The redemption of IBM

A BRUISING PILGRIMAGE TO SABARIMALA in Kerala, the hill abode of Lord Ayyappan, is an unlikely metaphor to capture what is shaping the $93 billion (Rs 5.87 lakh crore) IBM’s raison d’être in the era of cloud computing. For more than three years now, the Armonk, New York-based company has been wooing software developers outside its home market, most notably in India, to build a one-stop enterprise cloud marketplace. It has been an arduous journey, much like the Sabarimala pilgrimage that almost 50 million devotees undertake every year—a barefoot trek of 58 km through forests and hills, which requires surrendering the ego. But more on that later.

For now, consider that Big Blue, once the undisputed king of enterprise IT, is looking more vulnerable than ever. Revenues have dropped three years in a row, operating profits have fluctuated since 2011, and giant rounds of restructuring and job cuts have made headlines. In three years, the workforce has shrunk by almost 54,000 across the company and its wholly owned subsidiaries. And then there’s the unceasing attack by antagonists who are naturals in the cloud, while IBM labours through the process of rewiring its 104-year-old circuitry.

Simply put, the cloud helps deliver a host of essential IT components, such as servers, storage, and applications, as a service to clients via the Internet, cutting down on hugely expensive physical infrastructure. For a company that made its billions selling precisely that infrastructure, nudging its clients—typically Fortune 1000 bellwethers—cloudwards is a serious leap of faith. Amazon and Google, IBM’s main rivals in the cloud, an industry slated to be worth $127 billion by 2017 according to market research firm Global Industry Analysts, have no such dilemma. Neither does Apple, whose iOS platform joined hands with IBM last year to push industry-specific apps.

Since 2006, when Amazon Web Services (AWS) was unveiled, it has attracted a host of marquee clients. Companies such as Netflix have evolved on the platform, while the likes of NASA and Pfizer also use it, helping AWS grow to over $4 billion in size. Developers connect better with its ease of use and speed. In India alone, software-as-a-service (SaaS) companies such as Pune-based Druva and Chennai-based Freshdesk have gone global and touched $50 million in revenue in less than five years using the platform. Google Cloud Platform doesn’t have that kind of clout yet, but it’s growing in influence, with clients such as PwC migrating to it.

IBM’s client roster is no less impressive, including newbies such as Yelp and WhatsApp as well as veterans Whirlpool, Macy’s, ABN Amro, Dow Water & Process Solutions (DW&PS), and WPP. But that doesn’t guarantee success in the new battlefield unless the company starts thinking “cloud first”.

That’s going to take a mind-boggling manoeuvre. Unlike a comparable legacy outfit, say, Microsoft, which was built around its software prowess, IBM covers every segment of the technology market: hardware, middleware, and software. In hardware (high-end systems and storage), where it competes with the likes of Hewlett-Packard, IBM has been synonymous with the mainframe systems used by corporate and government organisations for enterprise resource planning and transaction processing. It holds an edge in middleware too, courtesy BlueMix, a platform comprising open-source technologies that helps corporate houses and web developers build enterprise-class cloud applications.

The company’s sweep of services was once insurance against a downturn in any of the segments. But it’s now the biggest roadblock to the agility that is key to survival.

For a company so entrenched in a particular way of working, moving to something as relatively amorphous as the cloud is fraught with risk. The most chilling fallout of the transition is that IBM faces the real danger of cannibalising its core business. Moving to the cloud means that IBM has to dismantle large chunks of its bread-and-butter businesses—enormous hardware and network installations, epitomised by bulky mainframes at its client locations. Last year, it sold its x86 server business to Lenovo, and it may divest more hardware units in coming quarters. “They have to burn the old forests to make space for the new forest to grow,” says an analyst from a global consulting firm. That’s something competitors Google and Amazon don’t have to face.

