For IBM, will the spin-off GTS help it get the Red Hat mojo?

Last spring after Arvind Krishna took over as CEO, we had a Twitter chat with Constellation research analyst Holger Mueller where we posted his idea it IBM must separate its software and service companies. It gave us the excuse to convene the type of bull session we have when we meet in the conference circle, but in this age of COVID, Holger was generous enough to recall this as a very pleasant one. 45 minute fire chat on YouTube, where we both threw our ideas around the benefits of such a split.

OK, we do not call it telepathy.

Last week, IBM announced plans to actually do at least some of it. It differentiates the device’s managed infrastructure services Global technology services division (fancy speech for the core of GTS) in a new public company (“NewCo”). Wall street liked the idea, as IBM shares jumped 6% on the news. Conventional wisdom is that this will allow IBM to make more efficient use of its Red Hat acquisition. It paid $ 34 billion dollars not to add $ 1 billion in revenue to a $ 77 billion business, but instead to capture Red Hat’s mojo to transform IBM. Exempted from at least some of its service companies is the rationale that at least one of the distractions from making the Red Hat deal the reverse acquisition it wanted has been cleared away.

On the number side, the GTS business has $ 19 billion in revenue and $ 60 billion. The backlog has clearly been the delay in IBM’s growth. It’s a mature business, one with low margins and low growth, but it takes a lot of determination for a company to abandon a device that might otherwise look like a cash cow.

In addition to the thin margins of the service business, the separation of GTS may be a step towards helping IBM get rid of the internal cognitive dissonance between services and software. When it puts its ducks in a row, IBM can come out with phenomenal software. Cloud Pak for data includes several SaaS services, including Watson Knowledge Catalog for data retrieval; Watson study for the development and operationalization of machine learning models; and Watson OpenScale to track the results of these models. In a hybrid cloud environment, these are exposed to services other than complicated software that requires consultants to create.

But when we asked IBM if there might be a vendor-driven option for Cloud Pak, like AWS outposts or Oracle Cloud @ customerthe answer was that this would be a GTS engagement. Hopefully, this is the type of thinking that ends when GTS is separated from IBM’s new core, which would be the software business. For the hybrid cloud business, IBM should include self-service rather than service.

In our fire chat, Mueller and I agreed that trusting the service company for such a large portion of revenue gave IBM Software less incentive to make its software less complex to implement. But the pull of the cloud creates a centrifugal force the other way around, at least if the goal is to build a SaaS portfolio.

There are other issues with being a combined software and service company. We have seen over the years that IBM, like many service-oriented companies, tended to act as fiefdoms, and that creates its own internal channel conflict. This conflict comes from localized priorities. Consulting groups are encouraged to find the best fit for the specific customer; In a pure service business, the biggest drawback is the barrier to scaling best practices or jumpstarts that can be replicated to other consulting teams. When you combine a service company with a software company, you still have that problem, and then you add the question of priorities: Should the consulting team recommend a custom or third-party solution at the expense of a solution from the software side of the company? Should software professionals recommend throwing integration business to external channel partners to build a larger third-party ecosystem?

Not all “channel conflicts” need to be bad. The major cloud providers have proven that in an era of as-a-service software, cooperation can actually be a very profitable strategy. For example, while Snefnug compete with Amazon Redshift, AWS still receives calculation dollars for each EC2 instance consumed through the rival service. For IBM, there is promise of that Red Hat OpenShift could provide a similar path to revenue generation with the best rivals.

By the end, IBM is still hanging on to $ 8 billion in revenue from the cloud services side of GTS, which is closer to IBM’s mission. And there will still be $ 16 billion from the more solution-focused ones Global business services (GBS) device. So GTS spinoff will not be a panacea for purists where IBM suddenly converts to a pure software company. It simply gets rid of the slower growth, less strategic part of the business. That still means IBM needs to keep working on sharpening its focus. As mentioned above, it means going all in on self-service for its hybrid cloud platforms. Throwing GTS can remove a distraction, but it is only a step in the direction of the transformation it seeks.