With the 2019 acquisition of open-source powerhouse Red Hat under its belt and a replacement cloud-savvy CEO at the helm, IBM is looking to reverse a decade of declining revenue and sagging stock prices with a bold strategy focused on hybrid cloud.
CEO Arvind Krishna, who formerly led IBM’s cloud and cognitive computing division and engineered the $34 billion Red Hat acquisition, made IBM’s intentions clear during a LinkedIn post to employees in his first day on the job: “Hybrid cloud and AI are the 2 dominant forces driving change for our clients and must have the maniacal focus of the whole company. IBM has already built enduring platforms in mainframe, services, and middleware. i think now’s the time to create a fourth platform in hybrid cloud.”
The Red Hat deal closed last July and Krishna has only been CEO since April 6, so it’s premature to pass judgment, although some early indications are positive. IBM got out of the gate quickly with the announcement in August that it had transformed its entire software portfolio to run on Red Hat’s OpenShift containerization platform through pre-integrated solutions called Cloud Paks. And Red Hat’s quarterly revenue soared by 24% in IBM’s Q4 2019 income statement , hitting $1 billion for the primary time.
Of course, the COVID-19 pandemic has upended everything, and there is no thanks to anticipate the impact on IBM’s business going forward. Other challenges facing IBM are easier to anticipate, however. They include whether the buttoned-down, bureaucratic culture of IBM can mesh with the more freewheeling Red Hat, where former CEO Jim Whitehurst is credited with fostering an environment of innovation and of empowering employees in the least levels of the organization. For now, IBM is maintaining Red Hat as an independent subsidiary, but skeptics wonder how which will play out.
Along an equivalent lines, now that Whitehurst is President of IBM, how will his working relationship with 30-year IBM veteran Krishna evolve? Outgoing IBM head Ginni Rometty, and her predecessor Sam Palmisano, held both president and CEO positions, so this dual leadership setup is new the corporate .
Many within the analyst community are bullish on these latest IBM moves, but there also are critics who question whether the Red Hat acquisition is that the game changer that IBM believes it’s , who are trying to find more clarity on what IBM means by hybrid cloud, and who means that the hybrid-cloud battlefield is crowded with formidable opponents like Amazon, Microsoft, Google and VMware, all of whom have staked out their own hybrid strategies. (See also: VMware’s ongoing reinvention)
Charles King, president and principal analyst at Pund-IT, says IBM is on the proper track. “Red Hat complements IBM both tactically and strategically. the corporate naturally fits IBM’s support for Linux and open source, and therefore the companies are strategic partners for several years. additionally , Red Hat’s innovations in containers and Kubernetes (via its OpenShift platform) will play key roles within the continuing evolution of IBM’s hybrid-cloud solutions and capabilities.”
He adds that the Krishna/Whitehurst pairing leverages the complementary skills and knowledge of both men. Krishna features a deep understanding of IBM technology, and Whitehurst was the previous COO at Delta Airlines before leading Red Hat’s growth surge. “The combination of technically and business-savvy senior executives should be highly beneficial for IBM, its customers, and partners,” King says.
Steve Duplessie, founder and senior analyst at Enterprise Strategy Group, is on board also. “IBM’s core customers are getting to need to move to a full cloud experience sooner or later and can trust IBM to urge them there. Red Hat just helps pave the way.” He adds that the new leadership tandem comes with the proper set of experiences. “These are cloud guys, not recycled mainframers,” Duplessie says.
But Holger Mueller, vice chairman, and principal analyst at Constellation Research says both IBM and Red Hat face a deeper, more existential threat. Mueller argues that the hybrid cloud is just a transitional phase on the road to the public cloud, where modern AI-driven applications that need the general public cloud’s cheap to compute power and scalability will ultimately live.
IBM can certainly make money within the short term as a consulting and services company that guides organizations on their journey to the general public cloud and manages their hybrid cloud environments, Mueller says, but he questions how IBM can stay relevant and not keep shrinking as workloads inexorably shift from enterprise data centers to the general public cloud. and therefore the very same conundrum applies to Red Hat, which garners an honest 70% of its revenue from Red Hat Enterprise Linux (RHEL), an OS primarily deployed in on-premises data centers. “How are you able to buy a corporation with not enough future-proofed revenue and future proof it yourself?” Mueller asks.
The IBM answer is that despite all the public-cloud hype, 80% of enterprise applications remain on-premises, and corporations are realizing that a lot of apps may never be suitable for the general public cloud for a spread of security, regulatory compliance and performance reasons. (The 80% statistic comes from an IBM-commissioned study by McKinsey & Company.)
“Our fundamental role is to assist enterprises to transform themselves,” says Jim Comfort, head of multi-cloud offerings at IBM. “We help them find out where is that the economic benefit and show them the foremost efficient thanks to doing this during a technology-agnostic and cloud-agnostic way. If I can do modernization faster in situ with fewer complications and obtain more business benefits, why wouldn’t I do that? that is what people are realizing.”
The IBM/Red Hat hybrid cloud vision
Comfort agrees that “cloud-native design” is that the future, but he maintains that the emergence of containerization technology enables organizations to realize 80% to 90% of the attributes of the hyperscale public cloud during a private-cloud setting.
