Vendor Ratings, Thomas Bittman Research Note 14 April 2003 Vendor Rating: IBM Rates Positive for Strategy, Portfolio IBM has a broad product portfolio with successful products in key areas. On demand is the right strategy if executed well. Challenges include small and midsize businesses, business consulting and cross-ibm synergy. IBM Overall Rating: Positive What You Need to Know: IBM s on demand strategy is sound, matches its product and service potential, and sets a strategic direction for all of IBM s business divisions. The challenge will be execution on such a pervasive initiative. Although services are critical to IBM s synergistic growth, software is perhaps more critical, both in terms of higher margins (and earnings) and also customer lock-in. While IBM competes across a broad array of markets, the criticality of software implies that Microsoft is its primary strategic competitor. IBM s challenge (especially in software, but also in services) is success in the SMB market (in terms of products, channels and mind share). In servers, IBM will successfully grow the xseries and pseries businesses vs. the competition. Overall, the two most-critical strategic measures of success are long-term service contracts and WebSphere market share and revenue growth. Analyst Comments: IBM s positive rating reflects its broad portfolio and strong financial base. Strengths are enterprise sales, outsourcing, WebSphere, and Unix and Intel servers. Challenges include small and midsize businesses, business consulting and IBM Tivoli. Detailed Rating: Initiative Rating Change Corporate Viability Strategy Positive No Change Financial Strong Positive No Change Marketing Promising No Change Organization Positive No Change Product/Services/ Technologies Product/Service Positive New Software Positive No Change WebSphere Strong Positive No Change DB2 Positive Down Tivoli Promising No Change Lotus Positive No Change Services Positive No Change Business Consulting Promising No Change Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
Outsourcing Outsourcing IT Consulting and SI Positive No Change BPO Promising Up Application Promising No Change IT Infrastructure Strong Positive No Change Hardware Positive No Change Microelectronics Positive No Change PCs Caution No Change pseries Strong Positive No Change xseries Strong Positive No Change zseries Positive No Change iseries Caution Down Storage Positive New Financing Positive No Change Technology Promising New Autonomic Computing Promising No Change Linux Promising No Change Pricing Promising No Change Customer Service/ Product Support Sales/Distribution Positive No Change Enterprise Strong Positive New Small and Midsize Business Promising New Support Services Positive No Change Corporate Viability: IBM has effectively outlined a strategy that fits the emerging market requirements for what Gartner calls the real-time enterprise, and it has excellent financials and a strong management team. IBM will be challenged to market to small and midsize businesses (SMBs), and will also find new competitive threats in consortia that are established primarily to compete with the broad IBM business model. Strategy: Positive On 30 October 2002, IBM CEO Sam Palmisano presented IBM s new on demand strategy (see Can IBM s On Demand Strategy Build Real-Time Enterprises? ). The strategy is an evolution of IBM s previous e-business solutions and integration strategy introduced under former CEO Lou Gerstner, but taken to the next level and combined with other initiatives, including autonomic computing (introduced by Gartner as the real-time infrastructure ), Linux, e-sourcing, grid computing, Web services and the business-consulting capability gained through the PwC Consulting acquisition. Gartner believes that IBM s strategy marks the next natural step in the evolution of its integration and solution strategy, designed to create the real-time enterprise. IBM focuses on total solutions for high-end, complex, heterogeneous enterprises. On demand effectively presents a cohesive corporate strategy that breaks down to specific business area strategies. Financial: Strong Positive 14 April 2003 2
IBM s portfolio is well-balanced among services (including significant revenue from long-term contracts), software (with a growing share of cross-platform software, the new lock-in platform for IBM) and servers (balanced between profitable but declining mainframe and midrange servers and aggressively growing Unix and Intel Architecture servers). IBM s financing business also generates significant business for the company. Less important are IBM s PC and technology businesses. The PC business is not strategic, per se, but it is necessary as a part of the total solution therefore, remaining profitable is the most critical goal. Technology will remain strategic only as long as it makes money. (That portion of the technology business that is necessary to support IBM s hardware business is, of course, strategic.) The key requirement with the technology business is to cover fixed internal costs through a robust original equipment manufacturer (OEM) business. Unfortunately, the OEM business will ebb and flow with the economy, so technology will remain the most variable business in the IBM portfolio. Professional services have been the revenue growth engine for IBM for years (see Figure 1). In 1993, professional services accounted for 15 percent of IBM s revenue. By 2002, it had grown to 39 percent (45 percent if maintenance revenue is included). Services were the primary driver of the IBM turnaround during the Gerstner era. In fact, excluding services, IBM s revenue has declined more than 20 percent since 1992. Figure 1 IBM s 2002 Segment Revenue 14 April 2003 3
