IBM’s numbers show the shifting economics of business IT

IBM posted their 2nd quarter results, and they are a stand-in for the broader market trends, since the company is the largest seller of IT to governments and corporations, worldwide. Revenue¬†($24.9 billion)¬†has fallen by 3%, below most analysts’ forecasts, with a real drop in its hardware business, but strong growth in software reflecting the reconfigurations in the IT world.
As large users of hardware move toward cloud computing solutions, like Amazon and the many others in that space, the demand for new hardware will attenuate. Likewise this transition erodes the services that accompany on-premise solutions. We have seen the impact of this on other consulting firms, like Accenture.
IBM recently announced plans to acquire Softlayer, a cloud computing player, but that deal — for $2 billion — closed too late to reflect the acquired company’s revenues in IBM’s results. But it shows that IBM knows which way the wind is blowing.
Especially bright areas for IBM, however, include Social Workforce Solutions (formerly Lotus, but now including all enterprise social tools) which rose 22% over the second quarter. It’s hard to determine what exactly is included in this line item, but if certainly includes IBM Notes, and probably related products like IBM Connections.
The takeaway is larger than the relatively good news for IBM. What we are seeing is the slide away from ‘vanity’ brand name server solutions in businesses, and a serious migration of computing scale to large, custom-rigged cloud services for dedicated instances of enterprise software. For example, Salesforce is seeing very strong growth in its hosted CRM solutions.
IBM efforts in this area, like IBM SmartCloud and the acquisition of SoftLayer, will have to accelerate, and IBM will have to reconfigure its business — and shrink its consulting workforce — around that reality. IBM has moved social technology like IBM Notes (former Lotus Notes) to its own cloud and onto Amazon, but this has been secondary to their focus. Now, it must become the primary modality of future plans.