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IBM expanding its footprint in Risk Management

Written by: Carlos SerranoPublished on: Sep 7, 2011No comments

Well, it feels like we should devote a complete section of this blog to IBM and its acquisitions. Over $14 billion in acquisitions in the last 5 years, many of those in technologies and expertise in areas squarely in or related to the field of Decision Management.

Over the past few days, IBM has announced its acquisition of UK-based I2, and of Canada-based Algorithmics. The official press releases – of course, similar in form – provide some insight on what motivated IBM to invest in these acquisitions: “accelerate big data analytics to transform big cities” for I2, and “accelerate business analytics into financial risk management” for Algorithmics. The terms of these acquisitions – not disclosed for I2 but believed to be in the $500M range, and in the $380M range for Algorithmics – are not enough to make them mega deals, but, they position IBM squarely as a major provider of risk management solutions for multiple industries, but in particular financial services and  defense/security.

Both companies leverage data, and increasingly what is now called big data with its volume + variety + complexity + velocity challenge, through sophisticated analytics to support automated and human decision making by assessing and qualifying risk.

A lot of noise has been made that these two acquisitions increase the presence of IBM in the big data analytics world. While that is correct at the technology level, I believe that they also do something else: they contribute to make IBM a key provider of core enterprise risk management solutions.

I2 is not a well known company outside the  security, fraud and crime risk management spaces. Of course, it’s never helped that a much better supply chain management company has the same name… I2’s products allow organizations to track vasts amounts of data, and organize it, search through it in order to identify patterns that may be indicative of terrorist, criminal or fraudulent behavior. A number of techniques are used, but a big claim to fame for I2 is its leading position in the link analysis space. Link analysis, also sometimes referred to as network analysis, and in a particular form made popular by social network analysis, identifies relevant relationships between entities, qualifies them (for example in terms of “betweenness”, “closeness”, etc) and allows to navigate them through multiple dimensions, including time, leading to the recognition of a pattern of entities and non obvious relationships indicative of potential issues. The analysis is carried out on large sets of seemingly disparate data:  transaction data, structured and semi-structured documents, phone records, email trails, IP data, etc. Its products, for example Analyst’s Notebook, have receive great reviews.

I2 brings to the table not just the risk management products and expertise that has made the company famous in that space, but also a solid expertise in the management of big data. IBM has made acquisitions in this space – Netezza a year ago, in September 2010 and NISC a little bit earlier  –  and I2 brings to the company complementary solutions and expertise.

Algorithmics is also a well known company in its space which is not well known outside of it. It specializes in the measurement and management of the risk of financial investments. Up to now it has been part of the French holding company Fimalac which happens to also own the Fitch Ratings agency which issues credit ratings to both commercial companies and governments – I would expect them to use the capabilities of Algorithmics. The company was created in 1989, and its initial charter – to create solutions to characterize and manage the financial risk of investments – addressed some of the risk issues faced during the 1987 stock market crash. We are not going to elaborate on why the similar risk management and rating issues remain at the forefront of preoccupations in the financial and political worlds…

Risk management is a fairly fragmented space, with specialized solutions focusing on different types of risks. In the short term, it is possible that IBM will not immediately compete with some of its partners in the risk management space, such as  Fair Isaac (disclosure: I used to work there). However, risk management is becoming much more of a global enterprise affair than it used to be – the sources of risk are becoming multi-faceted, delivered through multiple channels, touching multiple processes at once. Customers are looking for, and assembling themselves, enterprise risk management solutions.  This trend makes IBM’s acquisitions in this space well thought out to position the company at the core of these solutions, and I am certain that IBM will displace or acquire niche risk management vendors as its footprint in the space continues to grow. It should be noted that, like for big data, the acquisitions in risk management areas have been quite frequent for (Ever) Big(ger) Blue: NISC already mentioned earlier in January 2010, OpenPages in September 2010, PSS Systems in October 2010, and now these two.

Another important aspect is that a lot of the technology and solutions applied to the management of risk are also applicable to the optimization of processes and the increase of competitiveness. In a world where regulations will increase to reign in excesses, the search for incremental competitiveness will be combined with the compliance to regulations and the management of risk in comprehensive solutions. Decision Management already plays and will continue to play a central role there, leveraging data management, analytics, business rules, optimization and case management technologies in concert.

I do expect IBM to continue completing its portfolio in big data, decision management and risk management. IBM clearly has its acquisition machine in control – and it is paying off. For example, the investments in analytics have enabled its business analytics software and services unit to see seven consecutive quarters of growth, with a growth of 20% just in the first half of 2011. IBM’s goal is to go from $10 billion in annual sales now to $16 billion by 2015. A significant increase, but one that it is giving itself the means to achieve.

I have a little list of companies I would not be surprised to see becoming part of all this (although I missed one: Autonomy, bought by HP not long ago, was one I expected to see acquired by IBM…)

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