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Monday, September 18, 2006

IBM's software business: view from the top

Steve Mills, Senior VP in charge of IBM's software group, gave a keynote here at Forrester's Technology Leadership Forum 2006 today.

People forget how big IBM's software business is: Mills is sitting on top of a $17 billion organization. And, he's been with IBM for 33 years, so he's seen many changes in business computing over the years, and at IBM in particular.

Some of the interesting points from his presentation:
  • As organizations continue to build IT assets, the percent of IT spending going toward new development has been declining over the years. Today, only about 20% of IT spending is for new systems. Therefore, it is a challenge for CIOs to meet the demand for new systems, while controlling the costs of maintaining existing systems.
  • IT is the transforming technology of the past 60 years. It has transformed nearly every industry and affected many areas of our lives. It is the labor-saving innovation of all time. But IT itself is labor-intensive--an interesting paradox. The labor-intensive nature of IT is the greatest inhibitor to the improvement of IT utilization. The greatest problem facing IT organizations is their being overwhelmed with work and rising labor costs.
  • There is a consolidation of software vendors today, but the industry is still expanding and new vendors are being introduced. There is still new venture money flowing into the software sector at a rate of $4-5 billion per year.

  • The opportunity for business process outsourcing (BPO) is far larger than that for software-as-a-service (SaaS). Worldwide spending for BPO was $422 billion for BPO but only $2 billion for SaaS. In 2009, IBM expects the BPO market to grow to $641 billion, but SaaS to grow to only $3.9 billion.

  • Service-oriented architecture (SOA) is really just a continuation of things we have been doing in software for many years, such as object-oriented programming, remote procedure calls, and message-oriented middleware. The added promise of SOA is in greater flexibility in building and maintaining applications. SOA as a buzzword might go out of favor, but the concept will continue.

  • The greatest opportunity to reduce the cost of maintaining existing system is to "consolidate like crazy." The best way to cut software costs is to buy less software, and you do this by consolidating systems. How many ledgers do you have, how many inventory systems? Multiple redundant systems drive additional costs for hardware, software, and labor. The fewer systems, the better.

  • As an example of application consolidation, Mills offered IBM's own experience in going from 16,000 applications in the 1990s to 4,000 today.

  • Mills pointed out that IBM's software-related business is larger than SAP's because IBM plays not just in software but in hardware, middleware, and services--a market that is five times as large as the initial software sale.
During the Q&A session, Mills was asked whether Oracle's many acquisitions were good or bad for IBM. Given that IBM actually partners with Oracle at several levels, Mills was polite in his references to Oracle. But he did indicate that in all of the acquisitions IBM has done, it has learned to focus on growth of the businesses they buy, not just the financial leverage that might come from buying the revenue stream and cutting expenses (which he later referred to the "Computer Associates game.") According to Mills, Oracle has "a tough job ahead." He also said that Oracle's strategy has been a "dream come true for software vendors such as SAP and Lawson."

Related posts
IBM compromising its partner strategy with bid for MRO Software
IBM and Oracle: strange bedfellows
IBM: friend or foe to SAP?

by Frank Scavo, 9/18/2006 05:28:00 PM | permalink | e-mail this!

 Reader Comments:

Sounds like we're heading back to hardware and infrastructure vendors getting involved in application software. Maybe they'll do a better job of it this time. Probably not!

When I first got involved with HP in the mid 80's they had their own DB (Image), and their own MRP system (MM3000). Then they realized they couldn't compete in this arena. In my opinion the vendors should stick to software that is primarily plumbing and middleware. As HW advances there will be new apps that we can't even envision now. And it will take independent and creative software companies to invent these.
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