By running OpenShift on RHEL, companies can design new applications and modernize legacy apps during a hardened, secure, private-cloud environment then deploy them across the hybrid-cloud ecosystem, consistent with Comfort. IBM has even created Cloud Paks for its Z mainframes.
Containers have “opened the aperture of what is often done and where it is often done, and the way you’ll essentially design or modernize once, deploy anywhere, and manage consistently,” Comfort says. He points out that IBM recognized the facility of containers five or six years ago, and today the IBM Cloud is “the largest Kubernetes cluster at scale within the world.”
However, the IBM Cloud, an outgrowth of the 2013 purchase of SoftLayer, has not succeeded in gaining much traction in head-to-head competition against AWS and Azure. for instance, Gartner gives the IBM Cloud a paltry 2% market share within the Infrastructure-as-a-Service (IaaS) market, compared to 48% for Amazon.
But King points out that IBM’s definition of a hybrid cloud is quite just IaaS revenue. “IBM’s view of the cloud has always been broader and narrower than AWS, Azure, Google,Broader there in sense that IBM cloud revenues also include hosting, software, and consulting services. Narrower therein IBM Cloud is especially focused on the requirements of enterprises within the 140-plus countries where the corporation does business,” says King.
And Sid Nag, research vice chairman at Gartner, has stated that “by 2022, up to 60% of organizations will use an external service provider’s cloud-managed service offering, which is double the share of organizations from 2018.”
One validation of IBM’s specialize in the hybrid cloud is that the incontrovertible fact that Amazon (with its Outposts offering), Google (via Anthos), and Microsoft (via Azure Stack) are all eyeing ways to increase their cloud platforms to the enterprise on-premises environment.
Charles Fitzgerald, director of the consultancy Platformonomics, describes the competing hybrid-cloud strategies this way: “The public cloud providers are approaching it cloud-first and treat the hybrid cloud as an on-ramp to the general public cloud. they’re extending the rich and modern architecture of the cloud back to the legacy customer environment. IBM and Red Hat are both ranging from legacy software running on-premises and somehow shall architecturally span and control the vast and ever-expanding array of software that powers the hyper-scale public clouds.”
One advantage that IBM does have may be a longstanding, deep, strategic relationship with its customers. “The single hardest thing to accumulate during this business is long-term customers – and IBM wrote the book thereon,” Duplessie says. “Unless they can not bring those customers where they need to travel – the cloud – they’re going to get their share of opportunities.”
BNP Paribas banks on IBM for personal cloud
BNP Paribas may be a perfect example of a corporation that has both an extended history with IBM also as an extended future. The French-based global bank, which remains running IBM mainframes in its data center, recently signed a deal estimated at $2 billion for IBM to create and manage a personal cloud for BNP.
CIO Bernard Gavgani says that the bank built its own private cloud in 2013 but quickly realized that so as to accelerate the pace of digitization and reap the complete benefits of cloud technology, “We couldn’t still maintain our own private cloud. we would have liked more expertise.”
The bank sought proposals from Amazon, Microsoft, Google, and IBM with the stipulation that sensitive corporate data needed to stay in-house. IBM responded with “the best solution we could find” – a proposal to deliver the complete stack of cloud services within BNP’s data center, Gavgani says.
The private cloud is currently under construction and is predicted to open in July, with additional phases slated for North America and Asia-Pacific regions. Under the deal, IBM provides the hardware and software and can manage power.
Gavgani’s vision of a hybrid cloud aligns with IBM’s. Gavigan says that he and lots of his colleagues have come to the conclusion that trying to manage relationships with multiple cloud providers can become a costly trap. With this approach, he achieves security, he avoids technology obsolescence, and he gains the advantages of the cloud as an enabler of the bank’s digital transformation.
Not all applications are appropriate for the cloud, Gavgani argues, and corporations got to make a case-by-case decision supported whether migrating an app or re-writing it for the cloud will provide a business benefit.
Looking to the longer term
Gavigan says he’s optimistic about the direction during which IBM is moving. “Losing Ginni is gloomy news, but having Arvind as CEO is sweet news to me because he knows the cloud quite well.” The Red Hat side of the equation is additionally comforting to Gavgani, who says BNP was using Red Hat long before the IBM acquisition. “I’ve always been very impressed by the vision of Red Hat,” he says.
Rometty, who announced her resignation in January and who has been working with Krishna since then so as to assure a smooth transition, gets mixed reviews from analysts. Going strictly by the numbers, she presided over an era during which IBM’s annual revenue declined from $104 billion in 2012 to $77 billion in 2019. But others means that she was dealt a difficult hand from the beginning and did what she could to transition IBM from a hardware company to a software and services company. She also led IBM into emerging technologies like AI, blockchain, and quantum computing. “Overall, Rometty is leaving IBM a well prepared and future-focused organization,” King says.
And despite its less-than-stellar financial performance over the past decade, IBM remains a formidable force within the enterprise and a corporation that ranked No. 1 new patents in 2019. “Many people wish to position IBM as only relevant to the past, not the longer term. We unequivocally disagree,” says Comfort.