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IBM hangs its hopes on hybrid clouds, AI to revive growth

After a decade of stagnant growth, IBM is betting all of its chips that hybrid clouds, new partnerships and AI will catapult it to a more competitive position.

IBM seemed to have lost its edge over the past decade, reacting slowly to critical new technology trends, recording eight straight years of revenue declines and focusing more on financial reengineering than actual engineering.

But with new leadership in place the past year, IBM, the oldest of high tech's dinosaurs, appears to have found new energy to change. This change is driven by a hard focus on hybrid clouds, artificial intelligence and a deeper commitment to open source that together form an integrated platform IT pros and developers can use build the next generation of applications. Going hand-in-hand is a radically different go-to-market strategy built on partnerships with longtime competitors.

"IBM, for the first time in a long time, has a sense of who they are and what matters most in terms of their work and applied it consistently across all their technology elements," said Judith Hurwitz, president of Hurwitz & Associates, an IT consulting and research firm. "They were bound up and confused and it took somebody [with a fresh perspective] to deliver a more disciplined, technology-based approach."

Arvind KrishnaArvind Krishna

That somebody is IBM CEO Arvind Krishna, a longtime IBM employee and born-and-bred technologist. He served in multiple positions at IBM including as head of research, in charge of the cloud computing division, and was the behind-the-scenes driver of Big Blue's most critical acquisition -- the $34 billion purchase of Red Hat in 2018. Since then, IBM has demonstrated just how critical Red Hat is by placing the OpenShift product on every hardware platform and at the center of most software initiatives.

"[Krishna] knows where the important technology pieces are in the company and how to put them together," said one IBM consultant who requested anonymity.

Under Ginny Rometty, IBM formed some noteworthy partnerships, including deals with Salesforce and SAP, but Krishna has opened the company to far more strategic partnerships over the past year, with direct competitors to IBM's cloud business.

"His predecessor [Rometty] had IBM going it alone, competing against everyone else out there, which is why she couldn't get any growth," the consultant who requested anonymity said. "Krishna's approach lays a better foundation going forward."

IBM's AI-driven automation strategy

This week at IBM's annual Think conference, IBM will add what may be another key foundational layer. The new AI-driven IBM Automation Platform ultimately seeks to converge business and IT operations by collecting and correlating business and IT data, events and processes in a single data lake.

IBM, for the first time in a long time, has a sense of who they are and what matters most in terms of their work and is applying it across all their technology elements.
Judith HurwitzPresident, Hurwitz & Associates

The new offering provides business context to operational metrics along with dashboards that alert IT personnel to whether they are on track to meet mission-critical business objectives. End-to-end processes are automated using a combination of IBM Automation Cloud Paks, IBM add-ons such as Websphere Automation and third-party applications -- all of which can scale across multiple lines of business.

A critical piece of the platform is Watson Orchestrate, which intelligently orchestrates workflows on the fly, without programming. The software identifies and accesses a variety of business systems securely and allows different groups across an enterprise to collaborate on projects. The product has two operational modes: interactive, which allows users to collaborate by engaging the system through natural language, and autonomous, allowing them to work independently.

The Automation Platform is built on Red Hat OpenShift, but breaking with a long-held IBM tradition, the new offering works across any cloud, including AWS and OpenStack.

The new IBM has shown not only a willingness to have key products work on competitors' platforms, but also to work with them directly on initiatives. A recent example is the expansion of IBM's "hard tech" platform for semiconductor innovation, an ecosystem of 20 partners including Intel, chip manufacturers and designers, all brought together to create the next generation of chips.

The company has also significantly expanded its semiconductor facilities in Albany, New York, to include a 100,000-square-foot clean room and seven fabrication plants. All of this aims to strengthen the position of its hybrid cloud infrastructure portfolio. Last week, IBM showed off an early prototype of its first 2 nanometer chip that was designed and will be manufactured in the Albany facilities.

"We've created a very tight partnership between the software and chip sides of the business," said Mukesh Khare, vice president of IBM's Hybrid Cloud Research unit.

Anyone using Red Hat OpenShift with hybrid or multi-cloud will be able to use IBM's chip technology, he said.

"We'll focus these offerings where we have absolute competency, such as regulated industries," Khare said. "We are a technology-focused company at heart; maybe we haven't communicated that enough."

While targeting users in highly regulated industries such as telecommunications and finance is a logical choice for the new IBM, it could prove easier said than done.

"That could become a large market a few years out but a very hard and complicated one," said Dana Gardner, president and principal analyst with Interarbor Solutions, LLC. "You have to put in place the services and people who understand all those regulations, which could be expensive. I don't see that business and the chip consortium as enough to turn around a big ship like IBM."

The last piece of IBM's makeover is to completely split off its $19 billion Global Technology Services (GTS) unit some time in this year's fourth quarter. The decision to do so was driven by the unit's flagging sales and its interference with Red Hat able to pursue cloud sales opportunities.

IBM believes the former GTS unit, recently renamed to Kyndryl, has more than a fighting chance given it is significantly larger than many of the companies it will face in the managed infrastructure services market. It is also free to pursue new partnerships in a high-margin industry it couldn't before because of its association with IBM.

"The move is a bit like cutting back the tall or dead trees to give sunlight and water so the smaller trees can grow," Hurwitz said.

The decision also figures to help out the remaining IBM divisions, in particular the fast-growing Red Hat hybrid cloud and AI-related businesses that involve IBM Cloud and Watson. These businesses could use the boost. Once the split is official, IBM's revenues drop from $73.6 billion to around $54 billion going into 2022.

"Kyndryl is an important business to us because it helps clients manage, modernize and take the complexity out of their environments," said Jim Whitehurst, president of IBM, in a press briefing. "If you don't modernize, you won't have the dollars or capability to innovate."

The split could create competition between IBM Global Business Services and Kyndryl. Users holding contracts with each of the companies will be forced to decide between them. Users with contracts spelling out that IBM can't reassign the contract to a third-party provider will have to decide to stay with IBM or move to Kyndryl. IBM officials declined to comment about the potential conflict.

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