International Data Corporation (IDC), an IT and telecommunications research firm, calls the cloud a part of the third platform for enterprise IT, the first being the mainframe system and the second the client-server system, which took off in the 1980s with PCs tapping into mainframe databases and applications. There was a time when companies specialising in software, networks, and applications grew around clients who used IBM’s mainframe. But after the cloud, IBM has little control over the new ecosystem. “Migrating to third-platform technologies doesn’t happen overnight,” observes Venu Reddy, general manager at IDC Centre for Consultancy & Research, Bangalore. However, vendors will see greater success if they can “leverage their business arms to provide consulting services to enterprises in their journey to adopt the cloud”, Reddy says. Consequently, new roles like social media analysts and data scientists, which call for whole new skills, are getting created.

In another vital shift, business and IT heads will play a greater role in selecting solutions. Increasingly, such decisions can be taken by any business unit—marketing, finance, or even procurement—unlike the olden days when chief information officers alone were in charge. The cloud allows these users to tack on infrastructure and enterprise apps on the go, much the way mobile users shop for apps on Google Play or Apple’s App Store.

This also calls for cutting down the traditional cost base, including the manpower IBM once dedicated to clients. “A cloud-based model doesn’t need clients to own physical infrastructure, so why should they spend on people to manage it? This is true of all legacy players that have significantly invested in people to manage client infrastructure,” says a former IBM hand, asking not to be named. This will become more pronounced as clients switch to fully mobile workplaces, plugging in from anywhere, anytime. “Ultimately, for clients, the cloud is just one mechanism of how IT infrastructure is delivered,” he adds.

It’s a one-way route, as more and more clients are sure to embrace the cloud as an alternative to traditional IT consumption. “Whether a client opts for a private cloud (which allows it to control its IT department within the corporate firewall) or a public one depends on its flexibility, cash flow, and payment models,” says Vamsicharan Mudiam, country manager (cloud solutions), IBM India and South Asia.“[For us,] the journey is more complicated because we are addressing a wide range of constituencies rather than just enterprise clients,” admits Vanitha Narayanan, managing director of IBM India. “It is about transforming all our client bases to the cloud. We are helping our large enterprise clients move beyond IT on their premises, while small and medium enterprises (SMEs) are looking at us for scalable, secure infrastructure.”

If it manages this transition well, IBM will have created a playbook for coping with disruption. If not, it won’t be the first behemoth to be rendered obsolete by the churn of history.“IBM is a resilient company that has gone through all kinds of cycles,” says the analyst. In the past 30 years, it has tackled the rise of the PC, competition in computing services from Electronic Data Systems (now EDS), U.S. government opposition to its presence in both hardware and services, leading it to split the businesses for almost two decades, the rise of the Internet, and the offshore delivery wave.

“Even when it appears late, IBM’s response to most of these challenges has been phenomenal,” says another analyst, adding that its enduring influence is visible in its barrage of technology patents. IBM Watson, for instance, existed before the buzz and hype around data analytics. There’s no reason it can’t recreate the same success in the cloud.

It’s too early to understand the revenue implications of the cloud strategy in India. While it’s clear that revenue from the cloud will not soar overnight, it’s interesting to see the impact of this business on IBM globally.

Until 2013, IBM did not report the absolute revenue uptake from cloud. It only said, for instance, that cloud revenues in 2011 grew 3.8 times over the same figure in 2010. In 2014, after acquiring cloud infrastructure firm SoftLayer, it began reporting the impact on global revenue. Last year, it reported $7 billion from cloud, which puts it far ahead of Amazon. But that’s only part of the truth. Unless IBM is able to put cloud at the centre of its universe, it will be difficult to sustain these numbers.

ARMONK REALISES that this is not a game that can be played top-down from HQ, relying solely on the company’s 379,592-strong workforce that has been accustomed to a different way of life. So it’s focussing on nurturing and partnering a global community of free agents attuned to the cloud.

