Life in the cloud is tough for IBM; but with good planning, the company may still gain from the wrenching changes going on in the IT industry.
The past few years have been hard on IBM, an information technology company known for its buttoned-down culture and blue business suits. For ten straight quarters, the company’s revenues has declined, year-on-year. The company’s management were not excited about its recent disappointing third-quarter figures: Both sales and earnings per share, which has values of $22.4 billion and $3.60 respectively, were well below analysts’ expectations.1 Since the global demand for IT appears to have strengthened, analysts expected the firm’s fourth-quarter numbers to look much better. They were, however disappointed when it was released in January 20, 2015: the one-time world technology leader posted a profit target and quarterly revenue that bot missed their targets. The company’s total sales revenue fell nearly 12 percent to $24.11 billion, even though the earnings per share rose to $5.81 per share.2
From an entirely practical standpoint, IBM will need more than a quarter to get back on track. Its management thinks so too. This explains why they withdrew the company’s long-term plan of reaching earning per share of $20 as they recognized that its performance was faltering.3 Note that IBM is not about to collapse completely as it seemed about to in the early 1990s. During that period, corporate IT customers changed their taste from mainframes to PCs and servers – both of which are more distributed forms of computing. This change in consumer demand nearly bankrupted the company. Today, consumers are again changing their tastes for IT products, and this may affect the industry in general and IBM in particular. Businesses are now increasingly renting computing services in the cloud instead of owning computers. Given that both the computing technology and everything around it is changing, this shift can create a shocking wave in the entire IT industry.
Take mainframe computer, IBM’s crown jewel, as an example. IBM currently generates as much as 24 percent of its revenues and 35 percent of its profits from its mainframe computers and its related software and services. Mainframes, also known as “systems of records”, help banks to manage customer accounts. Last January, IBM launched a new model of mainframe, just to keep it more relevant. One of the new models can analyze and encrypt data in an instant. It can also process 30,000 transactions per second and 2.5 billion transactions per day.4 The bad news is that in these day and age of the cloud and mobile computing, such features come in handy. Thus most people increasingly use their smartphones to do their banking and many other transactions.
On the edge
The way corporate IT is developed, sold and used is also changing particularly in this modern era when it is opening up to the outside world. Software engineers are currently in high demand and, as a result, power is now flowing from hardware engineers to them. Previously, it used to be the chief information officers(CIOs) who held business purse strings. Not anymore. According to analysts’ estimates, chief marketing officers will spend more on IT than their CIOs by the year 2017. In addition, customers now are only willing to pay for specific results, such as for sales increases achieved by using IT software, instead of just buying the latest technology.5 So for longer-established hardware firms like IBM, SAP, Oracle and HP, survival entails rethinking how they do business. This further implies that they must become nimbler to keep up with more focused start-ups, provide a working environment that attracts younger people as well as develop new products together with their customers.
IBM did not move fast in that regard. The reason for this was that, for a very long time, its management concentrated on the company’s financial goals. Simply put, the firm continued to cut costs, shed lower-margin business(such as low-end servers and chip making) and buy back shares instead of getting ready for the new world. In 2013, the company acquired SoftLayer, a crowd computing provider.6 That was when things started to change for the company. To develop mobile business apps and mine social media data, it teamed up with Apple and Twitter in 2014. It also made another bold move: it started tweaking its organization. To make its fastest-growing businesses such as data analytics more focused and more better to compete with upstart rivals, it created separate units for them.
The only sensible question analysts need to ask is whether these changes are enough in terms of ensuring IBM’s future global competitiveness. The truth is that IBM’s new businesses, such as its cloud offerings, will eventually bring in more money than the old ones, which include its IT services. But this will take, at least, another three to four years. On the positive side, the company will, all things being equal, make it through this transition intact. It should also be noted here that IBM made a longer-term strategic bet with its artificial-intelligence computer system, which is popularly called Watson. This system may eventually turn into something big. The company had also continued to spend money on research and development. In 2014, the company was U.S.’s largest recipient of patents – a position it has maintained for 22 years in a row.7
Regardless of this feat, IBM is increasingly held back by its legacy business. The existence of companies that provide cloud services poses a big challenge for IBM: the cloud services they provide are cheaper than IBM’s more expensive and customized IT services, and this hurt the company’s profit significantly. Not only that, newcomers such as Amazon’s cloud-computing arm is also stealing customers from IBM.8
For survival purpose, IBM may have to separate its old from its new business more clearly, especially now that many of its clients are demanding for “two-speed IT” services, whereby they separate their more basic services(such as payroll processing) from their faster-moving and more innovative IT needs(such as data-crunching). The good news is that, with good planning, IBM may still gain from the wrenching changes going on in the IT industry.
1Information Technology: Computing, Fast and Slow. (2015, January 17). The Economist, Retrieved February 21, 2015 from http://www.economist.com/news/business/21639514-ibm-not-about-go-down-life-cloud-will-be-tough-computing-fast-and-slow
2Reuters(2015): IBM Profit Forecast, Fourth-Quarter Revenue Below Estimates. Retrieved February 22, 2015 from http://www.reuters.com/article/2015/01/20/us-ibm-results-idUSKBN0KT2FY20150120
4IBM(2015): IBM Launches z13 Mainframe – Most Powerful and Secure System Ever Built. Retrieved February 22, 2015 from https://www-03.ibm.com/press/us/en/pressrelease/45808.wss
5Information Technology: Computing, Fast and Slow, op. cit., p. 60.
6IBM Closes Acquisition of SoftLayer Technologies. (2013, July 8). IBM Press Release, Retrieved February 23, 2015 from http://www-03.ibm.com/press/us/en/pressrelease/41430.wss
7Information Technology: Computing, Fast and Slow, op. cit., p. 62.
8Rhodes J.(2013): Why IBM Lost the CIA Contract to Amazon. Seeking Alpha. Retrieved February 23, 2015 from http://seekingalpha.com/article/1759442-why-ibm-lost-the-cia-contract-to-amazon