IBM Gets It

This story in The New York Times today about IBM’s successful change in strategy reveals that the traditional  vendor understands the extraordinary disruptions the software industry faces, and plans to be right there to compete with vendors both new and old in the future. 

      The article largely concentrates on how IBM has responded to its rivals in Asia by hiring “aggressively in India to narrow the cost advantage of its offshore rivals in traditional technology services like operating data centers for customers and upgrading and maintaining their software.”

      Beyond the services area and the acquisition of software companies, however, the past year has revealed that IBM’s philosophy about software has begun to evolve as new competitors like Google, who operate on more nimble SaaS models, create applications that enable collaboration across the enterprise. IBM has responded by designing its own Web 2.0-inspired software, including IBM Connections, a social software suite that brings thinks like blogs and wikis into the enterprise on IT friendly terms.

      In some correspondences I traded with Wikinomics author Don Tapscott earlier this year, he said that IBM’s willingness to work with the open source community on Linux is a good example of how it embraces the 21st century model of openness as the key to innovation. And he points out, who would have expected this from the giant?

      “IBM was an unlikely candidate to become a champion of peer production and a leader of the open world,” he says. “After all, we’re talking about Big Blue—the company that became huge by building and selling proprietary everything. A company that was insular and vertically integrated 15 years ago now partners extensively with the open-source community and is considered a positive force for collaboration and openness.”

     In a way, IBM has done nothing more brilliant than the proverbial business philosophy of “listen to your customers.” A few months ago, when I spoke with Jeff Schick, IBM’s VP of social software, for my briefing on IBM Connections, he said, “Our marketplace observations about Web 2.0 technology and challenges facing businesses today are key. We did surveys to CEOs, and they say that collaborative innovation is the most important thing they need.”

      The overall point of the Times article is clear: IBM is adapting reasonably well to change. Though the company has experienced some very unfortunate layoffs, the article points out that things seem to be trending upward: “Profit margins at I.B.M. have risen steadily and it reported record earnings and cash flow in 2006. Wall Street expects the trend to continue when I.B.M. reports its quarterly figures today. The consensus estimate of analysts has earnings increasing 13 percent from the year-earlier quarter, to about $2.15 billion, or $1.47 a share, on a 5 percent rise in revenue, to nearly $23.1 billion.”

      Some of IBM’s peers, like Microsoft for instance, have been criticized for not having the same willingness to adapt their business as Big Blue has shown. Last week, when Microsoft launched its hosted CRM application to compete with Salesforce.com, the headline spoke for itself with the word “Finally.” Gartner predicted the move was too little, too late. Salesforce.com even boldly dismissed the software giant as not a really viable alternative in the hosted CRM space.

     But that might not be smart, and to count them out of any business involving software would be, well, foolish. Microsoft, a company in the technology community that contrarians love to hate, has not shunned this new model entirely, but instead says it will adapt on its own terms (which, for now, is probably fine for them financially). In a keynote speech at the Worldwide Partner Conference in Denver, Microsoft CEO Steve Ballmer declared, “the time is now” to move more of its software to, at the very least, a hybrid model that combines traditional on-premise and hosted philosophies.

      I wouldn’t count Microsoft out from making the same types of transitions that IBM is making (and Microsoft, undoubtedly, would argue they already have). But either way, this seems to be shaping up to be a good old-fashioned fight between the powers of old (Microsoft, IBM) and rising stars of the new (Google, Salesforce.com, etc.).

 The question, as they say, isn’t if; it’s when.