SaaS Comes Up Short
The depth and breadth of IBM's software portfolio are well known, but with much of that software tied to IBM's hardware and middleware, it limits the potential for software-as-a-service versions.
According to an internal document that details IBM's position in the SaaS market, based on the company's own research, its top competitor in 2012 was Oracle, with $707 million in SaaS revenue, followed by Microsoft with $430 million. IBM placed itself third with $371 million in SaaS revenue, and SAP fourth with $347 million (apparently not counting revenue from SAP's Ariba acquisition). Salesforce.com, with 2012 revenue of $3 billion, surprisingly wasn't listed as an IBM competitor, though Workday, with $130 million in 2012 revenue, was included.
IBM's goal is to generate $1.5 billion in SaaS revenue by 2015, according to this document. While most competitors were listed as growing their SaaS businesses at triple-digit rates in SaaS (fueled largely by acquisitions), IBM's SaaS revenues grew 55% in 2012. More worrying, signings of new SaaS accounts fell short of goal, with the biggest shortfalls outside of North America.
Those shortfalls are "an early warning sign," says the former IBM employee, as the softness will carry into coming quarters. What are the reasons? Most of IBM's SaaS offerings are hosted in North America and "don't always appeal to customers elsewhere," according to the former IBM employee. What's more, this source says, "IBM salespeople are not aligned to sell SaaS. While the high-level executives want to promote SaaS, many sales executives are not incented to sell."
These are cloud growing pains common with other vendors focused on on-premises software and systems. It's just surprising that IBM, so esteemed as an industry leader, didn't address them earlier.
The software businesses IBM is in -- mostly infrastructure software and middleware -- aren't generally the ones moving to SaaS first.
For example, IBM for years avoided buying into enterprise application categories where it serves as an integrator for the likes of Oracle and SAP. For every dollar IBM might make on enterprise applications, IBM senior VP Steve Mills has reasoned, IBM stood to make as much as five dollars on implementation and customization services.
Now that on-premises deployments are losing ground to the cloud, integration services dollars are starting to disappear. IBM now lists Oracle and SAP as cloud competitors. No coincidence that IBM has started to diversity its software portfolio by, among other moves, partnering with SugarCRM and acquiring HR SaaS specialist Kenexa.
Awakening The Giant
One thing that the many documents shared with InformationWeek make clear is that IBM is acutely aware of its competitive weaknesses and threats, and that it's intent on acquiring what it needs, repackaging and evolving what it has and, in some cases, changing the way it does business.
In an internal document in which IBM shared customer assessments, one customer was quoted saying "no company I can think of is more difficult to deal with for contracting." This assessment prefaced a detailed plan to offer simplified, SaaS-only contracts that offer better "clarity and transparency" on terms, conditions and policies.
Recent acquisitions, including Kenexa and SoftLayer, signal that IBM is investing in the cloud, even if most of the company's $104 billion in total revenue will continue to come from elsewhere. Cloud initiatives matter to IBM and to Wall Street because it's where the growth is, reflecting trends in customer demand.
Will IBM reach the $7 billion in cloud revenue (including $1.5 billion in SaaS revenue) it wants to achieve by 2015? It will take more acquisitions to get there. Will the cloud be the kind of high-margin business that IBM is used to? Doubtful. Competitors such as Amazon, where CEO Jeff Bezos preaches investing for the long haul, will not make it easy for IBM to do business in the cloud the way it likes to do business.