What CIOs can expect from IBM’s managed infrastructure spinoff

CIOs who depend on IBM to manage their IT infrastructure have been in legacy limbo since Big Blue first announced it would shed its managed infrastructure activities as a separate company in order to zero in on hot markets for technologies such as artificial intelligence and the cloud.

In the four months since IBM announced the spinoff, hints as to how the new entity will operate are coming into focus, with IBM seeing a big opportunity to offer new services in fields such as cloud reversibility or data management at the network edge.

Latest in a series of spinoffs

IBM customers are no strangers to Big Blue’s long-lived appetite for strategic divestiture. The company that became IBM was formed from the 1911 amalgamation of three activities, but in 1934 it sold one of those, weighing machines, and in 1958 another, time-recording, to concentrate on the third, computing.

Since then, the pace of selloffs has accelerated. IBM sold its printer manufacturing business in 1991 to form Lexmark. It sold its hard disk business, employing 18,000, to Hitachi Global Storage Technologies in 2002. PC manufacturing was next, when Lenovo bought a 90% stake in IBM’s $9 billion division in 2004, returning in 2014 to buy IBM’s x86 server business too. That same year, IBM paid GlobalFoundries $1.5 billion to take away its loss-making chip manufacturing business.

When Arvind Krishna took over from Ginni Rometty as CEO of IBM in April 2020, he foreshadowed the latest spinoff by telling staff that the company, weighed down by its legacy infrastructure services activities, had to have a “maniacal focus” on hybrid cloud and AI. The implications became clear in October 2020, when Krishna announced IBM’s plan to spin off managed infrastructure services as a separate company by the end of 2021.

The new company, titled NewCo for now, will employ 90,000 of IBM’s 350,000 workers and is expected to generate annual revenue of $19 billion from its 4,600 clients. It will inherit a $62 billion order backlog, ensuring it a steady start in life.

The entity already has a CEO, Martin Schroeter, who was lured back after leaving IBM in June 2020, having previously served as the company’s CFO and most recently as its senior vice president for global markets, where he led global sales. Last week the company announced additional NewCo leadership signings, including IBM veterans Elly Keinan as group president and Maria Bartolome Winans as NewCo’s chief marketing officer.

Speaking during IBM’s earnings call in January 2021, Schroeter said NewCo’s clients “trust us to deliver some of their most important workloads in challenging environments” and that the new organization will continue to invest in its technology and teams. The details of NewCo’s financial model remain to be defined, however.

Billing as usual

IBM’s managed infrastructure services division dates back a couple of decades to the Sam Palmisano era and was a response to market demand for end-to-end support for services in complex customer environments, not just those running on IBM hardware.

With the sale of the printer, storage, PC, and x86 server businesses, those environments inevitably became even more multivendor, says Bart van den Daele, IBM’s general manager for managed infrastructure services, who will be moving to NewCo later this year.

The market is going multicloud, everything-as-a-service, he says, noting that already 45% of NewCo’s revenue is cloud-based — and this is the part of IBM’s business that doesn’t fit into Krishna’s vision for a “maniacal focus” on hybrid cloud.

One concern CIOs may have is about billing: If they have an infrastructure management contract that transfers to NewCo, but that includes provision of IBM-branded hardware or software and services from Red Hat, will they have to change the way they manage their suppliers?

“From a billing point of view, there is no difference,” says Van den Daele.

Infrastructure services customers who receive a single invoice from IBM today can continue to receive a single invoice from NewCo, which will in turn bill IBM and Red Hat in the same way that it bills other suppliers. Customers who receive two bills, under separate accounting codes, for operational and capital expenditures can continue to receive two bills, he says — but in the future, one will come from a different legal entity, NewCo, he says.

Customers may also want reassurance that NewCo is not going to relocate to a jurisdiction that may be subject to trade embargoes or restrictions on personal data transfers. Krishna has said that IBM wants the spinoff to be tax-neutral for shareholders, which makes it likely NewCo will stay in the US.

“I think we will stay very close to where we are today,” says Van den Daele. “If you’re going to move to somewhere where a lot of people are going to raise their eyebrows, this tax-free spin is not going to work.”

Not standing still

IBM justly has a reputation for innovation. It was once again the top recipient of U.S. patents in 2020, with 9,130 grants, although it tends to sell its intellectual property (IP): It has only the second-largest patent asset holdings, behind Samsung, according to IFI Claims Patent Services.

So will the spinoff mean separation from IBM’s research labs, dooming NewCo’s managed infrastructure services — already viewed by some as IBM’s legacy business — to technological stasis?

“I find it unfortunate that they call it legacy,” says Van den Daele, seeming to relish the challenge of changing this perception. “Infrastructure services is part of our research, part of our labs, part of our patent factory. As we spin we will also announce how many patents we have, which kind of IP we have, and even potentially some things that we will productize going forward.”

The company already has cutting-edge technologies for managing its customers’ infrastructure, including IBM MCMP, which Van den Daele says delivers multicloud management capabilities that few others can offer, and the managed infrastructure team has already developed its own AIOps technologies.

Krishna wants to spin off the managed infrastructure services to free the core of IBM to grow — but Van den Daele says NewCo can grow too.

He expects the managed infrastructure services market to consolidate in the future but wouldn’t comment on NewCo’s own acquisition plans. At the very least, it should be safe from acquisition itself, at twice the size of its nearest competitor.

But there’s also plenty of room for organic growth in enterprise-grade services for infrastructure-as-a-service, security and resiliency, data management, or disaster recovery.

In data management alone, Van den Daele sees enormous opportunity as the increase in data production on the network edge outstrips capacity to centralize it for processing. Instead, he says, applications will have to move out to where the data is.

“Nobody realizes how big the infrastructure services opportunity is, just to make sure the data is hosted the right way, is controlled the right way, that data consistency and interoperability are guaranteed,” he says. “It’s a massive market.”

And then, he says, there’s reversibility.

Businesses running key functions in the cloud need to have a strategy to take back control if they need to, he says. Every cloud provider, including IBM, he says, equates high availability with disaster recovery and every CIO, he says, knows that’s not true.

Hyperscalers are increasingly offering racks of servers that customers can host on premises, running the same software as in the cloud — but that alone is not enough for CIOs to feel safe, says Van den Daele: Someone still needs to be around to manage those data centers and to handle the infrastructure service integration, he says.

“So, how do you guarantee that you get your data back and that you can get your applications back and that you can run somewhere else? These are questions that will keep on coming.”

Questions NewCo hopes it will be answering for CIOs for years to come.