A Critical Look at IBM’s On-Demand Computing Marketing Campaign

A CEO watching a football game or a golf tournament on TV today is reminded during the commercial breaks of something about his IT infrastructure. He’s reminded that it’s a mess.

The bearer of this bad news is IBM. The message embedded in its ads (once you finish laughing at befuddled businesspeople peering through “magic business binoculars” or examining the “universal technology adapter”) is simple: Your IT is broken, and you need IBM, the biggest technology company in the world, to fix it.

Now CIOs watching those ads know that IBM can’t, in fact, clean up the mess they live with every day—the costly proliferation of hardware and software that doesn’t work together; the shrunken staffs asked to manage more applications running on servers that typically use only 10 percent to 20 percent of their computing and storage capacity. They understand that IBM’s “e-business on-demand” proposes to solve those problems with technologies that are either in their infancy or so numbingly complex that they’re years away from being applied by the typically risk-averse Fortune 2000 company.

Unfortunately, CEOs and CFOs don’t care about any of that. All they know is that their IT costs—which are now more than 50 percent of the average Fortune 500 company’s capital costs—are throbbing on their balance sheets like big red sore thumbs. All they know is that they are facing a crisis of cost and complexity. And every time they see those IBM ads, it brings it all back.

But IBM’s on-demand vision is not going to bail CEOs out of their predicament—at least not yet. More than a year ago, American Express outsourced much of its IT group to IBM in what was hailed as the first example of IT as an outsourced utility. But it is not a utility. Amex’s computing resources are not mixed into a vast pool to get giant economies of scale, like electric utilities do. It is a variable pricing arrangement in which Amex pays a floating rate for computing power from a bunch of existing machines that are fully dedicated to Amex. That’s outsourcing with a pricing twist.

“IBM does support and the data center,” says Amex Vice President and CIO Glen Salow. “We do everything else—like application development and architecture.” Stripped of its on-demand hype, what you get with IBM is outsourcing, and outsourcing is what it has always been: a risky strategy that according to numerous surveys fails to achieve either better service or reduced costs 50 percent of the time.

That’s a coin flip.

But that heads-or-tails gamble doesn’t stop CEOs from wanting IT off their books right now, and IBM’s TV commercials tell them they can do it right now. Today.

However, if CEOs buy on-demand the same way they bought ERP and CRM—over 19th hole cocktails with consultants—the consequences could make the bloated expectations and cost overruns of the ERP and CRM era look like best practices by comparison. At least CIOs could unwrap ERP and CRM software and put it on servers. On-demand exists only in theory. And while CIOs during the years have managed plenty of difficult technology projects, implementing theories has never before been on their to-do lists.

Why Your IT Is a Mess

No one is better at conveying the crisis in IT today than IBM. The brilliance of its advertising campaign (and the way it avoids culpability for the problems it helped create) lies in the fact that it has beaten its competitors to market with a startlingly new strategy for selling technology: the truth.

And the truth is, IT has not delivered on its promises to the enterprise.

For all the sales talk about agility and on-demand, no hardware vendor today makes a server that can manage a server from a competing vendor as well as its own, if at all. And no software vendor writes its applications to share that server with anyone else’s apps. Any claim that on-demand computing can be delivered today depends on the fiction that you can build your infrastructure using a single type of application and use hardware with a single operating system from a single vendor. Every CIO knows that’s nonsense.

What CIOs need today is the ability to share computing resources across operating systems and across hardware vendors because that’s the reality they live with: a heterogenous infrastructure comprising everything from legacy mainframes to 15-year-old PCs to cutting-edge blade servers. And CIOs need applications that can be shared across this complex mess without falling apart or bringing down other applications in a massive crash. This technology exists (much like the technology to make a nonpolluting car), but there has been no advantage for vendors to offer heterogenous infrastructure and application management because doing so would hurt the sales of their own stuff.

But now the stuff is not selling. Sales of high-end servers were down 30 percent in 2001, according to IDC (a sister company to CIO’s publisher), and rose only 1.6 percent in 2002. And in 2001, ERP vendors’ revenue from existing customers for the first time outstripped those from new ones.

So by acknowledging, albeit humorously, the IT nightmare that their customers face, and by articulating the industry’s most ambitious vision for fixing it, IBM is attempting to make lemonade out of today’s lemons. And in so doing, it is threatening to leave its competitors in the dust.

