quarters of double digit revenue growth. In the third quarter of 2005, E&TS achieved revenue growth of 68% over the same period in 2004, following revenue growth of 37% in the second quarter and 55% in the first quarter of 2004.

E&TS is part of a fast-growing portfolio of products and services that IBM has assembled to address a new market opportunity in business expertise. IBM calls this market opportunity Business Performance Transformation Services (BPTS). IBM estimates that the BPTS market opportunity is worth $1.6 trillion, and that IBM's addressable opportunity within this market is worth $500 billion in 2005. IBM's BPTS business grew by 45% year on year in 2004 and by over 30% year on year in the first three months of 2005.

E&TS offers IBM's clients many means to improve the way they innovate. These include the use of global design centers, where IBM engineers and clients work together side by side, access to IBM's intellectual property portfolio and the use of strategic technology transfers, where they make sense.

E&TS helps IBM strengthen and deepen its relationships with its clients. Moreover, E&TS encourages and promotes the adoption of core IBM technologies, as IBM opens its technologies to its clients for use as a basis for further innovation. This strengthens the market position of IBM's technologies and promotes the sale of IBM's products and services.

POWERING THE XBOX 360

In November 2003, IBM and Microsoft announced that the two companies had entered into a semiconductor agreement. Under this agreement, Microsoft will use licensed IBM POWER microprocessor technology for the next generation of its Xbox computer gaming consoles. In March 2005, Microsoft said that IBM was providing custom multicore technology for this next-generation console, the Xbox 360. In October 2005, IBM announced that the custom processor built for the Xbox 360 is being delivered to Microsoft less than 24 months from the original contract signing to meet the company's worldwide product launch for the 2005 holiday shopping season. IBM E&TS helped to deliver the custom chip design and worked side by side with Microsoft engineers to accelerate the development cycle. IBM's state-of-the-art semiconductor fabricator in Fishkill, New York, is helping to manufacture the innovative Xbox 360 chip.

MERCURY RISING

In June 2005, Mercury Computer Systems announced that it was working with IBM E&TS on integrating Cell microprocessor technology in breakthrough computer systems for data-intensive applications, including radar, sonar, MRI, CT and digital X-ray. IBM developed the Cell microprocessor with Toshiba and Sony (which plans many uses for the chip, including putting Cell in its next generation gaming console, the Playstation 3), and manufactures the Cell chip at its Fishkill fabricator. In October 2005, Mercury announced that, through working with E&TS, it will offer a Cell Broadband Engine-based blade server in the first quarter of 2006, targeted at customers with intense-graphic design needs. Designed with the open standards of IBM eServer BladeCenter, the Mercury blade is designed to fit into the BladeCenter chassis and complements the IBM BladeCenter ecosystem.

VALUE FOR VALEO

In May 2005 IBM and Valeo launched a joint initiative to create a new Valeo division, called the Embedded Software Business Unit. The aim of this initiative is to create low-cost, reliable and safe automotive software. Under this initiative, IBM's E&TS practice and IBM's Business Consulting Services will provide Valeo with process and methodology support to complement Valeo's automotive expertise and know-how.