IBM’s supreme hybrid cloud strategy – Red Hat integrated, Kyndryl out

IBM’s Think2021! conference came at a time of great change for the company. I had a chance to listen in to CEO Arvind Krishna, president Jim Whitehurst, CMO Carla Piñeyro Sublett and others present its strategy, offerings and direction over the last few days. The bets it’s making in 2021 are very important for IBM when it will split off its managed services division into a separate company, now named Kyndryl, and is in the process of integrating Red Hat into its overall business.

My Figure above (based on IBM’s) shows a marketing architecture for how IBM and partner offerings fit together. In particular, reading from the bottom:

• Infrastructure includes IBM Systems (z, Power and storage) and Cloud (built largely through the acquisition of Softlayer in 2013) coloured blue as IBM’s own products; public cloud (AWS, Azure and others), enterprise infrastructure and edge (including other system suppliers offerings) coloured grey as non-IBM products.
• Hybrid Cloud Platform includes Red Hat’s infrastructure software products (OpenShift, Enterprise Linux) based on open source code, designed for development, security and operational services and coloured red – to indicate the fact that Red Hat is being run as a linked, but separated, company from other parts of IBM as a recognition of the importance of its offerings in many other competitors’ strategies. There’s no strategic commitment to Cloud Foundry or Suse Linux, used by some IBM customers before Red Hat was acquired, here; otherwise they’d appear in a grey box to the right.
• Hybrid Cloud Software is now sold by IBM as Cloud Paks, which include various packages of ‘pre-certified containerized software and foundational services’. IBM’s software offerings include automation, ML and AI, integration, networking, security and industry sector areas; its customers can also use a variety of third party software and SaaS offerings from the likes of ClearBlade, Confluent, Instana and myinvenio.
• Business Transformation and Hybrid Cloud Services includes Digital Transformation consulting, Application Modernization – mainly to do with containerisation – and its Intelligent Workflows (new ways to support specific work processes through the addition of automation, ML and AI). Most of these are currently supplied by its Technical Support Services (TSS) which will remain within IBM when its managed services offerings are spun off into the new company Kyndryl at the end of this year. A few are available from selected partners.

Separating the platform from the software layers in this way creates a distinction between Red Hat’s enterprise-hardened Open Source offerings and IBM’s proprietary ones, which have been re-engineered to run on top of them.

My Figure above shows my estimates for the proportion of its revenues by year that fit into its new schema. It demonstrates that Cloud and Red Hat revenues have grown significantly, its Managed Services (Kyndryl), Systems and Software areas have been stable and its Services have declined. The ‘other’ category is mainly made up of customer financing.

I can think of a number of ways in which this updated strategy will help IBM become more successful in future. In particular:

• It’s moving away from a ‘my way or the highway’ approach, the strategy recognizes the importance of third parties, whether from public cloud, x86 server, aligned software and/or service vendors.
• Competitively its positioning itself away from the more siloed proprietary approaches of many suppliers such as Vmware, AWS, Oracle and others who seek to provide complete solutions from a narrower selection of base technology.
• It offers big advantages in data management (one version of the truth) and security (especially in the base encryption of storage data).
• Its own software and service offerings will become more consistent, easier to try out, manage and deploy through adopting similar development approaches, look and feel and a common GUI.
• New technology (ML, AI, automation, Quantum computing, etc.) should be easier or users to accommodate, – plugged in as a service if necessary.

However, there are also a number of challenges to its success:

• It is based on the assumption that its customers have (or will) adopt Open Source software as the foundation of their enterprise architecture and infrastructure management, which for cost, cultural and/or skills reasons may be impractical for many.
• Red Hat may find that the integration of its products into IBM’s overall architecture makes it harder to work with its competitors.
• While many large and medium sized companies have accelerated the digitisation of processes and use of computing during the pandemic, others have struggled – or even ceased trading – through lack of revenues.
• The split-off of Kyndryl may complicate things, especially if it doesn’t fully adopt this approach, or increases the price of its services, if it does.

Just as buying Softlayer allowed IBM to become a cloud supplier, so buying Red Hat is allowing it to become the supreme ‘hybrid cloud’ supplier. Time will tell how this new approach resonates with its customers and prospects to create better revenue growth and profitability for IBM.