How IBM Plans to Conquer the IT World

Although it sells fewer units than smaller competitors in most of its markets, not to mention the fact that its prices are almost always higher while its technology rarely leads the pack, no other technology company can assemble as comprehensive a set of products as Big Blue: services, software, hardware and financing. Everyone else has a hole in his bucket. EDS ($11.7 billion in outsourcing revenue in 2002 versus $16 billion for IBM) lacks in-house hardware and software divisions, as does IBM’s main consulting rival, Accenture. Microsoft focuses solely on software. Only Hewlett-Packard comes close to having IBM’s breadth, but HP’s services and software divisions are much smaller.

Of course, all of IBM’s major competitors have partnership agreements with smaller vendors to fill out their offerings, but for the risk-averse CEO, IBM is the closest thing to a one-stop shop in IT. And if you have a mess, you want a janitor who knows how to clean up every bit of it.

IBM’s goal is to leverage its breadth in order to stop selling IT hardware and software and start selling business capabilities enabled by technology.

This vision is not new, nor are any of the technologies behind it. What’s new is the effort to make it consistent across the vast global empire of IBM. All IBM sales representatives—from its server division to software to outsourcing—are supposed to sell on-demand along with their own products. On-demand is supposed to drive the development of all of IBM’s software and hardware with the goal of making them capable of mixing with and managing applications from other vendors. The coordination challenge is huge. For example, employees in IBM’s grid computing unit spend 50 percent to 70 percent of their time doing marketing and education inside IBM itself, according to Ian Baird, vice president of marketing and sales operations at Platform Computing, which is one of IBM’s primary partner companies in grid computing.

The effort to develop the technologies necessary to fill out on-demand is no less ambitious. In 2000, IBM created a series of internal divisions, now called Emerging Businesses Opportunities (EBOs), that focus, among other things, on developing new technologies for the different pieces of on-demand, including utility (essentially pay-by-the-drink IT), autonomic (software that automatically diagnoses and fixes computer problems), grid (pooling computers to form a single virtual entity), business process integration and Linux (IBM’s answer to providing a single OS that can run on any type of computer, from a mainframe to a PC).

IBM says it will spend much of its $5 billion R&D budget on the EBO technologies in 2003. The heads of those EBOs report to the different business units that sponsor their efforts (autonomic is funded by IBM’s software division, for example) and to IBM’s central strategy organization. The emphasis is on progress—not profits—but the mission, according to Thomas Bittman, research vice president of server strategies for Gartner, is for each new EBO to bring something tangible to the market within two to three years.

These efforts have already borne fruit. IBM’s Websphere product is the top-selling application integration software, according to Gartner, and IBM’s integration of Linux into many of its hardware and software platforms is a direct result of the Linux EBO’s efforts. If there’s a weakness here, according to Bittman, it’s that the EBO system favors ideas that spring from within IBM over those from outsiders—a weakness it will have to address if it hopes to fill out its on-demand offerings. Meanwhile, IBM says it will spend $4 billion this year to acquire vendors to complete its on-demand portfolio.

To some critics and competitors, IBM is luring customers into on-demand—and away from competitors—before the capabilities are ready, trusting its ability to fill in the gaps later. “They talk about freezing the market and adding new capabilities over time,” says Joe Hogan, vice president of managed services for Hewlett-Packard. “We prefer to wait to announce things until they are available.” (Soon after this interview, HP announced its own version of on-demand, called Adaptive Enterprise, that has as many—or more—holes to fill.)

The general manager of IBM e-business on-demand, Irving Wladawsky-Berger, insists that IBM clearly explains the current state of on-demand to its customers, telling them, “Here is the vision; we’ll get there incrementally.” He acknowledges that on-demand is a long-term vision but says IBM is better able to solve the problems than anyone else. “The question is,” says Wladawsky-Berger, “Do you start from zero or do you start from a strong base? We think we’re starting from a very strong base.”

Deconstructing On-Demand: What’s Real, What Isn’t

CIOs who’d like to keep their jobs during the next two years must add yet another task to their already overburdened schedules: managing their CEOs’ expectations for IBM’s on-demand package, and HP’s Adaptive Enterprise and Sun’s N-1 strategy, among others. In this economy, CIOs who jump the gun on any of those technologies—or who let their CEOs and CFOs fire it for them—will pay dearly. The technologies for making what you have more efficient are untested, and most require consulting help. In today’s economic environment, CIOs need to make sure that any experiments they undertake have clear business payback, and that’s tough to do when the technologies are so immature. Here’s some of what IBM’s offering.

