IBM posted an 11% decline in quarterly revenues (Q109 compared with Q108), achieving $21.7B. While for some this would seem disappointing, but for me it demonstrates a comparatively strong position in the teeth of the gathering storm of the current downturn. In addition IBM’s net income stood at $2.2B, down just 1% on the previous year.
When looking at its business by the age-old divisions of hardware, software and services it may be a surprise to many the extent to which it succeeded in driving the ratios towards the latter two classes. I remember well the days in the 80s and 90s when IBMers dreamt of pushing hardware below 50% of revenues. Well (believe it or not) in Q109 hardware was just 16% according to my calculations. See Figure 1 for a picture of IBM’s revenues by category and quarter from 2003 until Q109.
I believe that we should consider two axes when evaluating how badly vendors will be affected by the downturn. In particular:
- Customer Type – let’s spread user types across the bottom from consumers, through self-employed, small, medium and large business. It seems clear that consumers were affected first and most deeply. Uncertainty about employment and the future put a break on spending (just think of the car industry). The next worst affected area has been Small and Medium Businesses (SMBs). Many found that borrowing dried up as a consequence of the banking crisis. Large businesses have not yet been deeply affected, with the exception of Automotive and Banking itself (although actually there’s been plenty of business in automating and stabilizing banking processes)
- Length Of Contract – let’s spread the type of contract out from bottom to top – starting with single one-off sales, through annual subscriptions, to multi-year services deals. It seems clear that the most affected were one-off sales (especially when from discretionary budgets). Revenue from annual contracts will clearly take some time before the failure to renew affects revenues – unless paid in instalments and cancelled. Again clearly long-term contracts have been the least affected by the credit crunch – even if many have been subjected to emergency renegotiation
A ‘Hingley-gram’ of these axes is shown in Figure 2. IBM’s current success is due to having many more large customers on multi-year contracts. If the downturn goes on for many years it will perhaps be increasingly affected. The reason the chip manufacturers Intel and AMD have suffered badly initially is that they have lots of small customers who buy one-off laptops on discretionary budgets.
Getting back to IBM… we might want to think about the regional affects of the downturn on its revenues. If shown a picture of IBM’s annual revenue growth by quarter and region in Figure 3. I’ve estimated regional growth by converting the $US values to representative local currencies (the Euro for EMEA and Yen for Asia Pacific). Perhaps surprisingly IBM’s growth trends are very similar by region – proof (if proof were needed) that the downturn is a truly global problem.
For the rest of my analysis I’ve taken a good look at the things IBM has announced over the last 6 months or so – looking for evidence of how the company is addressing the market in these difficult times.
IBM Outsourcing Is Boosted By The Downturn
IBM – like other services companies – has discovered that Outsourcing is almost always a strong countervailing business in a downturn. Since October it has announced contract wins and renewals with a number of banks and insurance companies around the globe. In particular:
- In India it won deals with both the Madhav Nagrik Sahakari bank (5-year) and Kurmanchal Bank (10 year)
- In Japan it extended its outsourcing contracts at the Hokkoku and Daishi banks and at Mitsui Sumitomo Insurance
- In Mexico it signed up Grupo Nacional Provincial and in the UK, Friends Provident – where the £200 contract is for outsourced IT and Infrastructure services
Outside the financial sector, where the credit crunch has had a strong influence on the likelihood of outsourcing, IBM has also won or extended contracts in a number of diverse sectors. For instance:
- Pfleiderer AG (a Russian provider of engineered wood)
- Mitsubishi Motors extended its contract for another 5 years
- Fluor (an American construction and engineering) also extended its contract
- Media-Saturn (a German Electronic Retailer) decided to outsource its Data Centres
- Korean Air renewed its 10 year agreement
- Primagaz (a French energy company) renewed for 5 years
- NASCO (National Account Service Company) an American Health Care company extended its contract for $184m all the way up to 2016
IBM Was Relatively Quiet On Acquisitions And Investments
In comparison with companies such as HP and Oracle IBM has been relatively light on the acquisition front over the last 6 months. It eventually succeeded in buying the French software company ILOG as well as Transitive – a cross-platform virtualisation software company. Its latest announcement was to acquire the Email service assets of Outlblaze. It also enhanced its traffic management capabilities through investing in the Chinese company Hisense TransTech. Perhaps the most important acquisition talk at IBM was the one that got away – despite strong rumours of discussions Sun found a partner in Oracle instead.
