Don't call IBM a big company unable to react to the fast changing technology world. In the company's latest quarter, the company proved to be the smartest kid on the technology block. Do call IBM smart for being sufficiently wise to take the big business-to-business trends of outsourcing, standard-driven software and system management as the key drivers and decide to control those functions through a clever balance of technology investment and acquisition. IBM, along with H-P, are showing that identifying the big trends and then going deep in capturing the segment you desire makes a lot more sense than chasing the splashiest big new thing such as games, consumer electronics or social networks. It is far better to be the company supplying the engines on which the splashy new thing is built than betting the company on being the next YouTube or Myspace.
First, the numbers. In the second quarter financials released earlier this week, IBM did everything except have their executives take a quick walk across the water of the corporate swimming pool. In the segments I try to keep most close watch on - services and middleware - the company showed it can not only talk a good game but is able to deliver the revenues. Overall, the company posted total revenues of $23.8 billion, up 9 percent.
Global Services revenues increased 10 percent and software revenues were up 13 percent. In the closely watched indicator of signed contracts for upcoming services, IBM showed contracts totaling $11.7 billion, up 22 percent year over year. The company ended the second quarter with an estimated services backlog, including Strategic Outsourcing, Business Transformation Outsourcing, Integrated Technology Services, Global Business Services and Maintenance, of $116 billion, an increase of $7 billion year to year.
Why the continued growth in service revenues and contracts in this era when the common wisdom is that service companies from India, Russia, et al will overwhelm the traditional U.S. suppliers? In my opinion, IBM is far more global than any of those global competitors. The company has steadily been moving the commodity parts of the service business (break/fix, call centers, tightly defined software development) to the lower cost areas of the world while keeping the closer contact, higher skill requirement pieces of the service business including software design, application integration and security implementation in the country where the customer is located. This is a model that other service companies worried about foreign competitors would do well to follow.
The growth of the middleware business is equally interesting.
Here is the segment of the IBM release on its software business:
"Revenues from the Software segment were $4.8 billion, an increase of 13 percent (9 percent, adjusting for currency) compared with the second quarter of 2006. Revenues from IBM's middleware products, which primarily include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.7 billion, up 16 percent versus the second quarter of 2006. Operating systems revenues of $568 million increased 2 percent compared with the prior-year quarter. For the WebSphere family of software products, which facilitate customers' ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, revenues increased 28 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 21 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, increased 33 percent, and revenues for Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, increased 12 percent year over year. Revenues from Rational software, integrated tools to improve the processes of software development, increased 11 percent compared with the year-ago quarter."
Even with the p.r.hyperbole aside, it is clear that IBM has built a middleware stack that customer's are buying. Remarkable, especially in the software business, is that much of this stack has been built on acquisitions including Tivoli, Rational, Lotus and many others. Integrating acquisitions in the software business is notoriously difficult and when those acquisitions must interoperate or put the entire software stack at risk, the difficulty is compounded. I give a lot of credit to Steve Mills at IBM who consistence in what he intended for the middleware product line has matched what he has delivered. I remember visiting Mills in his office several years ago when he mentioned the attraction and folly of company's becoming involved in markets that seem exciting at the time only to pull resources from needed projects. He used IBM's foray into educational cartoons ("The adventures of Hyperman" according to my memory) as an example. I'd suggest the execs at Microsoft might want to reflect on their continued investment in games and non-core business-to-business segments in light of the rise and fall of Hyperman.
IBM still has a lot of work to do. The balance between low cost commodity development and high touch system and software design changes daily. The continued development of the middleware stack has to also balance an embrace of standards with sufficient "software hooks" to make IBM the stack of choice. But in the just completed quarter, IBM showed that even a giant can be nimble when it maintains focus.