IBM 1999 Annual Report Download - page 92

notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Integrated Technology Services offer customers a single IT
partner to manage multi-vendor IT systems’ complexity in today’s
e-business environment including traditional offerings like
Product Support, Business Recovery Services, Site and
Connectivity Services, and Systems Management and Networking
Services. Learning Services supports the three primary lines
of business and help customers design, develop and deploy
curricula to educate their employees. The Global Services
segment is uniquely suited to integrate the full range of the
company’s and key industry participants’ capabilities, including
hardware, software, services and research.
The Software segment delivers operating systems for the com-
pany’s servers and e-business enabling software (middleware)
for IBM and non-IBM platforms. The company has reorganized
its e-business offerings to align with key customer opportunity
areas —transformation and integration, leveraging information,
organizational effectiveness and managing technology. In
addition to its own development, product and marketing effort,
the segment supports more than 35,000 Independent Software
Vendors to ensure that the company’s software and hardware
offerings are included in those partners’ solutions.
The Global Financing segment is the world’s largest provider of
financing services for information technology (IT). The segment
provides lease and loan financing that enables the company’s
customers to acquire complete IT and e-business solutions—
hardware, software and services—provided by the company
and its business partners. Special focus is placed on the financ-
ing needs of small and medium businesses, and the emerging
financing needs of NetGen companies. Global Financing, as a
reliable source of capital for the distribution channel, also
provides the company’s business partners with customized
commercial financing for inventory, accounts receivable, term
loans and acquisitions, helping them manage their cash flow,
invest in infrastructure and grow their business.
The Enterprise Investments segment provides industry specific
information technology solutions, supporting the hardware,
software and services segments of the company. The segment
develops unique products designed to meet specific market-
place requirements and to complement the company’s overall
portfolio of products.
Segment revenue and pre-tax income include transactions
between the segments that are intended to reflect an arm’s-
length transfer at the best price available for comparable external
customers. Specifically, semiconductors and disk drives are
sourced internally from the Technology segment for use in the
manufacture of the Server segment and Personal Systems
segment products. Technology, hardware and software that are
used by the Global Services segment in outsourcing engage-
ments are sourced internally from the Technology, Server,
Personal Systems and Software segments. For the internal use
of information technology services, the Global Services seg-
ment recovers cost as well as a reasonable fee reflecting the
arm’s-length value of providing the services. The Global Services
segment enters into arm’s-length leases at prices equivalent to
market rates with the Global Financing segment to facilitate the
acquisition of equipment used in outsourcing engagements.
All internal transaction prices are reviewed and reset annually
if appropriate.
The company extensively uses shared-staff concepts to realize
economies of scale and efficient use of resources. Thus, a sig-
nificant amount of expense is shared by all of the company’s
segments. This expense represents sales coverage, marketing
and support functions such as Accounting, Treasury, Procure-
ment, Legal, Human Resources, and Billing and Collections.
Where practical, shared expenses are allocated based on
measurable drivers of expense; e.g., Human Resources costs
are allocated on headcount while account coverage expenses
are allocated on a revenue mix that reflects the company’s
sales commission plan. When a clear and measurable driver
cannot be identified, shared expenses are allocated on a finan-
cial basis that is consistent with the company’s management
system; e.g., image advertising is allocated based on the gross
profit of the segments. The unallocated corporate expenses
arising from certain acquisitions, indirect infrastructure reduc-
tions, certain intellectual property income and currency
exchange gains and losses are recorded in net income but are
not allocated to the segments.
The following tables reflect the results of the segments consis-
tent with the company’s management system. These results are
not necessarily a depiction that is in conformity with generally
accepted accounting principles; e.g., employee retirement plan
costs are developed using actuarial assumptions on a country-
by-country basis and allocated to the segments on headcount.
A different result could be arrived at for any segment using
actuarial assumptions that are unique to the segment. Perform-
ance measurement is based on income before income taxes
(pre-tax income). These results are used, in part, by management,
both in evaluating the performance of, and in allocating resources
to, each of the segments.
90