Variable pricing. The only piece of on-demand that’s real today and might not cost more in the short term is variable-priced computing. The concept is simple. Instead of buying a new server that you may not use very much, you pay only for the processing power you do use. Software monitors the server and turns on more CPUs during peak periods and turns them off during slow ones. Vendors charge a monthly fee to keep the box in your data center and then bill you based on the average amount of processing power used each month. This is not new technology; it is, however, a new pricing scheme. Call it leasing on steroids.

But it’s not always a bargain. If, for example, you use most of the capacity of the new server every month, over time the fees can add up to more than what the purchase price of the server would have been. CIOs need a clause in the contract that caps the fees at the original purchase price of the server. And, of course, the billing schemes, like the technologies behind them, work only with one vendor. IBM cannot bill you for your HP server (unless you outsource it to IBM). Thus, even the variable pricing model falls apart when you consider trying to manage the entire infrastructure that way. But it’s a start.

A piece of American Express’s $4 billion outsourcing deal with IBM Global Services (see “If It Looks Like an Outsourcing Deal…,” Page 50) is based on IBM providing computing in increments of CPU power and storage capacity rather than making Amex pay for new boxes and hard drives. “The key is flexibility,” says Amex’s Salow. “Any good business has its ups and downs. [Variable-priced computing] lets us flex up and down a little more with the business.”

Grid computing. Variable pricing is helping drive the development of grid computing, which for years seemed to be an arcane technology with little value outside of supercomputing. With business relevance at hand, IBM is rushing ahead with its grid research, but it is not yet ready for the typical corporate IT infrastructure.

According to Gartner’s Bittman, useful grids today require that the computing devices (for example, PCs) be alike. They are also limited to applications that are designed for heavy parallel computing (where the processing work can be sliced up into many bits and then reaggregated). Most general business applications, like ERP and CRM, for example, do not work that way.

Furthermore, CEOs don’t want grids. They want cheap pools of computing power served up to them in the same way that electricity companies serve up power. But that is a very different, and much more complex, proposition.

“The concept of a plug-and-pay electric utility model for computing is appealing to anyone who’s dealing with the kind of cost pressures we’re facing today,” says David Dibble, executive vice president of Schwab Technology Services for Charles Schwab. “But you peel back the onion even one layer and the analogy falls apart.” Right now, building an infrastructure on the scale, security and fault-tolerance levels necessary for outsourcing companies to become the electric utilities of computing is impossible, Dibble says. “The PhDs who will do it are in grade school today, I believe.”

A much more likely near-term scenario is that CIOs will build small grids inside their companies to save money and resources. Indeed, Dibble has successfully piloted a small grid computing environment inside Schwab with IBM, as have other financial services companies, like J.P. Morgan Chase (see “How Practical Is Grid Computing?” at www.cio.com/printlinks). But grid is by no means a reliable route to reducing complexity and cost in most corporate infrastructures today.

Open source. IBM’s on-demand vision depends on software to connect and manage the messy infrastructures of corporate computing, but it has rarely led in software development. Instead, it has relied on acquisitions and open standards to sell the software portion of on-demand computing. In fact, IBM is killing two birds with one stone by embracing open standards like Java and the open-source Linux operating system. Open source gives IBM a weapon against its only real competitor, Microsoft, and it makes IBM look good to the IT community.

IBM makes nothing on Linux itself, but it sells the hardware and services necessary to get Linux up and running. Similarly, IBM is playing the dominant role in funding and helping write standards like the Open Grid Services Architecture, which is an open-source architecture for building grid computing applications. Open standards for grid computing help IBM sell services, hardware and grid consulting engagements, three areas where Microsoft does not compete.

Yet IBM’s approach to standards contains a risk for CIOs. If IBM’s influence becomes too large in these standards organizations, other vendors may not cooperate. Furthermore, standards organizations are famously slow moving. Patience will be a virtue for CIOs who want fully realized products that adhere to open standards.

And IBM is not always the white knight it portrays itself as. For example, when the open-source world treads too closely to IBM’s turf, IBM’s goodwill quickly ebbs. When asked about open-source alternatives to IBM’s DB2 database or its Websphere application server, for example, IBM executives bristle. “We’re not working on [open source] for philanthropic reasons; we’re going to make money,” snaps Dan Frye, director of IBM’s Linux Technology Center, who leads 250 IBM developers assigned to help build out the Linux operating system.

