The 109-year-old IBM is splitting into two, in a move aimed at a sharper focus on cloud and AI capabilities. The US tech major's infrastructure services business, which looks at delivering managed services, will be a new company by end-2021.
The timing, for sure, is a pointer to where growth will come from - and one that the pandemic has made a lot more apparent. Cloud and AI are where the future lies, and while legacy businesses would carry on as usual, they would no longer continue to be growth drivers.
The writing has been on the wall for a couple of years now, says Phil Fersht, CEO, HFS Research. “It took the pandemic to make them realize and do something,” he added.
A quick look at IBM’s business
IBM’s revenue segment can be divided into five. Their revenue for the year ended December 2019 is as below:
- Cloud and cognitive software ($23.2 billion)
- Global Business Services (includes consulting, application management and revenues at $16.6 billion),
- Global Technology Services (GTS) (cloud and infrastructure services with revenue of $27.3 billion)
- Systems (hardware and operating systems at $7.6 billion revenue) and
- Global Financing (financing and used equipment sales at $1.4 billion revenue)
The company’s annual revenue stood at $77 billion for FY19.
Spin-off
The split has happened at the GTS segment. The managed infrastructure services of the segment will become an independent entity by the end of 2021. The segment accounts for about $19 billion in annual revenue. It caters to 4,600 clients and employs 90,000 people.
IBM currently employs a total of about 352,600 people worldwide.
With the spin-off, the company is clearly shifting its focus from services to software and products portfolio. According to IBM Chief Executive Officer Arvind Krishna, this is a logical step to have a laser sharp focus on the $1 trillion hybrid cloud opportunity banking on its acquisition, Red Hat. The company acquired the cloud player in 2019 for $34 billion, in what was by far one of the largest-ever acquisitions made by a tech major.
What does this mean for IBM?
Analysts Moneycontrol spoke to agree it's all to the good. One of them described this as a “terrific move by IBM.”
Fersht explained, “Traditional Infra services is a Dog (high market share, but low growth) while Cloud represents the Star. Both businesses need a very different go-to-market approach.”
Why?
Chirajeet Sengupta, partner, Everest group, said in a note that at scale these businesses, services and software, require different investment strategies, and this move can go a long way in resolving IBM's traditional dilemma.
A dilemma most firms with software and services portfolios face once they have grown a certain scale.
For instance, Pareekh Jain, founder, Pareekh Consulting, pointed out that HP Enterprise hived off its service business and merged it with Computer Sciences Corporation to become DXC Technology. It also spun off its software business and merged it with Micro Focus.
For IBM, which has been witnessing a slow growth and a recent turnaround due to Red Hat, the timing could not have been more perfect. On the back of the pandemic, adoption of cloud and AI has only accelerated, to ensure business continuity.
As Krishna said, “As a more focused company, IBM will innovate and move faster, and invest more strategically in the future of our business.”
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