As Services Slow, IBM Rediscovers Hardware and Software

Last Updated Apr 20, 2010 7:04 PM EDT

Back in the 1990s, one of the major strategic shifts in the tech industry happened at IBM (IBM). Once a bastion of tangible products -- hardware and software -- IBM switched its emphasis to services. Many companies followed: HP (HPQ) and Dell (DELL), to name two. But recent earnings reports suggest that perhaps the tide has turned back towards selling traditional products.

To get a sense of how things have begun to shift, look at this chart from IBM's latest earning report:

To say that services have become unimportant at IBM would be silly. Together, technical and business services contributed 62.3 percent of the quarter's revenue. But look at the year-over-year change: Technology services was up by 5.8 percent, while business services actually declined. And yet, systems and technology (read: hardware) was up 4.5 percent in a tough IT sales year, while software grew by more than 12 percent. Compare that to the previous quarter, when software was up year-over-year by 2.4 percent and systems and technology dropped by 4.3 percent.

Although many people pointed to Intel's recent results as proof that the tech sector is enjoying a rebound, I didn't see them that way. Critical areas like data center microprocessor sales were down. But the IBM announcement is a strong indicator that at least large enterprises have started to recover.

Meanwhile, this isn't the first indicator of a shift back toward product on the part of some the industry's key players. For example, HP's earnings announcement in February told a similar story, although its services revenue actually declined. As both of these companies have spend considerable time, effort, and money on building their services businesses, I don't think they're intentionally throttling down. Both have diversified portfolios of products and services in technology, and both are using them to react to changes in the industry. The economy may have picked up some, but companies are a long way from passing out blank checks to their IT departments. Days of throwing money at computers to solve business problems are long over, and technology must prove a payback.

At one time, large companies looked to services as a way to pull themselves out of slowdowns in hardware and software sales. Look at SAP, which kept afloat for a long time by its customers' need for support. However, these results suggest that faith in services as a mechanism to tide over technology businesses that have experienced decines in their in core product offerings may be misplaced -- and that it's still important to focus on traditional lines of business because nothing lasts forever, including corporate need for consultants.

Boomerang Image: RGBStock.com user nazreth, site standard license.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.