Linux is not on-demand’s operating system, however. Websphere is. IBM’s application server is based on the popular J2EE standard but contains enough proprietary hooks to make critics wonder whether IBM is simply moving the old Windows versus OS/2 battle higher up the corporate infrastructure and lining up against Microsoft’s new application architecture, .Net. Websphere is IBM’s core technology for making the highest level promise of on-demand come true: business process integration. With Websphere, IBM wants to convince application developers to stop writing their applications at the operating system level (Windows, Unix, Macintosh) and write them to Websphere and Java instead so that they can work on any operating system. But Websphere relies on Web services, a complex and incomplete set of standards, and Java, which, while powerful, can be difficult for programmers to work with.

IBM’s Big Gamble…and Yours

With e-business on-demand, IBM is gambling with its most valuable asset: the trust of the market.

During the past 30 years, IBM has built a positive image for its brand equaled only by such marketing masters as Coca-Cola and Nike. In a 2002 survey of 240 companies by IDC, twice as many respondents identified IBM’s Global Services outsourcing group as “best-in-class” as they did IBM’s nearest competitor, EDS. “CEOs and CFOs are all about reducing risk,” says Rob Schafer, program director for research company Meta Group. “In the minds of CEOs, IBM reduces risk.”

Tom Kegley, vice president of IT for North America for Swiss pharmaceutical and health-care giant Roche Group, witnessed the power of IBM’s brand firsthand. When Roche’s diagnostics group was considering outsourcing Web hosting for about 100 websites in late 2001, the finalists were IBM and Genuity. Genuity’s bid was lower than IBM’s, and its service received high marks from big-name clients. But Genuity was having financial problems.

Meanwhile, IBM had been building a relationship with Roche’s top executives since 2000, when it hosted them at IBM’s Armonk, N.Y., headquarters and did a mea culpa presentation about Big Blue’s fall from grace and its rise under then-CEO Lou Gerstner. The meeting created a bond, says Kegley.

So when Roche executives heard about Genuity’s financial problems, the handwriting was already on the wall—even though Roche had had some service problems with IBM in other deals, says Kegley. “The director of marketing said, ’Do we want the devil we know or the one we don’t know?’” recalls Kegley. IBM got the job last year, and so far the agreement has worked well, Kegley says. Genuity, meanwhile, declared bankruptcy last year and was acquired by Level 3 Communications in a fire sale.

The Roche story is a classic example of the “solution sell,” perfected by the father of IBM, Thomas J. Watson Sr. In 1914, Watson began hiring boatloads of salesmen to build relationships with customers and learn their business problems before trying to sell them the company’s machines. Today, IBM’s dramatically successful services arm, IBM Global Services, built by former McKinsey consultant Gerstner in the ’90s, is trying to do the same thing with on-demand.

But leading with consulting and outsourcing can get IBM in trouble with its customers—as it has in the past. Consultants from IBM Global Services (as well as all the other major IT consultancies) oversold their customers on the capabilities of ERP, CRM and supply chain software, and the e-business craze brought another wave of ill-considered enthusiasm. If IBM oversells on-demand and overpromises on the implementation time line, it could damage that close and, in comparison with most other big vendors, trusting relationship it has with its corporate customers. Worse, with outsourcing such a big part of IBM’s business now, there is a danger that on-demand will devolve into a euphemism for simply getting rid of your IT by turning it over to IBM.

IBM’s Wladawsky-Berger says the goal of on-demand is to make IT more efficient and more integrated without forcing CIOs to buy new systems—no matter whether IBM runs it. “Clearly, if on-demand required you to redo everything,” he says, “that would be the dumbest strategy anybody ever could have come up with.”

But it’s not yet clear how IBM will accomplish an on-demand future that isn’t more expensive than the past.

“IBM has a vast array of enabling technologies, but they have a lot of work to do from a product architecture and vision and marketing perspective to integrate it into a single on-demand message,” says David Cearley, senior vice president of product management at Meta Group. “If IBM can better coordinate the pieces and the vision, then it has a very powerful message and will be a leader in this next generation of computing. If it doesn’t evolve its message, and it continues to deliver fragmented products, and on-demand becomes nothing more than marketing, then its breadth will hurt it.”

What’s clear is that right now e-business on-demand is not much more than a slogan. CIOs who think it’s something more are looking through those magic business binoculars, darkly.