From outsourcing to outcomes: IBM's next 5 years

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From outsourcing to outcomes: IBM's next 5 years

  1. 1. TBR T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C . TBR COMMENTARY From outsourcing to outcomes: IBM’s next 5 years Patrick Heffernan, Senior Analyst (patrick.heffernan@tbri.com) Geoff Woollacott, Senior Analyst (geoff.woollacott@tbri.com) Matt Casey, Analyst (matthew.casey@tbri.com) Krista Macomber, Analyst (krista.macomber@tbri.com) Nov. 25, 2013 Part 2 in a 3-part series IBM’s October 2013 earnings release spurred TBR to examine IBM, its relationship with China, and the overall landscape of technology companies in IBM’s industry. This is the second article in a three-part series; the first paper, published Oct. 21, 2013, presented a broad overview. This second paper examines IBM’s performance issues and outlines a strategy for the next five years. The third paper, to be released in 1Q14, will cover IT in China, including political and market trends, as well as implications for the technology industry overall. For companies tracking IBM’s financial performance or IT industry watchers receiving near-daily reports on IBM’s market moves, this series details where IBM is strategically, as well as where the company should be heading. Executive summary Recent earnings indicate IBM is at a turning point, but strategic shifts in 2013 suggest the company recognizes business outcomes as the link between cloud and analytics. IBM must make this link the central piece of its strategy over the next five years, or risk the market passing it by in the near future. IBM will not survive the perpetual changes in IT by remaining in its current state, and the company’s standard pace of adaptation will not keep up with the ever-changing market. Over the past five years the shift to cloud proved as significant to the IT industry as the migration from mainframe to client/server architecture in the early 1990s, with advanced network technology and virtualization moving
  2. 2. TBR computing from an asset-heavy, fixed-cost IT delivery model to an asset-light, variable-cost model. Over the past 15 years, IBM secured enterprise mind and wallet share by establishing a competence in running IT for large organizations that view IT as a basic, unavoidable cost center. IBM is synonymous with IT for many large organizations, anchoring its value proposition around robust technology capabilities wrapped with value-add services and shifting much of its weight behind outsourcing. However, with the IT industry in the midst of an evolution, IBM’s faltering hardware revenue and profit performance, as well as its sluggish software and services growth, raise questions about the strength of the company’s status as an industry stalwart over the next three to five years. TBR believes:  The rapid adoption of cloud computing fundamentally changed the way customers consume IT. Customers are moving from an asset-heavy, on-premises or megadeal outsourced model to an “add to cart” or “as a Service” consumption model (think of Amazon’s shopping cart icon);  IBM’s FY3Q13 earnings release highlighted the poor performance of the company’s hardware business in China, and the results showcase the need for IBM to evolve over the next two to three years to maintain its 100-year-old track record. TBR anticipates IBM will successfully transition from helping customers reduce the costs and complexities of running their businesses, to deriving unique, actionable insights. Over the next two to three years, IBM must: 1) Maintain brand strength; 2) Become flexible enough to change direction on pace with the market; 3) Unflinchingly shed unprofitable or nonessential pieces; 4) Acquire analytics software and capabilities; and 5) Bring in outside leadership. IBM provides value by being all things IT to large enterprises, and increasingly “all things” includes cloud solutions. IBM’s ability to anticipate industry needs rather than react to them depends on the firm’s understanding of its role in the emerging cloud environment. Going forward, being a leading, all-in-one IT provider means capably providing cloud and increasingly includes analytics as well. Delivering clients their desired analytics-based outcomes requires the coordination of many disparate systems and processes. Based on its size and capabilities, IBM is better positioned than most to deliver these outcomes, provided it makes the necessary strategic decisions. Based on IBM’s market position, intellectual property, history and specific moves in the software and hardware spaces, TBR believes the company will achieve its strategic imperatives and transform from an outsourcing firm to an outcomes-focused company. TBR believes IBM will make tuck-in analytics acquisitions and use IP to leverage its full portfolio when addressing specific line-of-business applications. In five years, IBM will still be an IT industry leader but will be leading in analytics, software and services — outcomes — as the IT industry transforms with cloud. What is IBM today? IBM thrived over multiple generations of technology by adeptly identifying market disruptors early on, willingly cannibalizing existing businesses to adapt to these waves of change and positioning for long-term profitability www.tbri.com
