How to win second place.....and stay there. Go Blue go!
Big Blue bets on a coming revolution
By Tom Foremski
Published: November 30 2003 18:43 | Last Updated: November 30 2003 18:43
IBM is set to make a multi-billion dollar bet that there has been a fundamental shift in the way corporations will buy technology.
Big Blue is launching a large reorganisation of its $13.1bn software business from early January to focus the software business on 12 industry sectors. It will be seeking to mine a potentially rich lode as the market for general business software matures.
It is the next move in a strategy that last year saw IBM acquire PwC Consulting for $3.5bn, adding 30,000 top business consultants, each with ties into large industries.
This is part of IBM's belief that, when corporate spending on information technology recovers, it will be driven by companies seeking ways to automate business processes. How technology is applied will be far more valuable than the technology itself.
"Technology in and of itself is not enough," Sam Palmisano, chief executive of IBM, said in a speech last month in San Francisco. "You'll get the competitive edge at the intersection of business process and technology."
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The reorganisation also offers a way to jump-start a software business that has been stuck in a narrow annual revenue range of $12.6bn-$13.1bn for the past four years.
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While revenues have held up well within depressed IT markets, they have been bolstered by billions of dollars in acquisitions.
These included Rational Software in February 2003 for $2.1bn, the database business of Informix in mid-2001 for $1bn and dozens of smaller software acquisitions.
However, increasing revenues through acquisitions is becoming harder as consolidation within the industry reduces the number of attractive targets. <font color=red>And IBM's software business is still heavily reliant on mainframe software leasing, a dependable but slowly declining revenue stream.</font>
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The best hope for growth comes from creating tailored software for specific industries that helps customers save money by making their own modifications.
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"This strategic shift is on the same scale as our decision to exit the software applications market in 1998," said Scott Hebner, vice-president at IBM Software.
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In the late 1990s, IBM focused on developing "middleware", software that links together large enterprise applications.
Application software companies, such as PeopleSoft and Siebel, no longer saw IBM as a direct competitor and started to produce versions that supported IBM middleware, and IBM's software group began to thrive. Now, another strategic change is required.
In early January in Las Vegas, more than 10,000 IBM software sales staff will gather to hear the details of the changes and the announcement of 60 industry-specific middleware software products that will be introduced over the coming year.
In addition, it will spend hundreds of millions of dollars to partner with software companies that provide leading applications within each industry sector.
Those partners would receive marketing and technical support if they agree to support IBM's middleware software.
"It's not surprising that IBM is making these changes," says George Gilbert, head of Tech Strategy Partners, a US business consulting firm.
"Within a maturing software market, successful software companies will need to be able to sell products that are more focused on the needs of their customers."
However, IBM Software's increased reliance on partners could be a problem.
"There could easily be conflict over sales account control," Mr Gilbert says.
Mr Mills, head of IBM Software, says that IBM will seek to strengthen connections with influential system integrators such as Accenture, Cap Gemini Ernst & Young and Bearing Point.
"There was a cooling off in our relationships with some of the system integrators following the PwC acquisition last year," Mr Mills says. "But those relationships have come back."
It will be IBM's ability to manage partnerships with hundreds of smaller companies that will determine the success of its software push.
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Methinks this is not the kind of conversation you can have in the coach section.<g>
............The solution provider, who asked not to be identified, said he recently was on a plane and seated next to a high-level executive with IBM's Global Services. The two talked about the on demand but, throughout the hour-long conversation, the executive could not describe what the strategy actually meant to end users and IBM's partners.
"For the life of him, he could not articulate it," the solution provider said. "If you can't brand it, you can't sell it. If you can't explain it so a five-year-old can understand it, then you can't sell it to the masses. I'm sure there are lots of opportunities, but people just don't get it today."
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