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The IBM business split: Big Blue places biggest bet yet on hybrid cloud

IBM has placed its biggest bet yet on hybrid cloud, by setting outs plans to hive off its managed infrastructure services arm, so it can throw its full weight behind tapping into the enterprise's demand for off-premise services

Given the company is one year shy of its 110th birthday, there is no denying the endurance of the IBM brand, nor the huge amounts of reinvention the company has had to undergo over the years in order to achieve such longevity.

Earlier this month, the company set out plans for what could possibly be one of the largest and most ambitious company reinvention initiatives it has ever embarked on, with the news that IBM is preparing to split its business into two separate, public traded businesses by the end of 2021.

One of these businesses, currently (and temporarily) dubbed NewCo, will concentrate on the provision of managed infrastructure services to enterprises, with the company claiming the split will immediately position it as a global leader in this space, with a customer base that includes 75% of the Fortune 100.

The IBM brand, meanwhile, will be retained to drive the continued growth of the company’s hybrid cloud, data analytics and artificial intelligence (AI) product lines and initiatives.

For anyone who has been tracking the firm’s financial results in recent quarters, the company’s decision to throw the full weight of the IBM brand behind its hybrid cloud and AI portfolio and strategy may not have come as too much of a surprise.

The firm’s cloud revenue growth increased by more than 10 percentage points between the first and second quarters of 2020, rising from 23% to 34% as a result.

It also used its Q2 results to confirm its hybrid cloud platform had generated $23bn in revenue for the company over the past 12 months.

Supporting enterprises

In a conference call with analysts to discuss the results, published in July 2020, IBM CEO Arvind Krishna said the company’s priority is to support enterprises embarking on two distinct, yet related, digital transformation journeys: the move to hybrid cloud and the adoption of AI.

“Clients want to modernise apps, move more workloads to the cloud and automate IT tasks. They want to infuse AI into their workflows and secure their IT infrastructure to fend off growing cybersecurity threats,” said Krishna, during the call transcribed by financial blogging site, Seeking Alpha.

“As a result we are seeing an increased opportunity for large, transformational projects. These are projects where IBM has a unique value proposition. But they are projects that take time to shape and therefore close.”

But when the projects do come off, the positive impact they have on the company’s top line is obvious, as evidenced by its Q2 results. During the same quarter, its Global Technology Services (GTS) business – which is being spun-off into NewCo – chalked up a 5% year-on-year decline in revenue.

Historic backing for hybrid cloud

IBM’s hybrid cloud-backing business strategy is nothing new. The company has spent the last few years trying to distance itself from the runners and riders in the public cloud space by predicting the hybrid cloud model would become the enterprise market’s preferred means of consuming IT services.

In an interview with Computer Weekly two years ago, in the summer of 2018, IBM Cloud general manager Sebastian Krause said IBM had been markedly quicker than many of its public cloud rivals in anticipating the enterprise’s appetite for hybrid cloud offerings in the years to come,

“We recognised that enterprises would not want to throw away all the assets they have generated over the decades,” he said. “Their business processes, business logic, data assets and everything that sits behind the firewall consists of years of work.

“So when there was this big war four or five years ago in the industry, and also between the analysts, where there was two camps [arguing] over whether it was private or public cloud [that enterprises would prefer], we said it is neither nor. The world will be hybrid.”

Several months on from this interview, IBM cemented its commitment to building out its hybrid cloud proposition for enterprises further by announcing its plans to acquire open source software giant Red Hat for $34bn.

In an open letter, published several days after news of the proposed business split broke, Krishna said the Red Hat acquisition had effectively laid the groundwork for the company’s break-up several years ago.

Read more about IBM and its business strategy

Since the acquisition completed in July 2019, IBM has drawn on Red Hat’s OpenShift platform-as-a-service (PaaS) technology to refine its hybrid cloud enterprise strategy, with more emphasis placed on how open and interoperable its cloud is compared to its competitors’ offerings.

And, according to Krishna, this means the company is now better positioned to “seize the $1tn” opportunity it claims tapping into the enterprise demand for hybrid cloud represents, while hiving off its managed infrastructure services arm leaves both entities free to concentrate on what they do best.