That’s where Narayanan’s office becomes key: India’s 3 million-strong developer population, estimated to overtake the U.S. by 2019, offers all the human capital IBM needs. The journey here started in 2012 with IBM SmartCamps, a talent hunt for startups in selected Indian cities, to identify and mentor ventures that build cutting-edge cloud services and solutions. Today, IBM has access to 60,000 independent developers in India, the largest base for it globally. It identified 100 startup ideas to work with in 2012 and 2013; last year, the number crossed 250.

It’s another matter that cloud startups in India are on everyone else’s radar too. Microsoft Ventures, which is also pursuing the best in this field, nabbed 11 of them, both business-to-business (B2B) and business-to-consumer (B2C), as part of its 2015 summer batch, from a list of 1,400-plus applicants. In fact, Microsoft has been providing accelerator facilities in India for nearly three years, graduating 63 startups in five batches. IBM’s response so far has been to focus on enterprise-solution providers. However, it is not abandoning B2C developers. There are startups like Koove, an online marketplace for used goods, which harnesses Facebook groups to build trusted communities for trading used items.

“The battle for cloud developers will be a key point for IBM,” says Robert LeBlanc, senior vice president, IBM Cloud, citing an IDC estimate that 85% of software is built for the cloud today.

WHILE THAT SOUNDS like a strategic battle you are taught to fight in a B-school, IBM watchers swear that it requires a far more gruelling workout for a company whose lasting meme has been the unwieldy elephant, and which quite possibly never had to look for talent on this scale in the outside world.

Luckily for IBM, it has people like Karthik Padmanabhan to deliver such home truths. This January, Padmanabhan, 48, then country head of IBM Software’s ecosystem development in India and South Asia (he now oversees the Asia-Pacific) and one who has deep insights into the developer and startup ecosystem, embarked on the Sabarimala pilgrimage for the fifth time. The rigours were unbearable at times, he recalls.

Prior to the journey, devotees prepare themselves for six weeks by fasting, meditating, and taking long walks. During this time, a pilgrim makes a hole in a coconut and fills it with ghee, the symbol of the ego. At the end of the holy trip, these ghee-filled coconuts are offered to the deity as the soul is purged of the ego after intense hardships. More important, the pilgrimage—like many others in this country—is a crash course in teamwork. “I realised all over again that the journey is not about individual achievement. You need to wait for the last guy in your group to come in before offering your puja,” says Padmanabhan. It requires pilgrims to dig deep into their reserves of patience—a more-than-useful muscle memory while handholding fledgling startups.

As IBM expands locally and globally and across industries, the co-dependency and handholding will intensify. “We’re a country that has grown around IT services and the mobile economy. So it makes sense to have Indian talent at the heart of BlueMix-land,” says Narayanan, referring to IBM’s reinvention around developers.

Last May, Padmanabhan’s team conducted a BlueMix Tour in Bangalore, Mumbai, and Delhi. It also held an IBM BlueMix Girls Night Out for women developers in August and conducted an App Factory Hackathon in September, both in Bangalore. There’s also a global entrepreneur’s programme in place that offers select talent mentorship, technology architecture workshops, and access to IBM employees. Instead of directly funding these companies, IBM offers them what it calls cloud credits. It means that selected startups get access to the cloud infrastructure, apart from work space and mentoring from IBMers in design thinking, product management, and metrics-driven workflows. The value of such assistance is anything from $12,000 to $120,000 a year. By the time developers exhaust their cloud credit, they are ready to offer their products on the marketplace, scale, and grow on a revenue-sharing model.

Early results from IBM’s tryst with startups have been heartening. Stelae Technologies, last year’s India winner in the talent hunt, also won the Asia-Pacific leg and finished second globally. It has built a product, Khemeia, to transform unstructured information into structured content ready for indexing. With IBM’s help, it has got leads into a few aerospace companies in France.

