Let’s face it, this hasn’t been a good quarter, even a good year, for tech. Given that, how is it that an IT company that’s been around for longer than most of today’s technology professionals have lived seems to be doing more than OK? IBM seems to be bucking the downturn. What can we learn from that?
One question that comes to mind is how IBM could buck the supply-chain problem that others are complaining about. The obvious answer is that the key product ingredient in IBM’s success is software, and in particular Red Hat software. There’s no supply chain issue with software, and Red Hat has unquestionably reshaped IBM, but IBM has assets of its own in play too, which leads us to the first lesson.
Since the 1990s, IBM has consistently been the vendor with the largest “strategic influence” in our surveys. We define strategic influence as the ability to shape customer technology plans in a way that conforms to the vendor’s own view of the market, and to its product offerings. At the same time, strong strategic influence seems to ensure relevant and accurate feedback from account teams to senior vendor management, which helps with positioning and messaging.
You can see that with IBM’s “hybrid cloud” slant. The fact is that the number of enterprises who aren’t committed long-term to a hybrid cloud is below the level of statistical significance for my surveys. Despite this, the slant on cloud computing that most vendors take is based on the media, and so they talk about “multi-cloud”, which is something enterprises see as a defensive tactic rather than a strategic direction. From IBM’s quarterly earnings call: “Hybrid cloud is all about providing a platform that can straddle multiple public clouds, private cloud and on-premise properties that our clients typically have.” That simple statement shows how IBM has made their cloud story resonate.
Another benefit of strategic influence is the opportunity to sell consulting and other professional services. Many enterprises have commented that having an IBM team on site has made IBM a kind of de facto IT partner. Who better to turn to when you need outside resources to augment your own team, or for a task you have no internal skills to address? I’ve seen this in accounts where my own consulting brought me into contact with IBM people.
The effects of all of this are clear when you look at the numbers. IBM’s overall revenues were up 11%, but software revenue was up 15%, consulting revenue up 17%, Red Hat revenue up 21%, and hybrid-cloud-associated revenue up 25%. Another interesting revenue number that’s my transition into the next IBM point is that transaction processing revenue was up 31%.
IBM has strategic influence dominance in no small part because IBM is the vendor most involved in the core business applications of major enterprises in major verticals. The old adage, so old I remember it from my early days in programming was “Nobody ever got fired for buying IBM.” With vertical-market expertise that’s literally unparalleled in the industry, IBM can count on C-level engagement and that protects those who make a pro-IBM decision. Add to this the fact that one class of application that’s immune from outside pressure is the core business stuff. You don’t have a business at all if you don’t invest there.
One interesting point raised by IBM’s strategic-influence success is whether IBM’s challenge with marketing over the last two decades is linked to its strategic influence. Strategic influence for vendors tends to be linked to sales-centricity; Cisco among network vendors has the highest strategic influence. That raises the question of whether IBM’s current success is due to a market-behavior shift that suddenly values sales over marketing. It may be, but there’s a bit more to it.
I think it is true that IBM’s resilience in 2022 is attributable to the strategic-interest factors I’ve just noted, but I also think that they’ve been perhaps a bit smarter than I had expected in the way they’ve integrated Red Hat. IBM has made no bones about how critical Red Hat is to their future, both on earnings calls and in other conferences and media comments.
What the current quarter shows relative to IBM and Red Hat is that IBM appears to have added value to Red Hat, created more value for its customers based on Red Hat features, and at the same time not interfered in any noticeable way with Red Hat’s own trajectory. They also appear to have been successful in leveraging Red Hat to gain additional sales traction and strategic influence beyond their original (pre-acquisition) stable of accounts. All that is good news for IBM…and for Red Hat.
The quarter may demonstrate that IBM is at least capable of, if not intending to, balance between leveraging its strategic influence and leveraging Red Hat’s marketing potential. In good times, when tech is stronger overall, they could expect to add to their bottom line through the evangelism of Red Hat’s stuff, and when times are tough (like now) they can still rely on their strategic base.
Looking at lessons for the broader market, the one I think is most important is that hybrid cloud is the cloud. Attempts to gain strong account traction with another message, including “multi-cloud” is almost surely a bad idea, and it could be really bad if competitors manage to figure out how to do hybrid cloud while you wallow in the multi-cloud media and PR machine. Red Hat’s own website features hybrid cloud prominently, and while it would be easy to say that’s IBM’s influence in play, remember that IBM’s hybrid play is largely directed at its own strategic accounts. Red Hat doesn’t have to sing that song, yet they do.
That sets up the question of what the tail and the dog might be in a hybrid relationship. IBM’s success suggests that in a major-market enterprise and in core business applications, the data center is very much the tail. Otherwise why pick your key strategic partner from the data center side of the hybrid? Could this mean that, for enterprise cloud use at least, a data center player with dominant strategic influence could drive the cloud more than cloud providers? If so, it would be huge for IBM.
Not so huge for others, of course. Ironically, the vendor who has the most to fear from IBM’s success might well be the vendor who has the most strategic influence in the network space—Cisco. There are two reasons. First, network strategic influence doesn’t translate to CxO IT strategic influence. If it did, Cisco would have turned in a better quarter, and would have been able to get its software initiatives going better. Second, Red Hat might end up poisoning Cisco’s well, directly or indirectly.
Data center networking is in some ways the only dominating piece of “capital equipment networking” that remains. People don’t buy routers to build a WAN. However, there is already pressure on the switching market from white-box solutions. I think that the Broadcom deal for VMware could boost VMware’s strategic influence in the data center, and they’re already second to IBM. Might Broadcom leverage that to push white-box switches (with their chips, or perhaps even their own switches) in competition with network vendors like Cisco? Could Red Hat be a competing source of open-source switching software? Could a lot of credible backers of white boxes shift data center switching decisively?
This might be the time we find that out. Enterprises are obviously having trouble getting incremental dollars for networking, and almost all of those I’ve chatted with on the topic say that they would be more likely to embrace white-box data centers if they were backed by a big player. They don’t necessarily need that player to be a big network vendor. This seems to present another argument that network equipment vendors can’t simply assume that the future will be a linear descendant of the past. Times change.