Bangalore: With at least 15,000 people, Steven Alan Mills employs the largest software sales force in the world. One may not have heard of Mills, 52, but they would surely be familiar with his company, International Business Machines Corp. (IBM), or Big Blue, the world’s second largest information technology company.
In the latest quarter, even as IBM’s overall revenue and profit declined in a tough market, Mills, senior vice-president and group executive, IBM Software Group, ensured that pretax earnings from his division actually increased by 5%, though revenue dipped 6%.
Overall, IBM’s revenue dropped 11% to $21.7 billion (around Rs1 trillion) in the first quarter, disappointing analysts, as demand for its services and computer hardware slumped. The firm still beat profit estimates as cost curbs contained the drop in its earnings at 1%, to $2.30 billion.
End-user focus: Mills says that a lot of things the company does sit on the boundary between classical application and middleware. Bloomberg
Mills’ software division contributes to about one-fifth of IBM’s revenue—which had a run rate of close to $88 billion—but accounts for close to 40% of its net profit, clearly indicating that he runs the most profitable part of the business. Unlike, say, the packaged shrink-wrapped Windows software of a Microsoft, IBM dominates a segment called middleware, which forms the core of corporate computing.
Middleware is the software that sits between the operating system, which talks to the machine, and the applications, which in turn talk to the end-user. However, increasingly, IBM is seen as offering functionalities that mirror what application software does, thus capturing a great part of the spending value chain from its partners.
On a recent visit to India, Mills talked about the current market conditions, IBM’s plans for the applications software segment, and the contribution of Big Blue’s India software labs. Edited excerpts:
If I were to crudely divide the software market into three different baskets of operating systems, middleware and applications, IBM is the dominant player in middleware. Six years ago, IBM did not have a presence in the applications end of the market but it now seems to be entering this too. What is the strategy here?
I would not characterize what we have done as a big push into applications (smiles). The products we have built and the 75-odd acquisitions we have done (in the software business alone) over a 15-year period—you will see that middleware still dominates our portfolio. That really is our business. We have added various things along the way. Lotus Notes, for instance: people view that as an application. What some people view as an application others might view it as (IT) infrastructure.
Content management, which some might view as application we see as infrastructure. More than the classification, it meets the needs of the end-user. We do software for loan origination (and) claims processing which are very application-like but done on very rich middleware infrastructure. The marketplace that Cognos (an company acquired by IBM in 2007) competes in is classified as middleware, but most customers think of its offerings in the application context. There are a lot of things we do which sit on the boundary between traditional classical application and middleware. Nobody would debate that a SAP ERP (enterprise resource planning, a business software) accounting would be application. Some are a bridge between the applications and middleware. We are very much focused on the middleware. We might add (an) application, like capabilities to meet the needs of the end-user.
But isn’t that tiptoeing towards full applications offering in the name of offering more functionality? Will we see an ERP, a CRM (customer relationship management) or similar product offerings from IBM and will you eventually go up against the likes of SAP AG, an Oracle or other existing partners?
We are not moving in those directions. Having an ecosystem and working with other companies to offer complete solutions is a key part of the strategy. We will never deliver all that is required by customers. We can’t make it all, we can’t buy it all. So we will work with our partners. We are SAP’s largest partner. We are Oracle’s largest partner. For every dollar a customer spends with SAP, we get probably $5 by providing hardware, software and services to surround that. If we choose to compete directly, say, with SAP like Oracle did, SAP will choose to steer business away from us. Oracle’s continuous acquisitions of application companies has made SAP and others stronger partners with IBM.
We are extremely sensitive about that (apprehensions by partners that IBM’s middleware will offer application-like abilities). The amount of revenue and profit we derive from the current ecosystem far outweighs any revenues we might realize by offering direct competing technologies. It doesn’t make economic sense. The middleware market is equal to the application market size and grows at the same rate. We won’t compete with our ecosystem.
Partners such as, say, Oracle and, to some extent Microsoft, want to work towards strengthening their position in middleware. Would you try and pre-empt that by pushing into applications?
Microsoft is a different case entirely. Oracle is more the example. Given the size of, say, the ERP business of an Oracle or a SAP, there isn’t anything we could buy which could rival them. All those companies are gone. There are some small players but that is not (what we’ll look at). The enterprise market is highly concentrated among a few players. Our focus would continue to be middleware.
How does IBM plan to cope with the current economic environment where IT budgets are shrinking?
Because we have been around for 100 years, we have had experience of seeing lots of recessions, downturns and slowdowns (laughs)... Customers become focused on cost savings... We have geared our solutions and offerings to show them how they can save money by using our technologies.
How closely does IBM work with Indian IT services vendors such as TCS, Infosys or a Wipro?
These are substantial relationships. We both see directly related, connecting revenues. They run accounts which we are in and we have been training and certifying thousands of their employees in implementing IBM-related technologies.