Hong Kong’s Insight Robotics was the global winner. The firm’s sensor-driven drone technology and imaging sensors help anticipate forest fires, a major environmental headache for governments. IBM Australia helped it connect with the governments of South America and Africa for business expansion.

As the B2B cloud marketplace matures, it will benefit startups as well as potential global customers. There’s a lot of room for growth as emerging ventures from India can scale up globally. For instance, Bangalore-based Fintellix (formerly iCreate Software) has a client base that includes some of India’s top banks who have opted for its compliance software products. It is now targeting community banks in the U.S. and will leverage IBM’s public cloud infrastructure to grow its clientele.

Working the SaaS model helps companies like Fintellix minimise sales and distribution costs, while many startups are evolving to become independent software vendors (ISVs) on IBM’s cloud marketplace. IBM’s clients work with 75 ISVs globally, scouting for business solutions in areas including supply chain, procurement, HR, and transaction processing across industries, especially banking, health care, and telecom.

As the marketplace grows, IBM will become more relevant in the cloud and begin to make money on account of hardware and consulting. (One estimate pegs the potential number of Indian ISVs with whom IBM’s relationship is in the early stages at close to 150.)

Working with IBM gives an ISV an advantage, because its offerings can be listed as IBM products in the marketplace. And what’s in it for IBM? One, the company need no longer hire developers; it only has to provide them a platform for scaling up and access to its enterprise clients. Eventually, Indian startups maturing into ISVs will trigger greater adoption of IBM’s data-centre infrastructure and cloud-middleware services. The young ventures can, for instance, access its Watson cognitive computing services.
Eventually, the shift could be towards a combination of private and public cloud as most organisations store sensitive data away from the public domain, and IBM has a hybrid solution to offer. “Whether you are a customer who wants to buy a bunch of metal (hardware) for a month or two, or run an established business in the cloud, you have the breadth of services from us,” says Mudiam. “With the cloud marketplace, it becomes easy for customers to shop for the right services,” he says.

More than the cloud, IBM is likely to see a greater share of revenue coming from consulting services. The migration to cloud often happens in a phased manner, and enterprises mostly depend on IBM for consulting services.
Players like Google and Amazon have built one-size-fits-all cloud environments. IBM’s key strength is it knows how to build technology solutions to suit an enterprise’s exact requirements. An analyst, who asked not to be named, says no two enterprise cloud-configurations are similar, which is where consulting muscle becomes vital.

“Traditional IT vendors [can] quickly leverage their portfolio strength. The opportunity is to guide their clients in their cloud journey with their complete array of services,” says Balaji Mahalingam, research director, IDC India.

IT WAS IN 2013 that IBM started prepping for big-ticket changes globally. The company acquired SoftLayer for $2 billion and went on to invest $1.2 billion to set up 15 more data centres across the globe, taking the count to more than 50.

Data centres play a crucial role, as clients, notably in the banking, finance, and government sectors, want to make sure that the data residing in the cloud is housed within the boundaries of their respective countries and comply with regulations. IBM unveiled its India data centre last year: a 30,000 sq. ft. facility in Airoli, outside Mumbai. A new SoftLayer data centre is expected to be set up here later this year. Which means the company has stolen a march on competition by establishing local infrastructure.

“With this data centre, almost every IBM market in the world now has one of its own,” says Mudiam. This automatically adds to the value chain in every one of these markets. “Today’s SMEs are tomorrow’s large enterprises, and today’s local players are tomorrow’s global players,” says Mudiam, explaining why this value addition is important.

SMEs are a particularly prized cachet for IBM. “Cloud has democratised technology, which appeals to a broader audience in the SME and government sectors,” says Narayanan. “For SMEs in particular, having world-class technologies is important,” she adds—perhaps more so than for their larger peers, which are not as driven to juice every penny invested in the business.

