IBM Builds Its Smarter Commerce Software Business Through Acquisition

IBM Smarter Commerce Highlights

• Has spent around $3b on software acquisitions in this area
• Focuses on software to support line-of-business in sales, marketing, procurement and customer service
• Helps IBM compete as a close second to Oracle in the application software market
• Hosts a conference in Madrid with 1,750 attendees
• Is used by Ing for addressing customers’ emotional needs, Boots for its Advantage loyalty card activities and The Home Retail Group for extending its sales to new channels
• Will continue to invest in acquisitions – probably in building its ‘Service’ business

We spent a very valuable couple of days in Spain recently listening to IBM’s Smarter Commerce strategy. If you’re in a purchasing, sales, service, or marketing line-of-business you may well already use it or one of the number of its acquired companies as a software supplier. If not, they’ll no doubt be trying to talk to you about its approach.
It was slightly incongruous to be talking about advanced social business (with one particular example of American impulse purchasing guided by in-store device tracking and Twitter) in a country which is commercially so challenged at the moment: nevertheless there were over 1,750 attendees in the Hotel Auditorium, Madrid (Europe’s largest Hotel in terms of size) and you’ll be interested to learn about one company’s approach to modernising and supporting customer and supplier-facing business processes.

Acquisitions Fuel IBM’s Strategy

Craig Hayman, GM of IBM’s Software Industry Solutions, described how the company is in the second year of a five years strategy based on supporting four line-of-business areas, which are:

• Sell – aimed at the VP of Commerce, Stores and Operations to help users provide a ‘seamless cross-channel experience
• Buy – aimed at the Chief Sourcing and Procurement Officer and Chief Supply Chain Officer to help manage the customer’s ‘adaptive procurement and optimised supply chain
• Market – aimed at the Chief Marketing Officer and VP of Merchandising to provide ‘targeted and personalised marketing across all channels’
• Service – aimed at the VP of Customer Loyalty to ‘anticipate behavior and deliver flawless customer service’

When launching Smarter Commerce in March 2011 IBM sized the market as a $20 billion opportunity for software alone, rising to $50 billion by 2015. To help it achieve the building of the business it has added significant resources through acquisition to its initial WebSphere Commerce suite, which is the basis of its approach and now fits within the ‘Sell’ theme.
These are the companies it’s acquired and how they fit:

• Sterling Commerce – positioned in both the Sell and Buy businesses and acquired from AT&T for $1.4 billion in 2010; it specialises in B2B distribution and ‘order in’ processes; it also offers integrated managed file structure
• Coremetrics – also in ‘Sell’ and offering Web analytics used in sales optimisation; the acquisition was announced in June 2010; as a private deal the acquisition cost was not announced, although we believe it was in the region of $18 million
• Unica – in ‘Market’ and specialising in campaigns and in-bound customer experiences; the acquisition was announced in August 2010 and cost $480 million
• DemandTec – in ‘Market’ and offering pricing optimisation software; announced in December 2011 and priced at $440 million
• Emptoris – a new addition in the ‘Buy’ areas and offering ‘plan to contract’ solutions; as a private company the price was not disclosed, although it was part of $930 million spent along with Green Hat and Platform Computing in Q1 2012
• Tealeaf – the latest company in a deal which is not yet complete will add customer experience management in the ‘Service’ theme; the purchase price has not been announced

Many of the solutions offered by these companies are available as SaaS offerings as we’ve mentioned before in relation to its Cloud Reference Architecture.
IBM’s software group has a detailed acquisition programme, which involves assessing potential companies, due diligence and integration. It sets itself a maximum purchase price and has walked away from some major targets as a result. It only looks at companies which fit in technologically (avoiding dot com companies for instance). It’s particularly keen to take profitable companies whose revenues can be amplified through IBM’s extensive country presence and sales network
In addition there are a number of other IBM offerings which are strongly related to its Smarter Commerce business. In particular:

• Netezza – its acquired analytics appliance and often used to feed customer marketing campaigns
• SPSS and Cognos – both used for business analysis and predictive analytics
• ILOG – business rules management systems and the basis of Smarter Commerce CPLEX

At the conference we also heard from Laurie Steele of IBM Global Process Services, which runs 50 delivery centres in 19 countries around the world: it claims to manage $57b procurement spending for customers and 228b customer interactions annually.

