By Charles King, Pund-IT, Inc. September 17, 2014
IBM’s System and Technology Group (STG), the company’s core hardware product organization, has been hosting annual analyst summits to discuss current events and future plans for about as long as I’ve been an analyst. That said, the summit held last week in Greenwich, Conn., finds STG and IBM at what some might describe as a crossroads facing significant changes in and challenges to its traditional markets.
The title of former IBM CEO Lou Gerstner’s memoir – “Who Says Elephants Can’t Dance?” – seemed entirely appropriate when it was published in 2002, but it’s arguable that the company needs to tap into some new steps and moves to deal with its current challenges. Those issues were detailed pretty succinctly by SVP Steve Mills, who leads both STG and IBM’s Software Group (SWG), in a Q&A session.
Mills noted that in the 1980s, hardware shipments constituted 80% of total sales in the technology industry but had fallen to 37% by 2013. The situation was even more extreme for IBM; in the 80s, hardware drove over 80% of its revenues, but that number fell to just 17% of revenues in 2013. In addition, the company currently sources hundreds of hardware solution components from third parties. Perhaps most importantly, significant shifts in profit margins have made certain IBM services and practices essentially unsustainable.
IBM certainly isn’t alone in working to adapt to these changes. Virtually all of the company’s competitors are trying – some less successfully than others – to follow similar paths. But as Mills noted, “Transformation is a commonplace part of day-to-day business. Evolution is harder.” Accordingly, the Greenwich event focused on how IBM is evolving, why it believes it is on the right track, and where its current efforts and further plans will lead.
What changes does IBM see roiling business IT markets?
- Data is a new natural resource – In essence, IBM believes that organizations want and must get greater pay back from the large (and getting larger) volumes of data they create, store and manage. That heightens the value and importance of analytics solutions, an area of particular interest to the company.
- Hybrid cloud is the new enterprise IT – IBM expects that the enterprise market is headed firmly in the direction of blending internal IT resources with external public cloud services. To get there, the company means to leverage its own hardware and software solutions, cloud offerings provided by its SoftLayer group and consulting engagements delivered via its business and technical services organizations.
- The enterprise IT customer base is broadening – This is most apparent in how increasingly proactive line-of-business (LOB) executives are influencing IT purchasing decisions. You might call this the “consumerization of enterprise IT,” but the practical effect is that vendors, including IBM, are altering the way they engage and persuade the customers they work with.
- Mobile/social overlay everything – The tremendous uptake of mobile devices, including smart phones and tablets, and the influence of social business sites and processes, cause particularly painful management, governance and security problems for traditional IT. IBM believes that its strengths in backend “systems of record” places it in an ideal position to work with front end “systems of engagement.” This is a key factor in the company’s recently announced partnership with Apple.
The STG Approach
IBM has innovative hardware platforms and leadership positions in numerous markets, but the company is also repositioning existing products and developing new related solutions to address these market shifts. Among these efforts are:
- Power Systems – IBM Power is the leading platform in traditional scale-up Unix applications and performance-intensive database and business intelligence workloads. The company intends to maintain Power’s preeminence in those markets while expanding its position in cloud and analytics via both scale-up and scale-out configurations. In addition, IBM is using its formidable efforts and history in Linux to position Power as an “open” alternative to Intel-based systems. In part, that involves closely engaging the Linux partners and ISVs who have been successful in developing Linux-based solutions for IBM’s System z mainframe solutions. But IBM is also putting considerable effort into the OpenPower Foundation which was part of the company’s decision to provide access to Power technologies via an ARM-like licensing model. OpenPower’s55+ members, including Google, NVIDIA and Tyan, are developing Power-based solutions to challenge Intel’s dominance in the server market.
- System z – IBM mainframes are the premiere global systems of record for traditional transactional workloads in industries, including banking and finance worldwide. The company plans to maintain that position while also enhancing the z platform for a variety of high performance analytics processes and purposes, including real time analytics.
- Storage – IBM can rightly claim first mover status in a variety of storage technologies, including hard disk drives, and the company has solid positions in most enterprise storage sectors. Moving ahead, IBM plans to strengthen its efforts in emerging storage technologies (particularly flash-based systems and software-defined storage solutions), and will also leverage its storage portfolio as a critical part of highly integrated, pre-engineered platforms.
Does IBM face any potential problems or challenges in pursuing these new strategies and market opportunities? Actually, yes. Two are of especial concern but they also represent significant opportunities for IBM:
- Farewell to System x – The STG event was the last that its System x executives and organization (which is being sold to Lenovo) will attend as IBM employees. GM Adalio Sanchez and VP of Strategy Alex Yost (both of whom will join Lenovo) offered a valuable overview of what will occur after the deal is completed. While IBM’s reasoning behind the sale seems sound and in keeping with its longstanding strategy of exiting “commodity” markets, leaving behind market-leading x86 technologies could cause more headaches than it corrects. In System z and Power Systems, IBM has some of the most impressive, innovative data center solutions and technologies currently available, but convincing customers to replace entrenched platforms has always been an uphill battle. Further complicating this will be a highly energized Lenovo server organization ready to make its mark and unencumbered by concerns about legacy hardware platforms or businesses. IBM believes that it has technical, performance and economics superiority on its side. Plus, the sale should allow the company to focus its efforts more clearly and concisely on its core existing and target markets. If IBM successfully pursues those points, the departure of System x could be largely or entirely pain-free.
- Shifting the focus for business partners – During his introductory presentation, Tom Rosamilia, SVP of IBM STG and Integrated Supply Chain, noted that a key strategic element moving ahead is “shifting the focus for IBM business partners.” That piqued my curiosity, since business partners have long provided the company critical support for succeeding in many vertical industries and regional markets. Further inquiries provided some light on the situation: a shift in focus is critically important due to the changing hardware economics. Translation: hardware margins are thin and getting thinner, so simple reselling will become an increasingly unsustainable business model. IBM has plans in place to help partners gain the training and skills they’ll need to succeed in an elementally changing marketplace. That seems like a sensible plan but, calling to mind Steve Mills, the only thing harder than evolving yourself is convincing others to evolve. However, if IBM succeeds in helping partners transition to higher value service and business models attuned to changing markets, it should also benefit from their resulting efforts. Satisfied, productive partners are, after all, typically profitable partners.
Overall, the STG analyst summit offered most of what I’ve come to expect from such events, along with a few surprises. Company executives and representatives seemed more energized and full of expectations than they have in past years. It may simply be a matter of fully formulating a complex yet workable and differentiating strategy. At that point, execution becomes somewhat mundane.
While IBM certainly has difficult problems ahead of it, the company has proven time and again that it is fully capable of meeting and overcoming challenges in the marketplace, in technology and even in its own organization. As IBM gets ready to rhumba this time around, competitors would be well advised to lace-up their own dancing shoes tightly. Attempting to trip up a pirouetting pachyderm is no easy or risk-free task.
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