While IBM’s Q4 cloud revenue jumped 23% and its $33-billion bet on Red Hat is looking good in these early days, CEO Ginni Rometty cannot afford another post-Q4 dropoff paired with promises of turnarounds looming somewhere down the road.
To prevent another such slump, it’s clear that IBM must make some fundamental and structural changes in its sprawling businesses so that the company’s organized around what customers want and need, rather than by internal history.
Rometty deserves great credit for devising and executing the Red Hat acquisition. It seems to have reinvigorated much of the company and given IBM a clear sense of identity that it has lacked for the past couple of years.
At the same time, however, a $33-billion investment requires a hefty payback. So Rometty needs to act decisively and quickly in making some additional bold moves that will better align IBM’s vast capabilities with today’s booming market opportunities.
IBM Needs to Embrace a Customer-Centric Model
IBM’s quarterly earnings calls sometimes sound like lectures on Byzantine history, where only deep insiders have any real sense of how the various pieces are connected or why they’re connected and what the final outcome might be.
I have no doubt that IBM has most or perhaps even all of the pieces it needs to sustain its heady Q4 growth performance. But the big question is this: can customers easily and seamlessly tap into the precise combinations of IBM capabilities that they need? Or do IBM’s internal politics and legacy org structure require those customers to master IBM’s Byzantine operations in order to finally and painfully get what they want?
Because if it’s the latter, then that model is utterly hopeless in today’s marketplace where customers have rightly begun to demand that tech vendors conform what they have to what those customers need, rather than forcing those customers to engage in an extended and frustrating scavenger hunt.
What We Heard on IBM’s Q4 Earnings Call
During yesterday’s Q4 earnings call, CFO James Kavanaugh repeatedly alluded to changes that are coming in the ways IBM’s huge consulting units—Global Business Services and Global Technology Services—operate together and with other parts of the company.
And maybe I’m crazy, but I think we’ve heard these promises before:
- “We’re investing in joint-services offerings across GBS and GTS and deploying joint go-to-market capabilities as clients look for solutions across applications and infrastructure.”
- “We’ll drive productivity and take structural actions, especially in our GTS business… In GTS, we’re going to take aggressive structural actions to reposition the business overall.”
- “We’re going to reposition this business for hybrid-cloud investing jointly, integrating GTS and GBS offerings around advise, build, move and manage…”
- “We’re going to integrate our go-to-market with GBS and our global account teams at the large enterprise level.”
I’m not saying the steps Kavanaugh outlines are easy, quick or without risk. Rather, the massive risk to IBM is that the rest of the world is moving much more rapidly than IBM is. IBM’s competitors have faced similar challenges and have addressed them more rapidly and more directly. This has allowed them to be more valuable to their customers and prospects *immediately*, not X number of quarters down the road.
So I would offer a few ideas to IBM, and I’ve asked my brilliant friend Ray Wang of Constellation Research to add his thoughts as well—you’ll see those below.
How IBM Can Reignite Its Growth
- Whatever the current timetable is for tinkering with GBS and GTS, cut that timetable in half. Then cut it in half again. And ask yourself: do IBM’s customers say, “Over there I need some business services, and over there I need some technology services?” Maybe they did that 10 years ago, but they sure as hell don’t do so today—yet IBM’s still dragging along its old and clunky GBS and GTS baggage. “Time is of the essence” is an understatement!
- On the earnings call, Kavanaugh said that in calendar 2019, GTS had $8.5 billion in cloud revenue, with huge wins at some major banks driving 13% growth. It’s time to make GTS part of IBM Cloud—the trend is your friend. And such a move would help IBM accelerate the structural changes Kavanaugh has been promising.
- IBM is the only major cloud player that does not identify its cloud services by the model that most customers have fully accepted: IaaS, PaaS, SaaS. Maybe IBM is smarter than every other cloud vendor in ignoring that model—and maybe not. It is hard for customers to get a sense of IBM’s cloud mission and positioning—other than Red Hat, Red Hat, Red Hat—because IBM insists on going its own way. It is time for IBM to frame out its cloud business in terms that customers embrace and understand.
- Unleash the data and AI team! It’s currently kept kinda/sorta separate from the cloud business even though customers view those specialties as intimately connected. The “Cloud and Cognitive” segment is a head-fake in the right direction, but again, IBM’s embrace of its own past—its legacy structures—prevents customers from gaining a clear, simple, and customer-centric perspective on what IBM can offer.
- And as promised, a few excellent ideas from Ray Wang of Constellation:
- “One of the big areas they can focus on is new partnerships. The cloud partnerships need to go further into industries but also work more closely with the other system integrators to build business units with their Cloud Paks.”
- “They need to make sure Red Hat still retains its culture going forward and allow Red Hat to stay Red for a bit longer.”
- “They should acquire a hyperconverged player or keep going deeper with Nutanix to show how mainframe, hybrid, multi-cloud, and on-premises can coexist on a single plane. Customers want choice but they also want easy management.”
After IBM’s very nice Q4 numbers, I don’t mean to be a curmudgeon and overlook their hard-earned achievements. But we’ve seen this play out before: a very strong Q4 followed by a slide into low-growth and no-growth land.
Rometty needs to accelerate the changes that IBM has been contemplating for some time. Because, fair or not, the world outside IBM is moving faster and more decisively than ever before.
Red Hat’s giving Rometty and IBM a chance to become relevant and disruptive once again—but if IBM doesn’t crank up the urgency, its competitors are going to move in rapidly, deeply, and mercilessly.
Subscribe to the Cloud Wars Newsletter for in-depth analysis of the major cloud vendors from the perspective of business customers. It’s free, it’s exclusive, and it’s great!