There have been many articles published discussing IBM’s Q2 earnings release and what their performance means for investors. In this article, we have highlighted 3 insights from the earnings release that IBM customers should be conscious of in evaluating their relationship and potential upcoming purchases.
1. Strategic Imperatives Revenue Goal – 40% by 2018
The revenue from what IBM categorizes as their strategic imperatives – which include cloud, analytics, social, security, and mobility – equates to roughly 27% of IBM’s total revenue today. IBM stated their goal is to grow this revenue category to 40% of total revenues by 2018. IBM’s current transformation plan is to migrate the older core hardware and related services businesses to these strategic imperatives as IBM deems these as the future growth and investment areas for customers. Further, IBM has stated these areas are much more profitable with higher margins, and bring with it additional shareholder value.
What this means for customers is investments within the strategic imperatives provide negotiating leverage. IBM has experienced an overall revenue decline for a few years now, and there is significant pressure from Wall Street to see a reversal of this trend. IBM has stated all along that this is part of the transformation journey, and that as the core business areas decline the strategic imperatives will grow to replace them, although this has not happened at a fast enough pace. So any revenue opportunities for IBM are important, but achieving growth in the strategic imperatives is critical to demonstrate success in the long-term vision. Further, the compensation plans for IBM sales representatives provide added incentive for closing strategic imperative deals.
In summary, all of this provides customers with added leverage during negotiations if they know what to ask for, including competitive concessions in non-strategic imperatives, provided customers are willing to use the strategic imperative investment to negotiate the overall, holistic relationship with IBM.
2. Software Revenue Down 3% YOY
IBM began a transformation over a decade ago to move away from lower margin hardware to more profitable, higher margin software. This shift continues and is a critical component of IBM’s long-term strategy. Software started with a small base number and has grown relatively steady over the years, with the exception of the 2009 financial crisis. So it is a bit of a set-back for IBM that last quarter software revenue actually declined a few percentage points.
What this means for customers is added pressure on IBM to quickly rebound and prevent declining software revenues from becoming a trend. Software investments present added negotiation leverage for customers, similar to strategic imperatives. Also keep in mind that both software and strategic imperatives are high margin businesses for IBM, so there is definitely more room for IBM to negotiate on price and other commercial terms to secure these deals.
3. Services Revenue Down 3% YOY – Goal to Utilize Global Delivery Formats
IBM has invested heavily in global delivery centers around the world to improve margins with lower cost resources. We have written that IBM appears to be at the forefront of commoditizing IT Services and have outlined some of the challenges this has created in providing value and meeting customer expectations. While IBM has seen an uptick in outsourcing deals, they appear to be losing system integration deals, and the offset IBM is counting on from cloud and SaaS based services is not there yet.
Additionally, IBM has stated that the utilization of some delivery regions is still under 30%, and their goal is to move more services deals into global delivery formats which will improve margins and profitability.
What this means for customers is to be careful. IBM is looking to sign customers to services deals that are based on IBM’s global services delivery format.
What you can do:
- Seek full transparency as to where these services will be performed to ensure it aligns with expectations and requirements.
- Insist on full pricing transparency for each delivery center and which delivery centers will be performing which services to ensure competitive rates.
We are not making any accusations here, but we are highlighting the potential for customers to be sold services at a rate card that may not be competitive for the region where the services are actually being performed. Therefore, we recommend customers obtain full transparency as to where services will be performed, negotiating rate cards specific for each delivery region, and ensuring that the services are actually performed in the agreed to delivery centers. There can be significant cost reductions and profitability gains for IBM under the global services delivery model, which IBM should be entitled to earn to some extent. But customers need to ensure that IBM is sharing some of these cost reductions with them, and to do so requires customers obtaining full transparency.
We would love to receive your feedback and thoughts so please do not hesitate to post a comment. You may also contact me directly at [email protected] if you would prefer a more discrete discussion regarding your specific circumstances.