Down, But Not Out: Still Time for IBM to Adapt to Cloud IT

By | February 17, 2015

Disruptive technologies are a time-tested means of upending the business environment. Remember Western Union? No, not the money order company, but the one that lost its communication empire to Bell Telephone. How about former business giants like Kodak, Motorola, WorldCom and most recently, Radio Shack, that once dominated their field and are no longer with us. All were undone by better mousetraps. The same fate awaits IT vendors who persist in defending stale technologies and business models: adapt or die.

IT is in a period of tumultuous change fueled by cloud and mobile technologies that field existential threats to titans like IBM, HP and even Microsoft, all once thought to be bed rocks of corporate stability (and profitability). As I discuss in this column, disruptive technologies spawning innovative new products and services have created seemingly unprecedented shifts in customer behavior, competitive landscape and profit margins that are severely affecting legacy IT vendors like IBM. A previous column focused on the damage inflicted on Big Blue and others, but argued that the financial and organizational pain has a silver lining for customers in the form of better products and services at lower prices: Survival of the Fittest as applied to business. Although it might have appeared I was writing IBM’s obituary, I don’t believe the company, or competitors like HP, Dell, SAP and others that have long sustained fat profit margins off of equally fat corporate IT budgets and overworked, under trained IT staffers, are in, or necessarily approaching an irreversible death spiral. Yet the old tech all-stars face a dramatically different business environment than the that in which they grew to dominance.

Today’s IT disruption results from the nexus of several factors:

  • rapidly commodified technology
  • universal network connectivity and globalized markets
  • significantly greater IT economies of scale promoting larger consolidation of infrastructures
  • enormous data generation and accumulation resulting in deeper data analysis and business insights
  • a consumer preference for services over products and subscriptions over purchases

Collectively these have created what some call the As-a-Service EconomyIndeed, as these charts illustrate, the growth of services as a share of total economic consumption is a trend going back decades, while IT spending on services relative to hardware, which was already several times higher, has increased by 25% over the past few years.

fredgraph

fredgraph_ITsvcs-vs-manufacturing

As I detail in the column, IBM already generates almost 87% of its revenue from software and (mostly) services, the problem is they are the wrong kind in the era of XaaS and utility IT services. IBM’s Global Services business specializing in developing, deploying and supporting complex, customized IT services built upon a foundation of on-premise, big iron hardware and software. IBM-Rev-Breakout_pie-2014Given the overstretched IT resources in large enterprises, where upwards of 80% of the effort is spent on sustaining existing IT services, the consulting, design and implementation business has been quite lucrative for Big Blue.

To prosper in the era of utility IT services, IBM refocus on delivering standardized, modular, usage based services that are easily integrable with third-party products. Instead of concentrating on consulting, design and implementation of one-off IT systems, IBM must rechannel its technical prowess towards building XaaS products and integration services for the as-a-service-economy.

ibm-cloud

Yet IBM isn’t starting from nothing, it already has thousands of developers, working on hundreds of projects in support of cloud and software services. Indeed the company is one of the leading contributors to OpenStack and 120 other open source projects having spent over $1 billion on Linux development alone. The company bought Softlayer to bolster its cloud infrastructure and service delivery and now reports total cloud revenue running $7 billion, up 60% yr-yr, with the as-a-service run rate amounting to $3.5 billion. The company has another promising services business in Watson Analytics, where the company is making a large, but wise bet on commercializing the quiz-show winning software into an extensive cloud platform with the goal of building a data analytics ecosystem. As my column concludes, IBM’s problem isn’t technology, it’s legacy: the company simply has too many people to support a lean, utility-like IT environment based on shared, open and extensible services built upon standardized hardware components.

In sum, IBM has the resources and skills needed to evolve into IBM 3.0 or 4.0, but it’s unclear whether it has the executive vision, will, talent and finesse to make the transition without wrecking the company in the process. When you’re dealing with a 400,000-employee, multinational behemoth, turning IBM into some hybrid of AWS, Google and Salesforce is akin to rebuilding an airliner in mid-flight. It’s also the perfect way for CEO Ginni Rometty to justify her big bonus.

As a commenter to my previous column pointed out, IBM has been through similarly challenging transitions before and come out more vibrant, innovative and profitable than ever. Successfully evolving Big Blue to the cloud-based as-a-service economy will prove similarly difficult and stressful, but given the firms many financial, technical and employee assets, it’s entirely achievable. I look forward to following its progress.