“Client demand for our open hybrid cloud platform is soaring. This is driven by the value clients find in a hybrid cloud architecture built on open source innovation that enables choice and control,” he wrote.

“An important part of our open hybrid cloud platform’s value lies in the expertise and services we provide to help clients on their journey – whether that’s modernising apps, building cloud-native apps, or migrating to the cloud. This represents a significant portion of the $1tn opportunity.

“Having a clear focus is only the beginning of the journey,” he said. “To bring our ambitions to life, we are also relentlessly pushing forward on the creation of a culture that fosters learning, radical candour, curiosity, speed, and innovation – a growth and entrepreneurial mindset.”

Which is just as well, because simply splitting IBM off from NewCo is unlikely to be enough on its own to strengthen IBM’s overall hold on the cloud market, said John Dinsdale, chief analyst at IT market watcher house Synergy Research Group.

Steady decline

According to Synergy’s own second quarter of 2020 market data, IBM accounts for about 3% of the overall public IaaS and PaaS sector, and its share is in “steady decline”.

Where the company does fare better is in the managed private cloud services sector, where it leads the market with 15% share, but – again – its lead is in decline there as well, said Dinsdale.

“The numbers are what they are,” he told Computer Weekly. “What this [business split] can potentially do is enable the new IBM to be a bit more focused and growth orientated. That will require some share and assertive senior management and a long-term commitment to making IBM a more high-profile cloud provider.”

In the past, IBM and its enterprise cloud proposition has been criticised for being too complex, as its product and service portfolio grew over time through a mix of acquisitions and in-house development, but also too SMB-focused.

As detailed in Gartner’s 2020 Magic Quadrant Cloud Infrastructure and Platform Services report, which categorises IBM as a niche player in the market.

“IBM Cloud remains a complex platform resulting from legacy offerings and uneven product development gains,” the report states.

Addressing criticism

The company has taken some steps to address some of the criticism surrounding the complexity of its cloud portfolio, including simplifying the branding of its platform and infrastructure service offerings.

For instance, the company retired both its IBM Softlayer Infrastructure-as-a-Service (IaaS) and IBM Bluemix Platform-as-a-Service (PaaS) branding several years ago, and began marketing its off-premise services under the IBM Cloud banner.

Even so, as detailed in the Gartner Magic Quadrant report, adoption of its PaaS offerings, for example, remain “scant” which is indicative of the “company’s diminishing mind share among developers who perceive IBM as a provider of legacy technologies”, it stated.

“Furthermore, some of IBM Cloud’s efforts to court software developers through open-source initiatives have yet to produce results,” the report added.

And where its IaaS proposition is concerned, the company has a lot of catching up to do, suggests the Gartner Magic Quadrant. “Although IBM launched [its second generation] infrastructure in 2019, the new IaaS offering contains a subset of the capabilities of SoftLayer, and is only available in five countries.”

Further issues

The complex issues that blight IBM are not limited to the size and make-up of its product portfolio, and they are likely to get worse (rather than better) in the wake of the business split, warned Margaret Adam, assistant vice-president of European Services, Channels and Alliances Ecosystems at IT analyst house IDC.

“IBM can already be a difficult company to understand and do business due to its scale, structure and history. In the short-term, the split will make things possibly more complex, as there will be uncertainty surrounding how exactly the split will happen and what and who will reside in the two resulting businesses,” she said

“The change will be significant and both businesses will have to completely re-state their products and capabilities. So after a year or two we think a new clarity of proposition will emerge,” said Adam. “IBM will need to be as clear as possible with customers during the transition, keeping them up to date with the implications of the split on the services on which they rely.”

What IBM does have working in its favour is the fact it is perceived by enterprise IT leaders as being a “safe pair of hands”, and that perception is one that is extended to its hybrid cloud capabilities.

“The challenge now for IBM is to be perceived as an innovator in this space, [and] sought out by those seeking to use cloud as the platform of innovation,” she said. “The splitting of the business and focus on hybrid cloud combined with AI can help this.”

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