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Reinventing IBM: The evolution of on-demand

Martin LaMonica and Mike Ricciuti CNET News.com

Published: 15 Jun 2004 11:10 BST

Haunted by failures
On-demand is another IBM attempt to chart the IT industry's direction. Many initiatives, such as the PS/2 personal computer or the AD/Cycle development tool, were all hailed at one time or another by IBM management as revolutionary -- and all ultimately flopped.

Few, if any, rivals have been as influential or prolific as IBM in the computer business. Its engineers developed the first relational database, hard disk drive, reduced instruction set computing (RISC) chip, speech recognition software and dynamic RAM memory. The company has been granted in excess of 22,000 patents in the last decade, more than its top 10 competitors combined.

Turning those inventions into revenue has been another matter. While IBM engineer Edgar Codd defined the relational database in the 1970s, the technology didn't mesh with corporate strategy. The result: IBM was late to market, and Oracle became the dominant leader in databases in the 1980s. More recently, despite its prowess in hard-disk design and manufacturing, IBM failed to recognise that storage would become a major market and was forced to play catch-up with EMC and other companies.

The consumer market is the scene of IBM's most infamous failure: the personal computer. The company's legendary mistakes around the PC serve as business school case studies in what not to do.

At the dawn of the PC era, IBM management's hardware-centric mentality underestimated the power of software and allowed Microsoft to establish its fortune with its Disc Operating System. IBM later attempted to build a successor to DOS, called OS/2, with Microsoft's cooperation. That ended in a high-profile divorce. IBM got a dead-end product, and Microsoft walked away with a multibillion-dollar franchise in Windows NT.

IBM fared no better in the years that followed, as one disaster after another highlighted the company's tin ear for software marketing. Well after Microsoft had established its Word and Excel applications as de facto standards, IBM repeatedly tried and failed to launch its own desktop software business.

It wasn't until the mid-1990s that IBM finally began to score some wins, seizing on the Java and XML (Extensible Markup Language) programming languages, then Linux technologies -- which together form the foundation of its current software products. IBM also bet correctly that the Internet would have an even more dramatic commercial effect on businesses than it did on consumers.

About that time, the company made some high-profile acquisitions, notably a hostile takeover of Lotus Development in 1995 and the purchase of Tivoli Systems in 1996. Bringing in independent software companies shook up IBM's hardware-centric and fractious culture.

"They were clear to me that they brought Tivoli in to change IBM, not other way around," Tivoli founder Frank Moss said in an interview last year. "One change that Tivoli had a significant impact on was the ability to make decisions like a software company. And I don't doubt that we pissed some people off along the way."

IBM now has a structured process for evaluating emerging technologies, such as autonomic and grid computing. Some investments have yet to pay off, including a billion-dollar bet on pervasive computing, and IBM admits that its multibillion-dollar chipmaking plant is not performing up to speed.

Those past mistakes are now indelibly recorded in IBM's institutional memory. Eschewing its former proprietary-hardware strategy, much of IBM's gear is built around standards. Although it has ceded some markets, such as networking hardware, IBM has finally recaptured lost ground in other areas: in 2002, it took the lead spot in the database market from Oracle. In the PC business, No. 3 provider IBM focuses entirely on corporate customers.

As it pursues its own on-demand ideal, IBM values the ability to react quickly to customer demand, which stands in contrast to the days when IBM's decision making was centrally planned. If it works, analysts say, the on-demand initiative could have an even more profound impact on the company than the e-business mantra born under Gerstner during the Internet boom.

"E-business was all about using IBM's services capabilities to pull all the technology together, but there weren't any fundamental changes in the technology," said Tom Bittman, an analyst at Gartner. "Now you can go to any division at IBM and hear an on-demand story that doesn’t conflict with other parts of IBM. That's pretty powerful."

Old enemies take notice
Already, rivals that once pitied IBM have responded to its new aggressiveness. A broad agreement between Microsoft and Sun Microsystems, announced in April, included plans to collaborate on technical interoperability. Closer interoperability between the two companies' gear is a hedge against IBM, which earns a lot of money in services by making disparate systems work together, said John Rymer, an analyst at Forrester Research.

"There's no question who our biggest competitor is," said Microsoft senior vice president Bob Muglia. "It is IBM."

The new IBM has become so confident that it is even returning to the scene of its painful defeat on the desktop to challenge Microsoft on its own turf. In May, IBM launched an initiative called Workplace, which has relatively simple applications that can be delivered via a Web browser from a network server.

Workplace demonstrates IBM's technology strategy in a nutshell. The entire package draws on several components already in IBM's arsenal, including its Lotus collaboration software and Eclipse open-source technology. IBM's strategy is to mix and match the components -- whether they're processors, software programs or business process templates used in consulting -- to tailor products for specific industries.

In targeting specific industries, IBM has pledged to spend $1bn to recruit partners and independent software providers with industry expertise. The partner outreach programme is a critical component of IBM's plan to garner more business from midsize companies, which are expected to fuel technology spending in the years ahead.

But this is uncertain terrain for IBM, and Microsoft is well-prepared to defend its ground, with thousands of independent software providers in its camp and a strong customer base among smaller organisations. To push into midsize companies, IBM must overcome its own legacy of catering to large corporations, which favour performance over cost and ease of use. A Microsoft executive said IBM is more interested in dominating any partner network than in being an equitable partner.

"All IBM is trying to do is sell IBM mainframes and service hours," said Adam Sohn, product manager of the Platform Strategy and Partner Group at Microsoft.

Competitors also criticise IBM's offerings as disjointed. Indeed, acquisitions have been instrumental to IBM's plan to provide one-stop shopping to corporate technology buyers. But accommodating new technologies, as well as decades of existing IBM systems, makes tightly integrating IBM's many parts a tough challenge.

"To really to catch up -- to get in a leading-edge position in the market -- IBM has made some purchases. And some of the purchases are really not well-integrated into their product suite," said Jackie Barretta, vice president of information services at transportation services company Con-Way.

The big in 'Big Blue'
Despite integration issues, the breadth of IBM's products will provide at least some advantage over the competition, and many customers will be drawn to its expertise in business consulting. IBM strengthened its services in 2002 by buying the management consulting unit of PricewaterhouseCoopers. That acquisition of 30,000 consultants serves as the linchpin of IBM's efforts in the fast-growing category of "business-process outsourcing", or BPO.

In this form of outsourcing, service providers take over entire business processes, such as human resources, finance or supply chain logistics. IBM is aiming for a larger portion of the BPO market, which it projects will account for about $500bn beyond the $1.2tn estimated for the traditional information technology industry.

All of these efforts play to what is perhaps IBM's greatest strength: its size. That alone has lent credibility to on-demand computing, regardless of the initiative's debated merits, and has influenced others in the industry to follow suit. Hewlett-Packard, Sun, Oracle, Microsoft, Computer Associates International and Veritas Software are all pursuing the notion of data centres that can automatically meet spikes in computing demand. Ultimately, corporate customers will save money by only paying for the computing resources they use.

"IBM is setting the model for what an IT provider ought to be, as we move away from the era of IT vendors just selling hard goods," Illuminata analyst Eunice said. "Many of IBM's competitors are quite explicitly aping IBM."

CNET News.com's Michael Kanellos contributed to this report.

This report is part of a three-part series focusing on IBM.
Part one: Reinventing IBM: The evolution of on-demand
Part two: The Big Blue boom: Betting on services
Part three: IBM: Research is the key