Hardware Is Still Part of the Mix

IBM wants systems innovation to meld with software and services.

Its an inescapable fact: Hardware is no longer the unquestioned core of IBMs business. And yet, IBM executives say, under new Chairman Sam Palmisano, the company will not only remain in the hardware business but will also continue to invest in advanced hardware technologies for the foreseeable future.

Whats the point? Is IBM bent on reclaiming past glories? And if not, what is it trying to accomplish?

The hardware business makes sense for IBM, company leaders say, but only with an approach thats radically different from the one the Armonk, N.Y., company has historically pursued. For some years, IBM has been less and less able to herd locked-in customers in mass migrations to new hardware. In response, the company has lowered manufacturing costs, exited commodity markets, cooked up self-managing technology goodies in its autonomic computing initiative, and wrapped the result in software and services.

For one customer, the combination hit the spot.

"When we looked at IBMs [Intel Corp.] architecture, we found they really are trying to make it as reliable as mainframes or Unix machines," said Andre Duncan, CIO of F. Schumacher & Company Inc., a New York-based supplier of fabrics and wallpaper. Duncan, in Newark, Del., is in charge of a server consolidation project in which 110 Compaq Computer Corp. servers will be replaced by 20 IBM eServer xSeries 440 machines.

But to unseat the Round Rock, Texas, direct marketer from the top of the Intel server charts, IBM will have to turn it up a notch and then some because not all customers are finding IBMs pitch on target.

"Im not sure what IBMs strategy is other than they want to provide services for an organization," said Greg Smith, CIO of the National Wildlife Federation, in Washington.

Still another customer has jumped ship. "We had a very good relationship with IBM for six years. Then in the last year and a half, they became more interested in selling than in service. They were incapable to respond to our needs," said Bruce Brorson, associate professor and IT program director at the University of Minnesota, Crookston, and an eWeek Corporate Partner. "We had about 30 exclusively IBM servers, but now we have migrated completely to Dell," Brorson said. Substandard laptop durability was also a catalyst to change vendors, he said.

In the less intensely competitive markets for iSeries (formerly AS/400) and pSeries (Unix) systems, IBM is seeking to keep costs down and profit margins up by converging the products while maintaining brand differentiation.

"Theyre going to eliminate the iSeries in late 2003 to mid-2004. The new machine will be dramatically more cost-effective, in the class of Unix servers," said David Andrews, president of Andrews Consulting Group, in Cheshire, Conn. Although Andrews predicted a merger of hardware platforms, the new system will continue to run the OS/400 operating system, he added.

IBM mainframes, or the zSeries, because of their distinct processor architecture and entrenched installed base, are not likely to merge with other systems, experts say, although IBM has been attempting to wring costs out of the manufacturing process and create what commonalities it can with other hardware lines.

Microprocessor technology has seen a considerable amount of IBM innovation in the past several years, with the introduction of the Summit interconnect chip set designed to boost the performance and scalability of Intel systems, including blade servers. IBM made a belated splash in the blade market in September with the introduction of its BladeCenter servers, which nonetheless earned praise from observers. "Theyve done a lot of innovation on the Intel platform," said James Gruener, an analyst at The Yankee Group, based in Boston.

IBM Server Group *

  • Top executive William Zeitler, senior vice president and group executive
  • Revenue 15.1 percent of company total in Q3, 2002; 15.6 percent in Q3, 2001
  • Head count Not disclosed **
  • Key products eServer p690, eServer x440, eServer z900, eServer i890, BladeCenter
  • What to watch in 2003 Evolution of BladeCenter; grid computing moves into commercial environments; Intel-based servers*Includes servers, storage; excludes personal systems
    **Company declined to provide information
    Source: IBM, eWeek reporting
Although it took IBMs imprimatur nearly 20 years ago to make the PC welcome in corporations, the company has given up manufacturing PCs in North America, the kind of strategic divestment that has been one of the hallmarks of the era of outgoing Chairman Lou Gerstner, who also signed off on the pending sale of the companys hard disk manufacturing operations to Hitachi. But in a strategy consistent with that for other hardware lines, IBM will continue to push innovations for corporate buyers, even if the products roll off an assembly line other than IBMs.

"Technology matters again. You must embrace commoditization and enhance it," said Robert Moffatt, IBMs senior vice president and group executive, Personal Systems and Integrated Supply Chain. One such innovation, Rapid Restore PC, backs up a PCs software image in a hidden partition of its hard disk. When the system crashes, the image can be restored from this partition, Moffatt explained.

These technologies make the systems cheaper to manage, either for customers themselves or for IBM Global Services when it takes charge of managing desktops in a service contract, said Moffatt. And the strategy has been producing something very unusual for the PC business at IBM—a profit—as it did in the third quarter, according to remarks by Palmisano to analysts.

For one customer, the strategy is working, too. "We switched to IBM as our primary PC hardware and Intel-based server supplier in July. The products seem very solid, pricing is very aggressive, and the support team has been very good," said Frank Calabrese, manager of PC strategy and services at Bose Corp., in Framingham, Mass., and an eWeek Corporate Partner.

The desktop strategy is unlikely to result in a No. 1 market share, since IBM no longer stresses consumer sales and has abandoned retail channels. But thats not a goal, according to Moffatt. Instead, the PC business is, like the server business under IBM Senior Vice President William Zeitler (see interview, Page 27), striving to weave technology innovations into a total solution that encompasses software and services as well as hardware. Very often, its working.