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Research at a Crossroads
Horn and the rest of IBM Research find themselves in the midst of a somewhat awkward transition. While products that the company makes have, as a whole, moved across the hardware-software-­services continuum, the research that underlies them hasn’t quite kept pace. Thus IBM Research appears, in certain instances, as if it’s attempting to answer the wrong questions.

Its Zürich laboratory, for instance, is close to completing work on Millipede, a nanomechanical device that can store data at a density 20 times higher than that of magnetic storage. But if Millipede proves commercially viable, it probably won’t be built by IBM, because IBM sold its storage division in 2002 as part of an effort to shed low-margin businesses. This February, it sold its once vaunted personal-computer business for the same reason. At the time of the sale, services already constituted slightly less than half of IBM’s $96 billion in annual revenues. Now that the hefty—$12 billion—but often unprofitable PC business is gone, services will likely check in at closer to two-thirds of revenues.

Horn’s challenge, then, has been to take a $6 billion research organization dedicated to work that advances tech­nology products and get it to do work that benefits service businesses. IBM is thus in the process of answering an important question for all technology companies: can corporations perform useful research in the services arena?

At the very least, say many observers, they’ll have to try. Roland Rust is a sometime consultant to IBM and director of the Center for Excellence in Service at the University of Maryland’s Robert H. Smith School of Business, which is partnered with the company. “It’s a no-brainer,” Rust says, that as the economy in general shifts away from goods, companies will need to pursue services research. He notes that even General Electric, an industrial giant, now thinks of itself as a services company. And he believes that IBM’s approach to services research will ripple through the rest of the industrial world, both because it has a highly regarded research lab and because it has made the hard transition from being primarily a goods company to being pri­marily a services company.

Henry Chesbrough, executive director of the Center for Open Innovation at the University of California, Berkeley’s Haas School of Business, is also unsurprised that IBM is shaking things up. He contends that the academic field of computer science exists in part thanks to IBM’s ­insistence that it wasn’t something that belonged to the physics, engineering, or mathematics departments. Chesbrough thinks IBM may help services in the same way, by putting its corporate stamp on the idea that services research should involve operations, marketing, and supply chain management. “Left to our own devices, we’ll remain in our silos,” Chesbrough says. “I’m excited about it because they’re taking a fresh look at a very old problem, and they’re among the very first to do something about it.”

But being among the first to do something is not necessarily the same as doing it quickly. “There was always a feeling we had to do something in services, as soon as we’d had a services business,” Horn explains. But the company had problems determining just what it should do. IBM ­Research had pursued formal studies of services projects, and it had even developed corporate strategies, such as the ­autonomic-computing initiative Horn unveiled in 2001, that involved elements of the service business. But these projects were geared toward physical products, not service products.

Then everything changed. IBM’s tentative approach to supporting services ended in July 2002, when it announced that it was planning to buy PricewaterhouseCoopers Consulting. By the end of 2003, the two companies’ first full year of merged operation, close to half of IBM’s revenues were coming from services. In contrast, services accounted for less than 15 percent of R&D spending. “So did that mean Lou [Gerstner, then the CEO] could say, ‘Do I need only half the R&D spending?’” Horn recalls wondering. “Those things get you thinking.”

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