  3. 3. TBR gains. One hundred years of steadfast success and proven ability separate IBM from other companies, particularly in an industry where start-ups ride waves of demand to exponential growth only to falter and close their doors in a matter of months. Traditionally IBM reinvented itself every 10 to 15 years, with the last major reinvention taking place in the mid1990s. At that time, IBM invested heavily in IT services, specifically IT outsourcing, fueling IBM’s growth over the past decade. Outsourcing currently generates the most revenue in IBM’s Global Technology Services (GTS) division, which is IBM’s largest revenue-driving unit. As a result, other elements of IBM, including consulting and software, have been positioned to support outsourcing. Today, IBM is an outsourcing company in an IT world moving rapidly toward outcomes. IBM stands apart from its outsourcing peers due to its core elements:      Hardware: System z’s upcoming 50th anniversary attests to IBM’s ability to map its server and storage portfolio and messaging to customers’ pain points. IBM combines industry-leading R&D capabilities with know-how around continually refining and, when necessary, reinventing market messaging in a marketplace driven by innovation and demand for smaller, faster and cheaper commoditized hardware. Management and IT Consulting: IBM’s management consulting practice is positioned on the value chain between high-priced, high-level management consultants and low-cost offshore systems integration vendors. Software: IBM’s software practice made early inroads into “as a Service” delivery. Currently, IBM Software is focused on the infrastructure layer and made several investments in analytics and systems management. Corporate Support Services: In addition to its IT capabilities, IBM developed a top-notch corporate support services organization, led by IBM Global Financing, which provides customers with flexibility in IT purchasing. IBM can leverage its balance sheet to provide clients with asset-light purchasing options, including traditional leasing and financing, sale-lease backs and IT services financing. Intellectual Property: As one of the longest-surviving IT vendors, IBM boasts a large suite of IP and owns a large number of patents. Over the years, IBM grew adept at taking large enterprises from innovation and transformation through to outsourcing IT. Since its inception at what seems like the dawn of technology, IBM has always understood its clients’ businesses. This know-the-business positioning enabled IBM to sell to the boardroom, while other IT vendors were selling to the engineers. IBM’s next transition IBM must preserve its place as an organization that services all IT needs, while continuing to innovate and add value. Services IBM’s consulting arm, Global Business Services (GBS), is the one element of IBM that will benefit from staying put. The company presently resides at the intersection of strategy, operations, technology and operations consulting sought by every other management consulting vendor. The high-level, strategy-centric firms added technology consulting capabilities to move downstream closer to implementation. The tech-heavy, low-cost companies have been recruiting and investing in higher-end management consulting resources. IBM GBS must maintain its competitive position, reengineer its marketing to ensure clients understand the company can service the entire breadth of any client’s consulting needs, including analytics, and continue to recruit talent in areas where the company lags behind the top competitors, such as human capital and strategy consulting. www.tbri.com
  4. 4. TBR As the customer base migrates from asset-heavy IT models to cloud-based, asset-light models, IBM needs to review the entire GTS portfolio. Over recent decades, IBM landed and executed on megadeal outsourcing engagements in part by excelling at detailed technology risk analysis, financial risk analysis, legal review and sales management. These capabilities are costly to maintain and likely to become less critical as engagements shift and clients’ needs evolve. IBM may need to reduce the size or redirect the efforts that go into risk analysis, a hightouch direct sales force and thorough legal reviews. Software IBM will likely avoid turning into applications vendor or providing narrowly scoped of line-of-business solutions, two markets that contradict IBM’s “Enterprise IT” core value. However, in the last year, IBM acquired HRM SaaS provider Kenexa and launched line of business-focused SPSS Analytics Catalyst, raising questions around the company’s strategic direction. TBR believes IBM is investing in the foundational layers of its core portfolio to sustain market entry points for analytics expansion while aligning these core solutions to current IT consumption models. The Kenexa acquisition moved IBM closer to applications vendors, including Oracle and SAP, in the cloud-apps space. Kenexa and Social Business Solutions are the only business applications in IBM’s cloud apps repertoire, and the company lacks the experience and portfolio to fully enter the business applications space. However, the integration and positioning of Kenexa over the last year indicates IBM’s vision for business applications within its software portfolio and may foreshadow IBM’s future moves. Prior to the Kenexa acquisition, IBM relied on services-led engagements through vertical specialization and integration with managed competitor environments. But with Oracle and SAP increasingly incorporating analytics across their software suites, powered by Endeca and SAP HANA, respectively, the IBM analytics layer on top of these business applications creates redundancy in customer environments. The Kenexa acquisition gives IBM the foundational element of this applications stack and thus regains IBM’s seat at the CxO’s table. IBM’s decision to promote Kenexa as part of Smarter Workforce and not as an HRM application illustrates the company’s recognition that occupying the baseline application layer is necessary to continue delivering analytics value in the enterprise. With SPSS Catalyst, IBM Software aligned existing solutions to current IT consumption models, shifting the entry points to IBM’s traditional “land and expand” business strategy, with lines of business increasingly involved in IT purchase decisions. The same luster and awe an SPSS Syntax file running queries on thousands of rows of data instills in an IT manager or