Cloud is now a boardroom discussion and more are requesting CIO adoption

Raising the stakes in a high priced game, interest in cloud computing is reaching beyond IT and lines of business to the board of directors. CIOs are increasingly being asked about their plans for cloud adoption. This comes alongside an already increasingly complex IT portfolio and strongly competing priorities. Change is needed.

Whither IBM?

IBM has been all over the media the past few weeks–both pitching its story and fielding brickbats and accolades for its prospects and position in the market. The company has been stagnant, at best, in revenue and market share in recent years, while adjusting its product mix and aggressively improving its profitability. But where does IBM stand as a continuing partner to the enterprise, as a provider of hardware, software, and/or services? Just how relevant is the firm in the evolving environment of cloud, big data, and mobile?

The major complaints

IBM’s financials, more than its products, have been the lightning rod for critics. Recent pieces in Business Week and Forbes look at IBM’s slide in revenues over the past couple of years. They point to its retreat from projected revenue growth, despite increased global IT spending, as well as market embarrassments such as IBM’s loss to AWS in a $600 million contract bid to provide private cloud computing to the CIA. They question whether the company’s culture and product mix that have combined to create long-term vendor lock-in for customers can survive the economics and new market dynamics wrought by cloud.

A commitment to earnings growth

But it is the firm’s “Roadmap 2015” strategy of reaching $20 of earnings per share of stock, begun under former CEO Sam Palmisano and continued under current CEO Virginia Rometty, that is pinpointed as the primary source of IBM’s problems. Earnings growth was seen by Palmisano as the appropriate strategy of a mature company and perhaps the only one that could raise buy and sell analysts sights from quarterly performance to a longer-term perspective. Palmisano even aligned his managers’ compensation with the company’s earnings targets. But IBM is now facing charges of ‘financial engineering’ from observers who have noted such practices as the increased use of non-GAAP accounting, allegedly to sustain its earnings growth. The claim is that the continued cuts and other moves to improve earnings have cost the firm its ability to grow revenues and innovate on the scale needed to compete in the new, cloud-driven environment.

A commitment to innovation

IBM, as well as Palmisano in a Harvard Business Review interview out this month, would counter that its annual investment of $6 billion in internal R&D, coupled with its pattern of acquiring startups with innovative technology, reflects an appropriate commitment to innovation. IBM counts its home-grown Watson technology, as well as key acquisitions such as its 2013 pickup of SoftLayer for cloud, among its strategic innovations.

The role of acquisitions in R&D

It is not by accident that tech startups fuel much of the innovation in the IT sector. Such companies begin with a new idea and are given the freedom of shoestring funding to develop, test, and revise their vision and execution. Additional funding comes with incremental signs of success, and startup management teams are supremely motivated with equity participation to deliver that success. In a now-familiar dynamic of the larger tech ecosystem, successful startups are in turn most often purchased by larger vendors, though some may break through with a public offering and extended growth period before a still-likely acquisition fate.

In technology, this process is both more often and often more efficiently effective than traditional R&D undertaken within the traditional corporate environment. In-house R&D instead best focuses on incremental improvements to existing products, integrating technology from newly-acquired companies into the larger vendor’s product line, and, occasionally, developing that larger, breakthrough technology that benefits from or requires the resources in time, money, customers and expertise that a larger vendor can provide.

The best of both worlds?

IBM has endeavored to copy some common elements of IT startups, with its vigorous support for open systems and in attempts to foster innovative thinking within its massive bureaucracy, while satisfying its investors (and primary source of capital) with the earnings it believes they crave.

Indeed, although IBM, like all other competitors, is still dwarfed by AWS in the cloud infrastructure market, it is credited with faster 1Q14 growth than Amazon or other competitors, excepting Microsoft, in the market. IBM was recently named the top IaaS provider, in terms of solution, for private or public cloud. In the past month, the company increased its commitment to OpenStack and announced more partners developing applications for its Watson technology.

The question is whether and how quickly IBM’s new cloud and analytics solutions will pay off, while its more mature hardware and traditional outsourcing markets face continuing challenges.

