By Charles King, Pund-IT, Inc. November 19, 2014
Like most major IT vendors, IBM invites industry analysts to annual summits that detail its current state and how it has progressed over the past calendar year. But while there were many similarities between the Analyst Insights event IBM’s Software Group (SWG) hosted last week and those from previous years, there were also profound differences, particularly in how financial and business strategy issues were addressed.
That isn’t to say that tech industry analysts ignore finance but this year, IBM chose to frame many of its go-to-market strategies and development efforts in terms of the financial benefits they deliver to the company and its shareholders. Why is that important? For a couple of reasons.
First, IBM’s last quarterly earnings announcement was pretty dreadful by most measures, so the company used Insights to offer deeper context for its current state and future plans. Second and more importantly, the company increasingly finds itself competing and being compared with vendors whose approach to business and financial performance metrics are often radically different than its own.
That may not seem like a big deal to some folks but it is absolutely crucial in terms of the way investors and the broader market perceive a company and its core value. It’s not so much comparing apples to oranges as it is, in some cases, likening a maxed-out Ford Super Duty pick-up to a factory-equipped Dodge Omni subcompact. That’s an important point to consider, since it is unclear how sustainable business and technological innovations can really be if the organization selling them is not being operated in a sustainable way.
Kicking things off
Insights kicked off with an informal keynote by Steve Mills, the IBM SVP and group executive who leads both SWG and the Systems and Technology Group (STG), which account for about $40B of the company’s annual revenues. Mills has been with IBM since 1971, so his comments and leadership are informed by levels of historical and technological acumen that many organizations would find difficult to match.
Additionally, Mills became IBM SWG’s SVP in 2000, meaning that he has been a central figure in the company’ shift from hardware to software and software-driven innovation. In retrospect, that change in IBM’s central strategy was prescient in the extreme. Virtually all of IBM’s hardware-focused competitors (HP, EMC, Dell and even Oracle) are pursuing similar efforts with varying degrees of effectiveness. Plus, it could be argued that innovative software will be crucial to any vendor that hopes to make its mark (and more than a few bucks) in cloud computing.
Mills focused his remarks on the still-maturing markets IBM is pursuing (analytics, cloud, mobile, social and security) rather than the company’s core “franchise” businesses like traditional business applications running on its System z mainframe and Power System solutions. However, he noted that, “Just because we don’t talk about some things doesn’t mean that we don’t love them.” Franchise customers constitute about 75% of IBM’s overall revenues, but emerging markets are growing at far faster rates, deliver higher margins, and also constitute opportunities where IBM can leverage new skills and investments.
Next gen enterprise IT
Mills’ remarks were followed by overview sessions on IBM’s emerging/maturing market segments:
- Mike Rhodin, SVP of IBM’s Watson “cognitive computing” business group, offered a detailed look at the state of that business, including the progress of the Watson Cloud “freemium” offering open to developers (which is seeing up to 1,000 new sign-ups daily). IBM has committed $100M to building out the Watson ecosystem, has agreements with 3,600+ ISVs exploring Watson-based applications and has 100+ currently available apps for the Watson platform. Ten universities began offering cognitive curriculums in 2014, and IBM expects the number to grow to over 100 in 2015. IBM itself is developing three Watson-based commercial solutions: for oncology diagnoses and treatment planning, for wealth management and for meal planning (Chef Watson).
- Beth Smith, VP of Information Management, and Alastair Rennie, VP of Business Analytics, provided an overview of IBM’s “Systems of Insight” analytics offerings. This is the most mature of these businesses, partly due to IBM investing $25B+ during the past decade in related M&A and internal development efforts. Analytics is showing solid financial returns (currently on track for $10B+ in annual revenues that IBM expects will grow to a sustainable $25B+ per year), and also complements numerous other markets and efforts. According to Smith, IBM’s analytics “opportunities are infinite,” but the company is finding solid traction in several areas, including enabling profit-focused business decisions, predictive maintenance and product quality, and increasing subscriber bases. Rennie highlighted the recently announced partnership between IBM and Twitter where the company’s technologies will be used for real time analysis of social data for business customers.
- Robert LeBlanc, SVP of IBM Software and Cloud Solutions, hosted a marathon session that focused mainly on cloud and mobility issues. IBM considers and approaches cloud in a fundamentally different way than competitors like Amazon, Microsoft and Google. LeBlanc noted that Microsoft is said to be paying $1.2B to build a massive new cloud data center near Ottawa, and Google is reportedly sinking $800M into a new cloud facility in Norway. In contrast, IBM spends about $100M for each of its new data centers, aiming to quickly roll out facilities that can be tailored to meet the computing and regulatory requirements of specific countries and regions. Along with its original 12 data centers, the 13 it acquired in the purchase of SoftLayer and the 15 new facilities being built or planned, the company will have a global network of 40 cloud data centers by 2015. LeBlanc also noted that IBM has more finely tuned “on-ramps” for organizations moving to the cloud. Rather than “one-size-fits-all” generic offerings, the company can offer customers everything from basic managed services to dedicated bare metal systems to IaaS to its Bluemix development environment in a comprehensive portfolio of solutions that can be finely tuned to individual clients’ discrete business and technical needs. LeBlanc also focused on IBM’s mobility strategy, especially the company’s MobileFirst solutions, by noting company research into the literal “high cost of bad apps.” Short version, the · effect of poorly designed, poorly functioning mobile apps is so deleterious in terms of lost customers and squandered good will that companies need to up their game or find jobs at Wal-Mart. IBM’s mobile strategy is designed to enable the former course with entry points aimed at everyone, including C-level executives, IT staff, developers and line of business (LOB) managers. Finally, LeBlanc (along with several other execs) detailed IBM’s recently announced partnership with Apple as further proof of its mobility intentions.