$ in Billions $35 LS 30 25 ITS 20 SO 15 10 Other Server Lotus Tivoli Storage x RSS Printers 5 0 BCS Services (IGS) Support (IGS) Middleware DBMS p i z Software Servers Other Micros Technology IGF PCs PCs Other BCS = Business Consulting Services DBMS = Database management system IGF = IBM Global Financing IGS = IBM Global Services ITS = Integrated Technology Services LS = Learning Services RSS = Retail store system SO = Strategic Outsourcing Source: Gartner Research (April 2003) Earnings are a different story, because margins are much lower for services than for software (see Figure 2). Professional services provided less than 5 percent of IBM s pretax profit in 1992. In 2002, 43 percent of IBM s pretax net income was due to IBM Global Services (IGS), but significantly, 42 percent was due to software. Although services are IBM s revenue growth engine, software is critical for IBM s earnings. Figure 2 IBM s 2002 Pretax Income by Segment 14 April 2003 4
$ in Billions 4.0 Services 3.5 (IGS) 3.0 2.5 2.0 1.5 1.0 0.5 0-0.5-1.0 Software Servers IGF PCs Other Technology IGF = IBM Global Financing IGS = IBM Global Services Source: IBM (April 2003) Marketing: Promising IBM branding has improved and become clearer during the past few years. Improvements include the ebusiness symbol, the five software brands (including Rational) and e-server. The message has also been effective: complex products for complex problems. IBM marketing has not been effective beyond large enterprises. SMBs (and vendors) see IBM as less relevant and less approachable. The most-critical business needing market perception improvement is software in the SMB space. The primary competitor is Microsoft, which dominates the SMB software market. Organization: Positive IBM has a strong executive team in place. Gerstner made critical changes to a deeply troubled company. During his tenure, he set IBM on a new course by eliminating redundancies and building a synergistic, solutions-oriented business as well as improving IBM s corporate culture (especially in terms of fiscal and managerial responsibility). CEO Palmisano now must take IBM to the next level increasing the company s role as an aggressive technology leader and providing highly visible and personal leadership in the industry. Both elements are critical for IBM s corporate growth, especially in the critical SMB market. Palmisano is shifting the company from the Gerstner focus of synergy and fiscal responsibility, to synergy and growth making more long-term investments (see How IBM Is Incubating Growth Opportunities ), putting more focus on technology leadership, and putting more emphasis on marketing and CEO visibility. Products/Services/Technologies: IBM has a broad portfolio of hardware, software and services that competes effectively across most market segments. Although IBM is not the leader in all segments, IBM leverages its broad service capabilities to build market share and independent software vendor (ISV) commitments to its other product lines. The on demand strategy provides specific guidance to each of IBM s business divisions. Software: Positive 14 April 2003 5
IBM is actively working on synergizing the various brands in the Software Group, finding ways to reuse components from one brand in another brand s offerings (see IBM s Software Portfolio ). This effort is no small matter IBM has a tremendous amount of overlap between the brands. However, the effort will help eliminate redundant R&D and give IBM more flexibility in packaging software based on market need, rather than based on predetermined product architecture. IBM s software is strongest in the enterprise market, but IBM is investing in Express versions of its products to increase their small share of the SMB market. With WebSphere, IBM is a leader in the enterprise infrastructure market, and it is well-positioned to further strengthen its leadership, thanks to its dominant position in traditional enterprise computing, longlasting customer relationships and leadership (in some cases, domination) in key middleware segments (see WebSphere Forms Mainstay of IBM s Platform Strategy and Take a Rational Look at IBM s Future AD Strategy ). IBM s data management software is led by the DB2 family, but, in an effort not to alienate Informix customers, IBM has committed to continue to support and, in many cases, enhance, sell and market the myriad of Informix database management systems (DBMSs). Gartner believes this will detract from IBM s focus and ability to execute within the DBMS-specific battlefield (see IBM DB2 Windows and Unix Products Are Still Catching Up ). IBM Tivoli has struggled in the past few years, but it is central to IBM s autonomic computing initiative. We believe that IBM is righting the ship and will regain lost mind share and trust with its customers in part, by focusing on best-of-breed functionality and leveraging IBM solutions, research and other initiatives. IBM continues to make substantial investments in the Lotus products. It has maintained market share (other than office suites) despite almost total loss of mind share to Microsoft in collaborative products. Lotus is becoming more important to IBM as a set of technologies to integrate with WebSphere in various product roles. Services: Positive IGS accounted for 45 percent ($36 billion) of IBM s overall revenue in 2002. This revenue is spread across seven primary industry vertical segments, with financial services and manufacturing accounting for nearly half. IGS currently has more than 180,000 service professionals in 160 countries (roughly 31,000 from the PwC Consulting acquisition). As a result of the PwC Consulting acquisition, IGS assumes the top revenue position in all worldwide IT professional service segments (except process management services). IGS categorizes its offerings into three primary segments: Business Consulting Services: These encompass transformational initiatives that streamline processes and change current business models (see IBM Seeks to Use BCS to Transform Itself and Its Customers ). Specific offerings include e-business strategy, buy and supply, sell and support, enterprise resources and e-business integration. The acquisition of PwC Consulting nearly doubled the size of this segment (82 percent growth). Integrated Technology Services: These services provide IT infrastructure efficiency for new and legacy applications and systems. The specific offerings include e-business infrastructure, networking and connectivity, infrastructure and systems management, business continuity and recovery, and technical support. Strategic Outsourcing Services: This was the largest portion of IGS s revenue until the PwC Consulting acquisition. Specific offerings include transformational outsourcing, application management (see IBM Accelerates Its Focus on Application Outsourcing ), e-business hosting 14 April 2003 6