SMEs can use the cloud to optimise IT ops, thereby ensuring more bang out of their investments. Or they can use the marketplace in the cloud to cherrypick innovations that will give them an edge in the race to digitise. “But the real reason for them to be present in the cloud is that customer behaviour is changing all the time,” says Mudiam, adding that this deters companies from buying expensive hardware for the long term.

If a shampoo bottle worth Rs 200 is the equivalent of an on-premise server, cloud represents the Rs 2 sachet. “With SoftLayer, we can deliver that sachet. It gives us the ability to go after customers who want capex taken out of the picture,” Mudiam says. SoftLayer, founded in 2005, identified the need for on-demand data centres and hosting services long before SaaS, PaaS (platform as a service), and IaaS (infrastructure as a service) took off.

Ultimately, IBM wants a situation where the client’s size is irrelevant. “It really doesn’t matter if someone is talking about public or private cloud, hybrid hosting environments, or managing dedicated servers—we have a solution for each,” says Marc Jones, IBM-SoftLayer’s chief technology officer. The former IBM employee quoted earlier says the company’s client relationships, built over decades, are a significant threat to competition. “All that will not go away in a hurry. They are still a one-stop shop for enterprise clients, unlike a Google or a Microsoft,” he says.

This gives IBM a valuable lead in the form of deep insights into client needs. For example, a large private-sector insurance company in India is running a project on how to determine automobile insurance premiums based on a driver’s skills, instead of vehicle condition. Driver-competency assessment has never been considered a part of the risk assessment. To ascertain the human-efficiency bit, IBM is helping the insurer find developers who can use Internet of Things and cloud solutions to build a product that can capture sensor-based activity (driving, in this case), analyse the data, and rate drivers.

Similarly, banks are looking for new features to make their websites and social media services more dynamic. Now, IBM can build these in-house or allow the startups in its fold to take over. Narayanan reiterates that times have changed: IBM’s core business has evolved from mainframe to a broader set of hardware and software solutions and network capabilities, and now to services. “But what has remained constant for us is solving the biggest business problems for governments and corporations,” she says.

IN ALL THE FRENZY, it is easy to forget that IBM is not exactly alien to the cloud. Louis V. Gerstner, Jr., the iconic CEO, turned IBM around from a company that clocked net losses of $8 billion in 1993 to $8 billion in profits by 2000. In his 2002 book Who Says Elephants Can’t Dance? Gerstner alludes to the cloud: “It had to be in one of these early discussions in 1993 with Dennie (Dennis Elenburg, a technical representative at IBM) that I was introduced to ‘the cloud’—a graphic much loved and used on IBM charts showing how networks were going to change computing, communications, and all manners of business and human interaction.”
Much before the book, IBM had ushered in ‘availability centres’ for enterprise clients, rather than own machines. But while it pioneered the idea of fractional use of hardware owned by somebody else, it was late on the Internet to serve such facilities digitally. The commercial Internet was a nascent idea when Elenburg mooted the cloud, and it didn’t help that IBM was grappling for survival and couldn’t afford distractions. “We have actually been doing cloud work for quite some time,” says Narayanan, referring to IBM’s history of private-cloud innovations, “but the SoftLayer acquisition has changed the game.” It empowered IBM to address companies that are born in the cloud—the progeny of the Internet economy.

Padmanabhan distils the impact of the new economy to a couple of mega shifts in the global business culture. One, even companies steeped in the pride of Americana, think Walmart or Target, are seeking succour from new talent bastions like India. Even if you are not into spirituality, that’s a symptom of a dying ego, hastened by what borderless upstarts like Uber and Airbnb have wrought upon unmoving incumbents in their respective industries. “Companies have learnt that the sharing economy is here to stay,” says Padmanabhan. “Our services must be tuned that way.”

Carrying on from that, the second big shift is the move to collaborative working. “People are giving away things. There’s a surge of open-source thinking among startups. Everyone wants to contribute.”

The cloud is where this theatre of evolution is playing out. It is up to IBM’s pilgrims to find paradise in it.