Software Business Driving On Demand

How important is software to IBM? Consider that in 2001, while software accounted for about 15 percent of the companys revenue, it was responsible for about one-third of the vendors gross profits.

But even that does not describe the growing importance of software to IBM. The fact is, said IBM Vice President for Server Group Technology Strategy Irving Wladawsky-Berger, software products such as WebSphere, DB2 and Tivoli—along with consulting and other services—will be critical to the companys eBusiness On Demand strategy.

"On Demand puts even more emphasis on software and services ... especially middleware," said Wladawsky-Berger, in Armonk, N.Y.

Software is key to On Demand computing, IBM officials say, because, to a large degree, the strategy is about creating a stack of flexible, easily modifiable middleware in to which enterprise applications—complete with industry-specific business processes—can be quickly plugged. The companys recently announced plan to acquire software development tools vendor Rational Software Corp. for $2.1 billion fits that overall strategy, experts say, because it will give developers tools they can use to create structured code more quickly.

A prime example of the strategy is how IBM has been evolving its WebSphere application server family of products. In addition to enhancing Java 2 Enterprise Edition support in WebSphere 5.0 and rolling out a low-cost version of the server, IBM has been beefing up its business process integration capabilities by adding products acquired from Holosofx Inc. and CrossWorlds Software Inc.

As a result, more enterprises have begun looking at WebSphere as a core piece of their e-business infrastructure. In the third quarter of last year, although IBMs overall software revenues decreased 3 percent, WebSphere revenues jumped 27 percent.

DB2 has also benefited. In a database market that slumped badly in the third quarter of last year, IBM said DB2 revenues grew 2 percent.

One enterprise that is standardizing on WebSphere Commerce 5.4 is Staples Inc. The company recently said that it decided to use WebSphere as the underpinnings of the relaunch of its popular StaplesLink.com business-to-business e-commerce site. Lisa Hamblet, vice president for B2B e-commerce at Staples, in Framingham, Mass., said the products support for Java was key to the companys decision to use it to link to 2.6 million individual customers and 10,000 business customers via the Web site.

IBM Software Group Top executive Steve Mills, senior vice president, group executive Revenue 15.2 percent of company total in Q3, 2002; 15.6 percent in Q3, 2001 Head count 35,000; unchanged from year earlier Key products WebSphere, DB2, Tivoli, Lotus (Notes and Domino), Rational software development tools* What to watch in 2003 The Tivoli product line will continue to add autonomic and On Demand features, including support for managing grids; WebSphere will continue to add industry-specific business process best practices templates and modeling tools. *Pending acquisition Source: IBM, eWeek reporting

Not all of IBMs key software products fit the On Demand push as easily. For example, the company reported in the third quarter of last year that revenue from its Lotus divisions messaging and collaboration product line fell 15 percent, while revenue from its Tivoli management suite declined 16 percent.

IBM officials, however, say they are rapidly enhancing those products—particularly Tivoli—to make them fit the On Demand concept.

In the case of Tivoli, the company has added a Service Level Advisor product, which helps users manage system performance to meet service levels, and a Business System Manager to help customers map business processes to the system resources they need.

Soon IBM will add policy-based storage management and identity-based resource management software acquired over the past year from Access360 Corp. and TrelliSoft Inc.

Ultimately, said Wladawsky-Berger, those investments not only will help enterprises respond more quickly to rapidly changing business needs, but they will also boost IBMs bottom line. "The good news for us," he said, "is that software for integration is anything but a commodity."