IBM is not alone

But IBM is not alone among large IT vendors facing reinvention amidst both ever-quickening  technology change and the inevitable pricing challenge from growth companies with minimal or non-existing profit requirements (e.g., Amazon). One pundit this week advised new Microsoft CEO Satya Nadella to copy IBM’s approach of shifting from its traditional (hardware) market to more profitable services. HP has been struggling to reinvent itself from before it passed IBM in revenue. Like Dell, these traditional hardware providers have shifted their focus to become integrated providers with an emphasis on the higher-margin services business. SAP and Oracle, as the biggest enterprise software providers, are also fundamentally challenged to adapt to the cloud-service delivery model. Gigaom’s David Linthicum recently noted the revenue impact that cloud is starting to register on these providers.

Consolidation is the traditional outcome of these waves of change

John Chambers, the CEO of Cisco, the networking giant that is likewise remaking itself for the cloud-based support of the Internet of Things, recently predicted a wave of consolidation among the top IT vendors. Certainly, that has been the pattern in all major technology shifts to date. As IBM won the mainframe wars, its five largest competitors came to be known by their acronym as “The BUNCH”, until they further consolidated and retreated from market relevance. And what of the minicomputer era, when Digital, Data General, and Prime were top competitors? Or, to a lesser degree, the engineering workstation era, when Apollo and Sun rule that cosmos? Chambers is likely correct in his prediction.

What does it mean for the enterprise?

What does this dynamic portend for these companies’ enterprise customers? It means customers can anticipate consolidation among some of their largest vendors over the next two to five years. These providers don’t collapse by closing up shop, however. A vendor with $100 billion or so in revenue still has very significant resources. Like IBM’s resurgence in the early ‘90s, a successful reinvention is possible and, at worst case, a graceful decline to consolidation does not present a dire situation for customers.

Still, it is best to judge these providers by the same criteria that always make sense:

  • current technology and solutions,
  • roadmap and direction for new technology,
  • partner ecosystem of complementary development,
  • products their adhere to the open standards and APIs that limit long-term lock-in,
  • stability with the ability to deliver, and
  • delivery of responsive service and adaptability to specific enterprise needs.

The development of “as a Service” delivery is making omnibus technology commitments and lock-in less of a requirement. Younger companies (e.g., Salesforce in SaaS) may have more momentum and fewer legacy challenges in their culture and bureaucracy, but they too require something of a reinvention with each new technology wave (e.g., Apple over the years). They also become candidates for consolidation more often than not. So, all vendors need to be evaluated with an awareness of likely longer-term change and open eyes as to their present performance.

IBM’s drive to earnings does raise questions, including concerns for its price competitiveness in the new environment. But IBM has a history of reinvention, and it will be interesting to see how the firm’s internal and external R&D fare over the next several years. The company is still scrapping right in the new-technology mix, despite its challenges of bureaucracy and scale.

Hey, IT, want to innovate? Become a network

Innovation may be an aging buzzword, but IT execs are only too happy to hear their CEOs parrot it. CIOs can get their seat back at the executive table if they can help turn their company – and its product – into networks.

A mature enterprise innovator

Network World has posted a great interview with Sean Belka, Senior Vice President and Director of the Fidelity Center for Applied Technology, AKA ‘Fidelity Labs’.

Fidelity has long been an innovator in technology, looking for a proprietary edge on everything from fund manager market information and analytics terminals to 401K delivery services. As such, the company has deep experience in investing for innovation, integrating IT operations with its lines of business, and finding those tasks that are still best centralized.

Among the organizational practices Belka described are the following:

  • While the LOB IT organizations are more focused on internal employee and customer needs, with a fairly immediate timeframe, the Labs pull in more external information, from market analysts to university research partnerships, to take a more experimental, futuristic, and big picture-oriented look at the possible uses and impact of new technology.
  • Although the Labs were looking at technologies such as mobile and social five years ago, they are currently more focused on wearables, artificial intelligence, and gamification.
  • With a staff of 75, the Labs have separate groups dedicated to new technologies, prototypes and development, and geographic innovation ecosystems, among other functions.
  • Fidelity has both enterprise IT and business unit IT, which the Labs will work with variously, depending on the scope of the project involved.

Only very large enterprises have the scale and resources to commit to IT that Fidelity enjoys.

But smaller businesses compete in the same market, and it is incumbent upon IT organizations from the merely large down to the midsized (and, critically, their partners and providers) to find ways for new platforms, technologies and packaged products to enable advanced and adaptable innovation–without incurring prohibitive managerial, tech skill, and resource costs.

There is also accumulated wisdom in how Fidelity organizes its IT to support both regular business operations and various stages of near-term and longer-term innovation and experimentation.