5 New Year’s perils and perks for IBM’s new CEO

On Jan. 1, 2012, Virginia Rometty formally took the reins as CEO of IBM (s ibm) possibly the most iconic and oldest of all IT companies.
To the naked eye, IBM is on a roll. Year-to-date, IBM stock has outperformed that of Wall Street darlings Google (s goog) and Apple (s aapl).  Investor whiz Warren Buffett snarfed up $10 billion worth of IBM shares for a 5.5 percent stake in the company. And much has been made that the company has transformed itself from the mainframe megalith into a software-and-services giant.
But as it forges into its second century, a Rometty-led IBM faces big challenges and big opportunities. Here are my top five.

1: When you’re really, really big, growth is hard

With 425,000 employees and annual revenue north of $106 billion, IBM is nothing if not big.
And growth from a huge base is really tough. “It’s a numbers game. For a company that size, growing even 5 percent means adding a huge number of people,” said Amy Wohl, president of Wohl Associates, an IT consultant and long-time IBM watcher.
To chase growth, IBM must keep buying companies and technologies to feed its critical cloud, analytics and big data efforts. In May 2010, CEO Sam Palmisano said the company earmarked $20 billion for acquisitions over the next five years, and it’s done its best to spend that money. Most recently, it bought DemandTec for $440 million and Emptoris for an undisclosed amount.
The game plan around these acquisitions isn’t just to fill in check marks in the IBM product portfolio, but to give IBM’s gigantic services arm more ways to sell more high-margin services and consultation.

2: Services cut both ways

In the past few years, software and services have made up a bigger percentage of IBM’s revenue — the company put that at 83 percent last year.
IBM is not in the product sales business so much as it is in the trickier — and potentially more profitable — consultative-solutions sales business. IBM’s blue suits go in, hear about the customer’s business, and problems and recommend a total hardware-software-service solution. That model is the envy of competitors, but it can also be a very long sales cycle at a time when many business customers might just want to add some IaaS instances from Amazon (s amzn) or another IaaS to meet their immediate needs.
Even system integration and IT outsourcing deals are changing with the times, and some pundits say IBM will be hard-pressed to move more of its service work from a traditional outsourcing model to a less-pricey operational-expense transaction model. David Tapper, IDC’s VP of outsourcing and offshore services, said this fall that more of that once common systems integration work is moving to a SaaS-like subscription model, according to CRN. The hard part for IBM will be to negotiate that transition from big-bang up-front bucks to more incremental — and possibly less profitable — services.
The sheer number and variety of IBM products and services is a problem and blessing in and of itself. It means that IBM sales and service people have to go into accounts and do a long-and-involved consultative solution sale. The upside is such sales — if they close  — tend to be big and profitable.

3: Clear up the cloud plan

Like its competitors, IBM is guilty of a certain amount of cloudwashing, but the company does field a ton of cloud-enabling technologies. Now it needs to better explain what it offers, what’s in the pipeline and which offerings suit which customers. Last April, it laid out its SmartCloud initiative that consolidated a range of public cloud-like offferings under one brand.  In September, IBM bought Platform Computing and its respected private-cloud and big data products.
A month later, IBM announced a slew of cloud services including enterprise-focused PaaS capabilities. Of particular interest to the big data crowd was its new Hadoop-based InfoSphere BigInsights product which will be part of  IBM SmartCloud platform. Still to come are planned enterprise-focused software-as-a-service offerings, according to an IBM spokesman.
IBM casts cloud computing in its own mold. Business customers are billed for IBM  cloud services — no credit card transactions here. The company is just not “into cloud” the same way others vendors are, said Frank Dzubeck, president of Communications Network Architects, an IT advisory firm that has followed IBM for years. “They’re into the enablement of everyone else. It’s a different philosophy — which basically started with Sam [Palmisano] saying ‘we don’t compete with our customers.’  They do provide private clouds to people, they enable telcos etc. They are behind the scenes for a great many large organizations,” Dzubeck said.

4: Keep reminding end users that IBM is there

Everyone now looks back on IBM’s controversial decision to sell off its desktop and ThinkPad laptop line to Lenovo in 2005 as a good idea (so good, in fact, that Hewlett-Packard (s HPQ) tried to mimic the move earlier this year with disastrous effect). But the lack of end-user facing devices means that IBM is missing out on the single hottest arena in hardware. There are no IBM tablets, no laptops, not even desktops. That poses a problem, although it’s not insurmountable, says Roger Kay, president of research firm Endpoint Technologies Associates.
“IBM doesn’t have a brand of devices that people touch and see. … So IBM needs to do something like ‘Intel Inside,’ which it is doing with ‘Smarter Planet’ to promote the company so that people don’t forget who’s in the back room,” Kay said.
In some respects, IBM is reaching the customer from inside out while Apple is going the opposite way, building up its back-end capabilities with iCloud by seeding the universe with its slick, connected iPad, iPhone and MacBook Air endpoints.

5: Beware of smarter competitors

For the past two years, IBM has profited because one of its chief competitors — HP — can’t seem to get out of its own way with management turmoil, hardware missteps and overall nuttiness. Another, Oracle, (s orcl) seems to be rebuilding itself in the image of IBM, but IBM of the 1960s, buying a fading hardware business in 2010 and spending the year trying to digest it. No one company stays this lucky forever. No one can bet that those two companies won’t get it together. Palmisano is on the record saying that of all the competitors out there, Oracle — with its database and middleware strengths — has to be watched closely. Rometty will have to continue that watchfullness.

Bonus item: Ride the Watson momentum

IBM, Oracle, HP, EMC  (s emc) are all pushing big data and analytics big time going into the new year. But none of the other rivals had the PR coup that IBM engineered with Watson, IBM’s artificial intelligence super star that entered the culture with its Jeopardy! championship last year. Palmisano promised that Watson is more than fun and games, and IBM already is applying the technology to healthcare and other industries.
It’s critical that IBM continue to prove that all that fancy and impressive R&D can be applied to real-world products that can be sold into many industries.