- IBM to divest one-fourth of its business for a simple and leaner organization
- Focused on boosting its profitable cloud revenue segment, which recorded 19% YoY growth, as per the recent Q3 2020 results; Expansion of IBM’s hybrid cloud services ecosystem to further provide data for its AI Watson solution; With an aggressive growth plan, IBM’s CEO aims to double sales of its Red Hat open source software unit by 2023
- Quantum—another focus area of IBM; It aims to provide more computing power by reducing power consumption for its enterprise users
For almost seven years, IBM exhibited a slump in growth, with dropping top-line revenues and shrinking operating income. With just seven months at the helm of a CEO role—Arvind Krishna took a bold step of splitting the company into two interdependent public listed entities—IBM and NewCo. This shift shows a transformative approach, outlining a new wave of innovations in the organization. Following are the reformations being implemented by IBM to achieve its growth trajectory:
How is IBM looking to accomplish this?
- Expanding the partnership network:
IBM expects numerous Independent Software Vendors (ISVs) to move to its hybrid cloud and the AI model. Also, partnerships with vendors by offering co-op solutions will create more revenues mutually. This partnership strategy is reflected from recent tie-ups with Service Now (for AIOps), Adobe (Customer Exp using the hybrid cloud), and Salesforce. The vertical focused cloud offering is another area IBM is focused on; for instance, IBM collaborated with Bank of America for providing cloud solutions to the financial services industry. IBM can offer more purpose-built cloud offerings for other industries by coupling its technological capabilities and customer insights.
- Opting the organic route to strengthen its offerings:
To provide new technology and know-how and strengthen its solutions backbone, IBM opted for the M&A route. Spanugo (Cloud Cybersecurity Posture Management Solutions) and WDG Automation (AI-Infused Automation Capabilities) are its recent M&A. The focus has always been its main growth objective for cloud, AI, and security.
- Investments in various business segments:
The GBS segment of IBM drives its hybrid cloud model, with one-third of Cloud Pak revenues resulting from this segment. Hence, the company plans to invest further in this segment, supporting its hybrid cloud model. IBM invests considering that all segments should contribute to growth. To enable this growth, IBM drives its investments toward R&D and focus investments on high-demand areas. The key areas of investments are:
- Consulting business: To equip the GBS consulting resource with skills to fuel the planned growth strategy
- Ecosystem: To strengthen the ecosystem for collaborating with key partners (Adobe, Salesforce, ServiceNow, and ISVs—large and small) for IBM’s hybrid cloud platform and cloud properties
- Innovation: To increase R&D investments in Red Hat technologies and drive innovation in the key areas of Cloud and Cognitive Software (hybrid cloud, data, AI, and security)
- Acquisitive growth: Next 12 months considered to be an acquisitive period, with the projected cash flow from Q4 to empower edge over peers
- Interdependency with NewCo:
NewCo will also witness increased investments in automation and infrastructure modernization to obtain different cloud partners. The partnership will help IBM leverage NewCo as a managed services partner.
MARKETSANDMARKETS’ Viewpoint
IBM-NewCo spinoff is part of the larger revenue-restructuring of the organization. IBM has structured its path of creating a leaner software and services firm by investing, partnering, and innovating on cloud (hybrid model utilizing Red Hat acquisition), bundled AI and security solutions, and new technology development (Quantum computing). IBM can count on NewCo. as its partner for infrastructure services, while NewCo can further develop its strategic alliances or partnerships to garner a customer base. Though the global pandemic has led to project delays and purchase deferrals from a few of its customers, IBM aspires to revive its revenue from mid-to-end-2021. Few points to consider are as follows:
- Strategic investments in-sync with customer shifts:
IBM’s investments are in-line with the customer shifts in major industries. The clientele from the banking, healthcare, retail, media and entertainment, manufacturing, and airline industries are running their operations on mainframe. They have already begun to migrate their workload to the cloud environment.
The strategic partnership with Adobe to provide a modernized customer experience transformation is considered a dig at the peers. The focus of this strategy is to provide digital transformation and real-time data security to legacy customers from regulated industries.
Peers of IBM offer mainframe migration and modernization programs to global customers through public cloud platforms from AWS and Microsoft. For instance, Google Cloud acquired Cornerstone, a mainframe migration company to compete with AWS and Microsoft in the public cloud space.
These competitor developments back IBM’s move to tap the mainframe clientele from regulated industries and execute and realize the strategy.
- Divestment and the Status Quo:
Although divestment is not new to IBM, the presence of only a grey-line bifurcation between the two new entities in terms of the service revenue linked to both GBS and GTS has kept the analyst and investor community loaded with anticipations.
IBM leadership’s promise to set up a publicly traded Managed Infrastructure Services company with double-digit EBITDA growth leads to a lot of interpretations from the analyst point of view:
- How will be this contractual clause between the NewCo and IBM showcase in the coming years?
- And extension to the above, how will IBM view if NewCo prioritizes/proposes cloud solutions involving competitor cloud platforms on a large scale?
- Execution strategy will be the game-changer:
IBM must quickly become a self-service reliant cloud and cognitive software and solution provider with a minimized dependency on NewCo capabilities. Though IBM is already playing catch-up with its archrivals in cloud and cognitive business—AWS, Google, and Microsoft—but it needs to up their execution game substantially. A descend in becoming self-service reliant software organization might challenge IBM’s command, particularly in the cloud industry.
Nevertheless, with the restructuring and banking over R & D investments and various new and emerging technologies, IBM appears to be a better prospect in becoming one of the most transformative organizations in the coming decade.
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