Why IBM’s Spin-off is Off by 180 Degrees
IBM’s strategic rationale behind its recently-announced re-organization is a repositioning that enables the firm to profit the most from increasingly complex, multi-cloud, hybridized business IT environments. This is exactly the kind of thinking that IBM needs to survive and thrive. A solid rethinking and reinvention of IBM has been in order for several years.
Unfortunately, as announced, IBM plans to spin out its Managed Infrastructure Services (MIS) business unit as a completely separate firm. The remaining “IBM” will focus on its cloud platform business, its systems hardware, its software business, its business and IT consulting, and its Watson / AI business.
Analysis of enterprise clients’ needs, and of IBM competitors’ positioning, suggests that jettisoning MIS will separate IBM from what is likely to be its strongest growth business – and the source for investment that its other business units will need to survive.
Spinning the Spinoff
Spoiler alert: IBM will need to invest heavily and with an eye on long-term returns rather than short-term improvement to enable its announced approach to work effectively. To wit:
- Cloud services platforms are exceptionally costly. IBM is already a strategic partner reselling AWS and Microsoft cloud platforms. Its own platform would need massive investment in technology, staff, infrastructure, marketing, channels, and more to compete. Why would IBM invest strategically to own and build out a diminishing-margin commodity that it already resells from other providers? It seems to make much more sense to invest in adaptable, scalable managed services that build on top of those platforms.
- IBM’s agile software portfolio has aged. IBM’s software and tools are considered to be very technologically solid. Red Hat remains a cornerstone of agile-oriented software development and modernization. But consensus among enterprise and provider clients is that the portfolio is failing to keep pace with client and partner approaches and desires. To compete in the new software reality, IBM must also invest heavily in modernizing and expanding its software portfolio and go-to-market approach.
- Good services, thin margins. In pursuit of financial improvement, IBM expanded from a tech-led to a more services-inclusive business strategy several years back. Unfortunately, those services – including cloud, outsourcing, IT and business consulting – have not delivered the margins expected. Services should be generating high margins to invest in core improvement. Instead, they’re increasingly challenged in a marketplace suffering from smaller engagements of shorter duration and less complexity.
Reorienting the Spin
Identifying challenges is no fair without offering solutions, so here is what I suggest for IBM:
- Keep the MIS unit as integral to the future of IBM. This is where the core growth will be through the next decade and more. It will also enable funding of many or all of the improvements needed.
- Recognize that the cloud platform is an adjunct. Why hold on to massive overhead that duplicates what you already re-sell from AWS and Microsoft? If IBM must keep the cloud platform, enable and position it as a niche, value-added capability optimized for specific applications (e.g., ISV DevOps) or for specific markets (e.g., healthcare).
- Invest in the Software unit. Modernize the entire portfolio (including adding/acquiring more new stuff). Fund that investment with growing MIS revenues.
- Make Cognitive work better. Get Watson’s hands dirtier. Push more and deeper AI within IBM Software to optimize development, testing, design thinking/design engineering, and cost reduction of all these. Then, apply that to MIS to optimize adaptable and dynamic IT services management.
- Rethink and modernize business and IT consulting and other services. High prices and thin margins are a poor strategy, and unsustainable as competition thickens and opportunities shrink.
- Spin off the systems group – or embed it in niche cloud services. Hardware is simply outside of what IBM plans and needs to do. Keeping it affirms that IBM leadership believes that the company’s past is more important than its future.
If this re-organization proceeds as announced, IBM will be reinforcing its traditional thinking and business approach at a time when it truly needs to – pardon the phrase – Think Different(ly). It will also reinforce that its strategic vision is one of markets orbiting IBM, rather than IBM orbiting markets. Reality is a different spin entirely.