Breakouts broken out
I attended several breakout sessions but three were particularly interesting:
1. Transformation of industries via data/analytics, led by Inhi Cho, IBM’s VP of Big Data and Information Governance, and three other company executives discussed the practical benefits IBM customers are capturing with analytics, and illustrated them with memorable examples. One – a national chain of coffee shops whose same store sales were cratering. Executives decided that the problem was poor quality baked goods, so the company bought a large commercial bakery operation for nearly $1B only to find the problem continuing. IBM was hired and discovered that the largest driver for client loyalty/satisfaction were the barristas who regularly engaged with the customers. The real problem? The chain had an average employee turnover rate of 250% per year.
2. An overview of IBM’s design efforts was led by Phil Gilbert, GM of SWG design, who leads the new IBM Design group launched in 2012. Though IBM is seldom considered a design leader, let alone being in the same league as Apple and other cutting edge players, Gilbert discussed the company’s long history of design successes. That included the IBM Selectric typewriter, an iconic product whose 1961 introduction set the company firmly apart from its business machine competitors. He also detailed why IBM now believes that design is absolutely strategic to its broader efforts, and how it intends to recapture that leadership position, especially relating to developing useful and user-friendly software design.
3. An Internet of Things (IoT) session was led by John Thompson, IBM’s VP of IoT strategy, who provided insights into both the company’s broad view of market opportunities and a few notable customer success stories. Those included Pratt & Whitney, where IBM solutions are being used to predict aircraft engine wear and the likelihood of breakage, and Vestas, where IBM analytics are being leveraged to maximize the efficiency of wind turbine placement. Thompson said that while many IoT promoters are positioning it as an essentially new thing, it is anything but. In fact, IBM estimates that about 70% of the tech used in IoT deployments is reused. The challenge is in properly mastering and leveraging the other 30%, a goal IBM seems well positioned to achieve.
The enterprise of computing
During his closing remarks on the final day of Analyst Insights, Mills noted that it requires considerable skill to allocate assets so that neither IBM’s franchise customers nor its new efforts are shortchanged, but that point is especially important in what he described as, “an extremely asset-intensive company.” What did Mills mean by this?
IBM is far more profitable than virtually all of its major competitors with 2013 earnings per share ($15.43) that were about 5X those of Hewlett Packard ($3.03), about 6X those of Oracle ($2.42) and Microsoft ($2.65), and nearly 10X those of Cisco ($1.55). Plus, that doesn’t take into account Amazon (whose AWS and other cloud offerings compete against IBM Cloud) which, despite more than doubling its annual revenues since 2010, is reportedly on track to lose over half a billion dollars this year.
Additionally, IBM has achieved its remarkable profitability despite investing far more in R&D (averaging about $6.25B annually) than other vendors, a point that’s critically important to the success of any vendor’s future efforts. But to get there and stay there, the company has also been ruthless in pursuing highly profitable markets and divesting itself of lower margin businesses, including the System x (Intel-based) server business it sold to Lenovo and the deal it struck with GLOBALFOUNDRIES to take over IBM Microelectronics.
However, the goal isn’t to simply discard businesses the company deems to be underperforming. These and previous divestitures have been successfully structured to provide IBM the components and products it needs while also stepping away from manufacturing headaches and investments.
Why is any of this important? In essence, it speaks to IBM’s abilities to effectively, transparently do business and compete while providing full value to its shareholders. That is a crucial proposition for the company’s shareholders (particularly institutional investors that love higher than average dividends) and a key differentiator between IBM and many or most of its competitors.
So what did I take away from IBM SWG’s Analyst Insights? A few things:
- IBM’s longstanding, software-centric strategy continues to hold together well. More importantly, while it has been far out in front of the competition in this regard, the company remains willing and able to tweak its efforts and direction to account for changes in the marketplace.
- The company’s analytics and big data solutions are the most mature of its efforts in emerging markets and also complement numerous other areas. Plus, the ongoing success and performance of IBM’s analytics and big data solutions suggests an increasingly bright future in both established markets and emerging fields like IoT.
- IBM’s Watson is certainly unique – no other vendor has anything remotely like it, and those who portray Watson as a sort of “Siri on steroids” are either deeply ignorant or whistling past the graveyard. That said, while the enthusiasm around Watson looks promising, I and other analysts are still waiting to see how the technology will impact IBM’s bottom line.
- The refocusing of attention and energy on product design leadership is a terrific development and should help IBM clearly differentiate itself in enterprise software and other fields.
- Related to that, IBM’s developer-focused mobility initiatives could pay real dividends, especially if the company can rekindle the “culture of design” goals of the energized IBM Design group.
- IBM’s cloud computing assets, experience and strategy differ markedly from competitors, particularly massive public cloud vendors like Amazon, Microsoft and Google. That’s a good thing in terms of building a manageably profitable business, but public cloud players have a remarkable degree of momentum. What IBM’s eventual position will be in a mature cloud market is still a work in progress.
- Finally, the solidity of IBM’s overall financial position and the transparency of its business practices may be its greatest overall strengths. That’s especially the case when you compare it with competitors, especially those that depend on the patience of increasingly stressed and disappointed shareholders. This is not to say that IBM doesn’t face challenges, including ongoing, deepening global economic uncertainties, rising hardware commoditization and rapidly changing IT usage models, but those issues are problematic for virtually all enterprise IT vendors. Challenges remain, but IBM’s focus on maintaining a solid foundation and sustainable innovation should lead it to success.
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