IBM Has Been Adding New Resources
Expanding resources is particularly difficult in a downturn, when most vendors are looking to cut expense. However IBM has been active in adding to its centres around the world. In particular:
- In Argentina opened 3 new Global Delivery Centers and extended its South American Virtual IT Campus
- In Scotland it is investing £2m for a new services business to help run mid-sized UK Enterprise Data Centres
- It opened a new Research Center in China
- It chose Michigan State University as the site of a new IBM Global Delivery Center for application services
- It is opening a new Technology Service Delivery Center (along with 1,300 new jobs) in the city of Dubuque, Iowa
IBM is strongly rumoured to be active in reducing its staffing levels particularly in the USA and Western Europe. Its activities are said to be more targeted than in previous times and it has managed to avoid having to announce major restructuring. The situation – if true – is perhaps better for its PR image than internal morale. However almost all ICT vendors are in currently the process of cutting staffing levels.
Cloud Computing Is Everywhere At IBM
IBM announced its Cloud Services Initiative on October 6th 2008. Since then the subject has become a regular theme in its press announcements and marketing activities. For instance:
- At the University level – it has been working with North Carolina State University to extend access to educational resources through Cloud Computing. It has also delivered software to Ontario Universities via Cloud Computing. Kogakuin University in Japan is managing its IT infrastructure with help from IBM’s public Cloud Services. In America the National Science Foundation around $5m through its Cluster Exploratory (CluE) program to participate in the IBM/Google Cloud Computing University Initiative. IBM even established what it believes is the first ever Cloud Computing Laboratory in Hong Kong
- In collaboration with other ICT vendors – it has signed a deal with Amazon Web Services to deliver software via Cloud Computing and has demonstrated real-time application mobility through the collaboration between IBM Research and SAP
- In its own Products and Services – it has launched Cloud Computing ‘consulting and implementation services’, a ‘Cloud social networking and collaboration service’, a ‘Cloud service for Web conferencing’, a portfolio of integrated Cloud services from its Lotus division and the Blue Cloud initiative to advance Enterprise-level Cloud Computing. Its InSite One product is designed to help tackle the explosion in medical image data brought about through Cloud Computing
The cynic in me says that Cloud Computing will boom in the downturn as it is a) largely undefined and b) can be a way of offering under-utilized compute resources. IBM, however, is genuinely enthusiastic about bringing advanced programming to its users through new techniques and services. In a sense this ties back to its success in Outsourcing, where there is a clear difference between the technologists and business application users.
Green IT, CSR And Collaboration – Strong Themes At IBM
Looking at IBM’s announcements it is clear that there are a number of themes that are driving the company. In particular:
- Corporate and Social Responsibility (CSR) Business – IBM makes business out of CSR. For instance it has been providing CSR consulting (its references include the investment firm Jantz Morgan and the 4Food Restaurant Chain) and it launched a sustainable procurement consulting service
- CSR Activities – IBM takes its commitment to stakeholders seriously and has announced a large number of initiatives. These include hosting an Innovation Forum to address Green issues with African thought leaders, helping to develop IT and business professionals in Ghana, launching a social networking site along with the Feminist Press to try to increase the number of women in Science, continuing to provide volunteers (for which it received an award from the Pro Bono Partnership), searching for cures to childhood cancer through its World Community Grid and collaborating with hundreds of Universities to try to drive changes in curricula to develop a ‘smarter planet’. It has also been involved in an EU consortium to address the issues of memory loss in aging populations and in the ‘Nutritious Rice Project’ with its World grid and with IBEC to extend mobile broadband services to rural Americans
- Green IT – It has been working with the University of Saskatchewan in research into how to reduced greenhouse gasses as well as helping customers such as Tucson Electric Power build Green Data Centres
- Collaboration with Other ICT Vendors – IBM has been working with a great variety of other companies to deliver solutions and products. Some of these include Boulanger for the first French 3D Internet Store, the OpenAjax Alliance for Web 2.0 developments, Intel for open switch specifications for blade servers, Nokia to make Lotus email available to 80m mobile phones, Samsung for automation in the consumer electronics area and both Google and Continua Health Alliance to move data from remote personal medical devices into applications such as Google Health
Some Conclusions – Copy IBM To Weather The Storm
You can’t always choose your customers and – just as hardware has considered to be too high a ratio in its revenue mix a long time ago, so many have though IBM too dependent on large business customers. Not so now, as it is being less affected by the downturn than those companies who have consumers as their targets. Negotiating multi-year contracts is also helping the company – not just in the Outsourcing business, which is always strong in times like these. IBM has been conservative in its investments – avoiding major acquisitions and has not had to announce major lay-offs. It is engaging in very strong collaboration activities, especially with Universities and continues to pursue CSR, Green IT and other themes – not just to be a caring modern company – but mainly to make money from associated business. It will be certainly interesting to see how well it’s financial results stand up to other vendors in coming quarters.