and infrastructure outsourcing (see IBM Global Services Joins IT Utility With Business Process ), including data center, desktop, network and managed storage. Hardware: Positive IBM has focused its server efforts in the past two years, putting clear emphasis on the pseries and xseries for growth and market share, and the zseries and iseries in terms of growing use within their installed bases (see IBM Focuses on Its Server Portfolio to Grow Market Share ). IBM s PC Division is still struggling to maintain profitability. Price has become the primary criterion for many customers who now consider PCs to be commodity products. IBM s bundled value focus approach has been received with mixed results. Gartner believes that while IBM s strategy is sound, it must continue its supply chain initiatives to remain competitive on price, as well as bolstering its marketing and image to generate demand. In monolithic storage, IBM has grown its market share and installed base. It has excellent market coverage and mind share. In modular storage, FAStT is making it onto many end-user shortlists and is very competitive. Technology: Promising IBM is positioned well in an expanding Linux market (see IBM s Linux Strategy: An Appraisal and Outlook ). IBM s goal is not to make Linux its dominant operating system, but rather to promote heterogeneity. Heterogeneity is the key to IBM s server, software and services strategies, for obvious reasons. The business model around Linux itself is not as core to IBM and may evolve over time. Autonomic computing is the foundation of IBM s on demand strategy. Autonomic computing is about applying computing power to solving the complexities of a computing environment which makes heterogeneous computing easier. In addition, autonomic computing increases the economies of scale that IBM s service organization can use for outsourcing or hosting services, and it provides added value that will increase revenue (and margins) for hardware and software products by reducing customer total cost of ownership. IBM is in a good position to invest in technology for autonomic computing in complex, heterogeneous environments. Financing: Positive IBM s financing capabilities dwarf those of most competitors and give it a significant differentiator. IBM Global Financing (IGF) is the largest IT leasing company worldwide. Although it generated a mere 4 percent of IBM s total revenue in 2002, it contributed 12 percent of the profits. IGF offers a broad range of highly sophisticated and flexible lease and financing offerings that will often involve complex multivendor hardware, software and services. It has extensive international financing capabilities that are among the best in the industry. Its large-scale remarketing capability of surplus IT equipment and parts allows it to manage internal business risk in the long term and, hence, to be a reliable business partner. Overall, IGF has an impressive operation with significant new market opportunities. From a customer perspective, however, the view is more complex. Coordination between the IBM sales team and IGF can often be muddled, limiting IGF s opportunities to upsell. IGF continues to struggle with some operational routines, especially with low-value, operationally intensive lease portfolios, such as 14 April 2003 7
PCs. For those enterprises with complex requirements and the ability to manage sophisticated supplier relationships, IGF is a good choice. For midsize enterprises, regional companies or those without the capability to manage multifaceted supplier relationships, IGF s size and sophistication can work against it. Customer Service/Product Support: IBM s sales force is effective for large enterprises and strong channel relationships within the upper end of the midmarket. Making strides to improve channel relationships to eliminate conflict and enhance incentives, IBM still has significant challenges ahead to forge relations among lower-tier ISVs and systems integrators that maintain the majority of SMB relationships (see IBM Increases SMB Attention: Ability to Deliver Questioned ). In support services, IBM consistently ranks highly for its product maintenance and support capabilities perhaps best of breed and very close to a strong positive evaluation. Related Research and Ratings: Corporate View Can IBM s On Demand Strategy Build Real-Time Enterprises? IBM Increases SMB Attention: Ability to Deliver Questioned IBM s Linux Strategy: An Appraisal and Outlook How IBM Is Incubating Growth Opportunities Software IBM s Software Portfolio WebSphere Forms Mainstay of IBM s Platform Strategy IBM s WebSphere Integration Offer Signals Long-Term Plan IBM DB2 Windows and Unix Products Are Still Catching Up Take a Rational Look at IBM s Future AD Strategy Details on IBM s Changes to Passport Advantage Licensing Services IBM Seeks to Use BCS to Transform Itself and Its Customers IBM Global Services Joins IT Utility With Business Process IBM Accelerates Its Focus on Application Outsourcing IBM Commits to the Business Process Outsourcing Market Servers IBM Focuses on Its Server Portfolio to Grow Market Share 14 April 2003 8
IBM s xseries: Innovation Is the Key Previous Research IBM Earnings Remain Solid, Indicate Growth in 2003 IBM s New CEO Will Make Two Major Changes IBM Must Turn Its Real-Time Enterprise Vision Into Growth IBM Shows Future of Grid Computing Rating Definition: Strong Positive Positive Promising Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key BPO Business process outsourcing 14 April 2003 9
DBMS IGF IGS ISV OEM SI SMB Database management system IBM Global Financing IBM Global Services Independent software vendor Original equipment manufacturer Systems integration Small and midsize business Core Topics Powerhouse Vendors ~ Powerhouse Vendors Server Platforms ~ Hardware Platforms IBM Headquarters: Armonk, New York Web Location: www.ibm.com 14 April 2003 10