IBM’s Q1 FY2019 results demonstrate just how hard a cloud pivot is working out

Profile picture for user gonzodaddy By Dennis Howlett April 16, 2019
Summary:
IBM may not have delighted Wall Street but you can see its trajectory as an object lesson in business model pivots and what this means for customers.

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IBM has not had a good time of it under Ginni Rometty's leadership. At least that's what financial wonks would have you believe as the iconic technology behemoth turned in yet another relatively disappointing result for Q1 FY2019. But the string of misses, misfires and dull results belie a fundamental problem for technology providers that were not born in the cloud.

A cloudy history in the making

In the 'good old days' - think 1992-2000, technology companies quite literally printed money as the Golden Era of client/server ERP became the gateway drug for customers believing the marketing rhetoric that automated and integrated business processes would pave the way for super-efficient operations. History tells a different story because as we've come to learn, it never played out as well as the technology industry implied. Sure, the software vendors got rich and their service provider hangers-on got both rich and powerful in terms of customer lock-in but looking back, did customers benefit to the extent they were promised?

Fast forward to 1999, the year Salesforce was founded and the promise of 'no software.' What a breath of fresh air that turned out to be. Instead of IT controlling everything with a digital stamp, real users could make real choices about what they wanted and how they wanted to consume it. At the time, much of the industry chose to turn a blind eye, considering Salesforce and its attendant CRM focused services as a sidecar and something of little consequence in the grand scheme of IT landscapes.

In 2006 along came a New Zealand based startup called Xero. They focus on the SMB/mom and pop businesses, providing easy to use accounting software as a service. Again, no-one took much notice. And when Workday started to make noises, about the same time as Xero got going, well - that's HR, and we all love that eh?

Coincidentally, Oracle had recognized that while SaaS (as it was then) represented an opportunity, it quickly discovered that development for what is universally understood to be cloud was anything but 'lift and shift.' The now infamous 2006 statement 'we're halfway there' was met with almost universal derision.

It wasn't until the 2010-12 timeframe, a period I remember very well - that IBM realized that the writing was on the wall for its deeply entrenched ERP implementation business. That was the time when SAP HANA started to hit the streets. IBM was rightfully concerned that its longtime partnership with SAP, which included for IBM to sell its DB2 database and associated hardware into large SAP shops was in jeopardy. Despite soothing noises from SAP, IBM didn't stand back and wait for the proverbial to hit the fan. It planned for what I and others predicted would be a gradual downturn in the on-premises implementation business.

At the time, the thinking was that those implementations would start to fall away around the 2015-17 timeframe. That prediction turned out to be remarkably accurate, and regardless of which software/services/hardware vendor you follow, the pattern was fixed. For any of these storied vendors to survive, let alone thrive, they were left with no choice but to pivot. Why?

Despite legendary account control, customers suffered from a combination of war weariness in implementations, resentment against audits and overwhelming complexity, all at a time when software choices were expanding exponentially and where the opportunities to get from underneath the yoke of the mega-vendors became real. Look at any large scale IT landscape today, and you'll find very little evidence of cohesion or, for that matter control outside of a few large spaces. The stories of firms finding hundreds of instances of Salesforce are only just emerging, but you get the point.

In IBM's case though, the rise of firms like AWS presented a new threat to its otherwise lucrative data center business. Couple that to a change in focus from offshoring/outsourcing to value add and IBM faced not one or two but three significant threats to its business. While faceless and unemotional financial analysts won't give IBM a pass, I am surprised that IBM has managed to get as far as it has without getting remotely close to crashing out. If anything, it speaks to three factors.

Three times a winner?

First, IBM has been around a very long time and survived a near-death experience in the early 90s. Sure, it made some horrible mistakes under Sam Palmisano's leadership, and Rommety didn't exactly get off to a stellar start. Watson is pretty much a bust today, despite substantial engineering efforts. Part of what has been learned around cognitive computing will bear fruit but as an overarching concept? Forget it. In recent years, the culture of IBM has changed, and the company has steadily removed its 'old guard' who, quite frankly, would always have held back the company as all prehistoric and tenured officers do during times of change. IBM is no longer the place you aspire to enjoy a 30 plus year career.

Second, IBM can count some customers that go right back to its earliest days. That kind of loyalty is being rewarded in both directions as the company stands alongside those customers in developing new age solutions. In that sense, IBM is back to its consulting and services roots but made for a different world.

Third, and despite the legacy of data center contracts with years to run, IBM has managed to create a compelling narrative around hybrid cloud environments that allow it to play to strengths. Die-hard public cloud advocates might poo-poo the IBM rhetoric, but that would entirely ignore the commercial realities that both IBM and its customers face.

What does this all mean at the Q1 FY2019 stage?

The numbers speak for themselves.

IBM Q1 FY2019

Not pretty but not catastrophic. But it is in the detail that we see where IBM goes next. In an analyst call, Jim Kavanagh, CFO IBM said:

As our clients become digital enterprises, they need tighter integration between hybrid cloud and their data and AI platforms to unlock value. And so we recently made changes to our management system to more effectively address our clients' evolving needs and in preparation for the acquisition of Red Hat. The changes also better align our portfolio to the market and to underlying business models.

This narrative goes to the heart of the challenge that customers face if/when they make that move to hybrid cloud environments in a purposeful manner while at the same time looking to unlock true business value. It is something to which I alluded in an earlier commentary about SAP's pivot and which HfS addresses in its Integrated Automation Platforms story.

As an overall example of how this work, Kavanagh quoted a customer:

Within cloud application migration, GBS cloud advisory services works with enterprises to plan and implement a clear strategy and roadmap for their hybrid cloud journey. We are doing this with Tribune Publishing as they transform from a legacy print company to a digital company, helping them determine the right environment for each of their applications and optimizing their migration to the cloud. Our next generation enterprise application offerings assist clients as they build and implement cloud native applications in areas such as Workday, Salesforce and S/4HANA. IBM is now leading the market with over 200 S/4HANA impact assessments, over 200 implementations and more than a 125 go-lives. In application management, we are shifting our business to cloud-based offerings and continue to have good momentum in our cloud migration factory and cloud application development.

But as you can see from the results, while the implementation focus may have shifted, it's had a significant revenue impact.

My take

How well IBM navigates these waters in the face of stiff competition from the likes of Accenture and the potential for a growing threat from the software vendors themselves, especially in bespoke and cutting edge projects remains to be seen, but for now, I am looking at IBM through a different lens.

Instead of beating them over the financial head, I want to see how well they manage the ongoing pivot and how well that plays out for their customers.  I know for example that in some segments, IBM is carefully managing customer expectations while at the same time introducing and growing fresh, young and (right now at least) raw talent.

The good news is that for all the difficulties of making a cultural change in a firm of this size, IBM has a history of errors from which it can choose to learn. Get it right, and it will serve as a blueprint for others to observe. Get it wrong and - well - better lessons for others stuck in the reinvention cycle.

In the meantime, I'd counsel IBM to take a peek at what the likes of Xero and Zoho are doing. Why? Because they have both recognized and responded to the business need for hiding complexity, making the heavy lifting behind process automation trivial from the user perspective while at the same time helping customers adjust to 21st-century realities.