statistician does not pack the same punch with a chief marketing officer. Hardware Considering IBM’s position as a provider of robust, proprietary hardware platforms, the company has had further to fall in revenue, profit and market share compared to many other server and storage vendors. During the landscape’s transition to software-led functionality delivered on commodity hardware spurred by cloud and mobile consumption models, IBM’s Systems and Technology Group (STG) revenue declined for the past eight consecutive quarters. However, as IBM’s competitors such as Oracle and HP also struggle, TBR believes the company’s performance is more a result of changing market dynamics than missteps on the part of the company. IBM refreshed its server and storage portfolios to be more flexible and open, which will help the company to cover all its hardware bases in large enterprise accounts, and also increase its public, private and hybrid cloud sales. IBM will keep STG alive by positioning its hardware offerings as building blocks to cloud-driven business agility and analytics-enabled insights. IBM will invest in chip innovation and manufacturing systems to support large enterprise customers’ hardware needs — and maintain strategic relationships — provided hardware profitability does not experience another www.tbri.com
  5. 5. TBR decline in the magnitude it did during 1Q13 (keeping STG under the microscope). Currently, IBM uses STG and chip innovation to support its customers’ full IT requirements and no longer tries to use hardware to drive revenue or profit at a corporate level. TBR believes IBM will shed elements of its server and storage portfolios or migrate to a licensing model. In the past, IBM sold iconic divisions when they no longer provide IBM with a competitive differentiator for large enterprise customers, most notably with the divesture of its PC group to Lenovo. While STG currently provides a differentiator, changes in economics similar to the changes that reduced the value of owning the PC group, could alter that calculation. IBM will tightly monitor this situation in the coming years. Strategic imperatives and recommendations: What should IBM do now? How can IBM get where it needs to be over the next few years? TBR sees two strategic imperatives and offers three strategic recommendations: Strategic Imperative I: Maintain IBM’s brand. The old saying “No one was ever fired for hiring IBM” reflects the strength and longevity of IBM’s market presence. As long as IBM’s brand image remains intact, the company will have a seat at the table in the C-Suite. TBR believes IBM needs to continue to demonstrate it is on the cutting edge of technology and understands its customers’ IT and business needs. From a technology perspective, IBM needs to leverage its internal intellectual property and augment it with software acquisitions that round out the portfolio. From a business perspective, IBM’s long, rich history of selling to the boardroom enables the company to address the new IT buyer on the buyer’s terms. With an outcomes-focused services business in place, IBM must figure out how to sell that outcomes model to a hesitant customer base. Strategic Imperative II: Become flexible enough to change direction on pace with the market. Technology is evolving rapidly, and delivery and consumption are morphing at a rate that demands companies shift quickly. IBM cannot have another 15-year evolution like its shift from hardware to services. The nature of IT moved from large architectural shifts, like mainframe to client/server, to smaller, faster shifts enabled by the move to a cloud-based architecture. Strategic Recommendation I: Evaluate which pieces of IBM no longer provide either adequate margins or critical lynchpins to other services and shed the underperforming and nonessential elements. IBM showed a willingness to shed hardware and services capabilities in the past, which TBR believes the company needs to do again in the cloud-based future. Strategic Recommendation II: Acquire analytics software and capabilities. Analytics will become the crux of IBM’s success in the coming years as the firm’s continued ability to provide business insight to clients will help strengthen IBM’s reputation as an all-encompassing services provider to large enterprises, differentiating IBM from other vendors that offer in-app analytics but struggle to provide enterprise-grade, cross-function analytics that give clients a competitive advantage. Strategic Recommendation III: Bring in leadership from the outside. IBM needs make hard changes in hardware, and merge software and GBS into one “as a Service” outcomes-based vendor. With IBM’s size, culture and legacies, the firm may need outside leadership to shepherd it through tough changes. TBR’s IBM-based research If you would like more information or the first part of the series — IBM Cites China in Sluggish Performance; Are the problems limited to IBM? —published on Oct. 21, please contact any of the authors listed on this article. TBR provides additional IBM research in the following publications:  3Q13 IBM Cloud, Cloud Business Quarterly, Nov. 13, 2013 www.tbri.com
  6. 6. TBR  3Q13 IBM, Computer Business Quarterly, Nov. 6, 2013  3Q13 IBM Global Services, Professional Services Business Quarterly, Nov. 6, 2013  3Q13 IBM Software, Software Business Quarterly, Nov. 6, 2013  2Q13 Data Center Benchmark, Computer Business Quarterly, Oct. 16, 2013  2Q13 IT Services Benchmark, Professional Services Business Quarterly, Sept. 27, 2013  2Q13 Public Cloud Market Landscape, Cloud Business Quarterly, Oct. 1, 2013  2Q13 Software Vendor Benchmark, Software Business Quarterly, Oct. 1, 2013 Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com. ©2013 Technology Business Research Inc. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce. www.tbri.com

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