Proof Points for IBM’s Market Strategy

We have discussed in our previous Supplier Scouting Reports how IBM has been evolving its business over the past decade from a hardware business to a software and services business. But let’s take a quick look at some numbers from IBM’s Q4 2013 earnings release to understand why.

IBM reported gross revenue and gross profit margin for its 5 business segments as follows:

Revenue $ in Billions

IBM’s hardware business is represented in the Systems & Technology business segment.  While profit margins are comparable to its services business, total revenues have been declining and IBM just had a major 25% year-over-year decline.  Plus, the hardware market has shown a great degree of volatility and with so much competition there is little opportunity to improve these margins.

Don’t be fooled by the profit margins in the services business segments.  IBM has been renegotiating and restructuring a number of its long-term services agreements to be more profitable, in addition to increasing its services backlog.  Services are a key part of IBM’s growth strategy for 2 big reasons.  First, there is a greater opportunity for margin improvement as efficiency gains are realized on longer-term services contracts and rate increases are applied in outer years.  Second, the service businesses allow for IBM to be onsite working side-by-side with clients to assist in defining pain points and business improvement opportunities.  This leads to more sales opportunities and an entry point for selling its highest profit margin business segment – Software.  Also, these business development efforts are no longer expenses as they are being billed at a profit as part of a services engagement.

Clearly, Software is tremendously profitable, and now represents IBM’s second largest revenue business segment.  It is obvious why IBM continues to acquire software companies (Aspera, Fiberlink, Xtify, to name their 3 most recent ones) and improve its cloud services offerings as they represent huge revenue and profit opportunities and a sticky customer relationship.

So if you already have an IBM relationship, or are considering one, understand that IBM will be heavily focused on selling its services and software offerings.  Both offer tremendous revenue and profit opportunities, recurring revenue streams, stickier customer relationships, and the ability to offset selling expenses through billable hours at a profit.  Additionally, they present opportunities for IBM to offer customer financing for larger initiatives at roughly a 50% profit margin.

UpperEdge believes that customers who have a better understanding of IBM’s go-to-market strategy can better guard against unwanted selling efforts, as well as protect themselves from entering into agreements with hidden downstream costs.  If you would like additional information regarding IBM and advice on how to negotiate a best-in-class agreement, please contact me at jlazarto@upperedge.com.