IBM Second To Only Oracle In The Application Software Market

IBM made $20 billion revenues from application software in 2011, lagging behind Oracle, who was the market leader with $25 billion. It is in a strong second position – well ahead of Microsoft and SAP who are in third and fourth positions respectively (see Figure 2). It is interesting that the seasonality of Oracle and IBM differ, with the former peaking in the second quarter and the latter in the fourth. As the Euro Crunch recession bites it will be interesting to see how the 2 companies change position, adding acquired revenues while no doubt suffering from the weak economy.

Customer Endorsements Of Smarter Commerce

IBM shared the stage at the conference with its customers who described their commercial aims and how they use IBM software to help. In particular:

• Ing was represented by its CEO Ron van Kemenade, who described how the bank is trying to win back customer confidence by addressing emotional as well as transactional needs; one example was a change in how it connects when its customers forget to take their cash from ATM machines (apparently this happens about 2 thousand times a year) by contacting them by text or email and reassuring them that the money remains in their accounts; his advice to the audience was that marketeers are usually not confident in issues of technology – they are always too late and don’t ‘get it’; his advice to IT leaders is for them to become more self-aware and think about customers rather than just internal services
• Boots was represented by Ruth Spencer, head of its Advantage loyalty card; this UK pharmacy has 17.5 million card holders, including over 50% of adult women in the UK; her company uses so much IBM software that she had to be selective when registering because the online system couldn’t handle all the information; Boots has been a serious user of market research for decades and it was good to hear her describe its approach in this area – mixing online (6-k customers) with offline inputs for quantitative and qualitative purposes; when asked how IBM could improve Smarter Commerce, she replied that it ‘has an awful lot of plumbing to sort out very quickly’ – a reference no doubt to the integration challenges for its acquired businesses
• The Home Retail Group was represented by Peter Connor, its Information Systems Director, who spoke about Argos, Homebase and Habitat retail operations (with 800 retail outlets in total); it has been using technology for ‘click and collect’ activities at Argos; across the group he reported that 40% of sales in 2011 were multi-channel and 6% from mobile devices; it has been successful in building social networking, reaching 4.9 million followers on Twitter, 4.9 million views on YouTube and 377k fans on Facebook ; its use of IBM software includes Sterling Commerce for its fleet operations; he defended the strong high street nature of his companies business by commenting that even Amazon is looking to increase its offline business

Numerous other customers presented their strategies in breakout sessions and panel discussions – Panasonic on B2B and B2C CRM, the Bank of Montreal on omni-channel business, the Irish Dairy board on supply chain management (which it runs without owning any of its own warehouses), Bayer on optimising supply chain management for its extensive chemicals business and Netherlands Railways on advanced scheduling for the railway system. Their approach was typically non-technical, talking about their business challenges and solutions to help other attendees with their own issues. While the use of IBM software was apparent in their conversations, it was not overtly referenced.

Some Conclusions – The Opportunities Are In Line-Of-Business And Pure Industry Sector Applications

Of the systems vendors IBM is the most advanced in understanding the needs of customers at an industry sector level, supplying the majority banks worldwide with System z mainframes to run their transaction processing on for instance. However its Smarter Commerce strategy is about line-of-business rather than vertical market, as witnessed by the conversations common marketing, sales, service and procurement issues at this conference irrespective of the type of organisation they work at. In building Smarter Commerce rapidly through acquisition IBM is adding applications to help horizontal business processes. The integration process is helped by the non-technical expertise of these new users and the requirement for acquired companies to have common design processes. It is also able to use its Cloud Reference Architecture to fit the deployment and delivery of these applications, especially in SaaS versions.
We may be swayed by IBM’s decision to sell its Retail Store Solutions business (part of STG) to Toshiba recently, but it looks as if the balance of its business is moving away from pure industry sector applications – and it hasn’t finished: we expect it to acquire yet more companies in 2012 and beyond to fill out its strategy – especially in the ‘Service’ area.