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Visitors entering the T. J. Watson Research Center in Yorktown Heights, NY, are greeted by glass cases displaying historical calculating machines, from the abacus to Leon Bolle’s multiplier. The objects do honor to IBM’s history. They also serve as reminders to the people who work here that IBM’s products today are not at all what they used to be.

IBM’s track record in corporate research is almost unparalleled. The company routinely nabs the greatest number of U.S. patents in a given year. Its researchers have won two Nobel Prizes in physics. Its laboratories invented magnetic storage, the first formalized computer language (Fortran), fractals, the relational database, and the scanning tunneling microscope. If quantum computers ever do arrive, it will be in large part because of developments at IBM Research.

“There is no product in the IBM company that does not start in research, with minor exceptions,” says Paul Horn, a solid-state physicist who has run IBM ­Research since 1996.

But while Horn is proud of IBM’s achievements, he believes that the company needs to change the way it thinks about research, for the simple reason that its product mix keeps shifting toward the ethereal. That started with software. Once seen as a mere hardware accessory, software grew in importance after the 1956 consent decree between IBM and the U.S. government, which created the market for packaged software. For decades thereafter, IBM sold more software than any other company (in 2004, its software sales totaled $15 billion, about 16 percent of its revenues). But although software can’t be taken apart on a lab bench, the role that R&D can play in its development has always been clear to researchers at IBM. Computer languages, the relational database, middleware, security software—they all met obvious operational needs. But IBM’s most recent category of product—services—has more than a few of its engi­neers scratching their heads.

Speaking about IBM Research, Horn says, “If we were to disappear, there’d be a sudden stop in our products side. I can’t make that statement about services.”

But what, exactly, are services? Within IBM, the word is used in two ways. First, “services” is one of the company’s three broad product categories (the other two being physical products and software). Most pure services are sold by IBM’s 180,000 consultants and range from wholesale IT outsourcing to training, ­human-capital management, and the On Demand Innovation Services effort, a broad (that is, vague) effort to make widely disparate systems communicate more effectively, and in real time. These services don’t have profit margins as high as those of IBM’s proprietary hardware and software, but service sales often follow product sales (and sometimes drive more product sales).

The term “services” is also used by people at IBM to mean any work that helps improve a product or a process. The product could be a piece of hardware or software; the process could be the way consultants present data to clients. But whether services are thought of as discrete products or product enhancers, IBM sees them as critical to its future.

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