If it has been abundantly clear for quite some time that IBM is facing a number of significant challenges, it is also clear that Virginia Rometty is a woman that is able to face them. She’s never been one to bandy words, and her message to investors in this year’s annual report is no different. Going forward, IBM will be focusing on data, the cloud and “systems of engagement”.
Usually, the annual report of any major corporation shares at least two of the qualities of drying paint: it takes a long time and it's not very interesting.
However, this one is interesting because it fills in many of the gaps in its strategy that IBM has been a little bit unclear about until now, including the role of hardware in its business over the coming years.
When IBM announced some weeks ago that it was selling it is x86 server business to Lenovo, many commentators — and investors — were questioning IBM’s strategy around hardware going forward.
It didn’t quite create the panic former HP CEO Leo Apotheker created when he announced he was considering taking HP out of the PC business, but it did result in a number of reactions, not all of which were favorable.
However, just as Meg Whitman clarified HP’s position on PCs, so too has Rometty on IBM’s plans for hardware. Big Blue is staying in the game and by the looks of it for the long-haul, she said:
IBM will remain a leader in high-performance and high-end systems, storage and cognitive computing, and we will continue to invest in (research and development) for advanced semiconductor technology."
That must come as some relief to those IBM workers that are still employed in its hardware division, even if it’s no consolation to the former x86 workers in China who have to move to Lenovo once the deal is closed, and were still on strike this morning over the deal.
Big Data, Cloud and Storage
The decision to keep the upper-end hardware, though, is not a random one. It reflects the fact that for the foreseeable future, IBM will be banking on high-end servers to push its big data, cloud and storage business.
And banking really is the word here. IBM is expecting this business to develop over the years, even if the performance of some of its other divisions over the past year “did not meet expectations.”
That said, the shareholders of any other company would probably be happy with the dividend increase of 12 percent that IBM delivered, and the 18th successive year that IBM has raised the dividend. Not Rometty, though:
In 2013 we invested $3.1 billion for 10 acquisitions. We invested $3.8 billion in net capital expenditures. We invested $6.2 billion in R&D, while earning the most US patents for the 21st straight year. However, revenue in 2013, at $99.8 billion, was down 5 percent and 8 percent on pre-tax incomes."
A core part of addressing these issues is the upper-end hardware business which is being re-focused to provide support for the other parts of its business like cloud computing, or big data.
For those that rightly point out that it has to address these issues in a very competitive market where the likes of Pivotal or Intel are competition, Rometty has this reply:
We are accelerating the move of our Systems product portfolio — in particular, Power and storage — to growth opportunities and to Linux, following the lead of our successful mainframe business. The modern demands of Big Data, cloud and mobile require enterprise-strength computing, and no other company can match IBM’s ongoing capabilities and commitment to developing those essential technologies."
In sum, IBM has the back-up and support of a wide range of businesses that other companies don’t — and this is why the future of hardware at IBM looks secure, at least for the moment.
1.The Rise Of Data
Even if businesses spend a lot of time talking about customer engagement, customer experiences and improving the former by developing the latter, at the heart of all this is data and the management of data. In fact, Rometty compares data to historical drivers like steam power in 18th century, electricity for the 19th century, and hydrocarbons for the 20th century.
With the proliferation of devices, there is 2.5 billion gigabytes of data created every day, 80% of it unstructured, and a lot of that information that businesses could be using to develop customer insights. To this this requires not just analytics but big data analytics and IBM has been developing this for a number of years:
The market for data and analytics is estimated at $187 billion by 2015. To capture this growth potential, we have built the world’s broadest and deepest capabilities in Big Data and analytics — both technology and expertise. We have invested more than $24 billion, including $17 billion of gross spend on more than 30 acquisitions. We have 15,000 consultants and 400 mathematicians.”
If that’s impressive, so is the fact that two thirds of IBM Research’s work is now devoted to data, analytics and cognitive computing, and the fact that it now has an ecosystem of 6000 partners and 1000 university partnerships, many theme geared towards filling in the skills gap that we have noted on a number of occasions. It also includes the Watson business that IBM says “will change the nature of computing” even if progress here is a little slow.
2. Cloud Computing
IBM is estimating that by 2016, 25 percent of the world’s applications will be available in the cloud, with 85 percent of all software now being developing for the cloud. The market for cloud computing is expected to reach $250 billion by 2015 and IBM is looking to take a major chunk of that market building on its SoftLayer acquisition:
Our cloud foundation at the infrastructure level is Soft Layer, the market’s premier public and private cloud environment, with 'bare metal' dedicated servers that provide unmatched compute power, deployed in real time, with hundreds of configuration options. Our public cloud processes 5.5 million client transactions every day."
However, moving to the cloud will not be a straightforward move and many enterprises will go through a phase of hybrid cloud computing that will require considerable investment in middleware or what Rometty describes as a new class of “cloud middleware services.”
Last month we announced several capabilities that will connect enterprise data and applications to the cloud. IBM’s entire enterprise software portfolio is becoming available to developers in an open, compostable business environment to build applications with flexibility and scalability. A 'cloud first' approach is being implemented in IBM software development labs globally."
3. Customer Engagement
Running parallel to this, Rometty says, is the developing of new approaches to engagement across all channels and with all constituencies including customers, employees, partners, investors and citizens. As a result of this, 57 percent of companies now expect to devote more than a quarter of their IT spending to these new systems of engagement by 2016, nearly twice the level of 12 months ago.
If most people who contact a company expect a response within five minutes and 80 percent of mobile users have their phone with them 22 hours per day, then it is logical that customer engagement is, to a large extent, happen at the mobile end of the business.
For IBM this meant the launch and the development to its MobileFirst business and the acquisition of eight companies around it over the course of 2013.
However, mobile business and users expect customized and personalized services, with a large percentage of people will to trade private information to achieve this, but only if they are sure that that information would be kept private.
The growth of this part of the business through acquisition and development will continue over the coming year, with Rometty hinting a more acquisitions like Kenexa over the coming months.
Where this goes from here is open to speculation, but it’s likely to be a lot more of the same over the course of this year including acquisitions, new technologies, and, unfortunately, more layoffs as IBM looks for better financial performances in the coming quarters.