At the end of last year my founding partner dropped a quite outstanding post – The Importance of Software at IBM. In it Stephen analysed IBM’s 2011 financial results through the lens he has been using for most of the year (the end of the age of Software-only business models). It should surprise nobody that Software is a higher margin business than Services, but it is still striking that by September 2015 fully 50% of IBM’s profit is expected to come from Software, especially given it currently only accounts for around 25% of total revenue.
In answer to the larger question of how important software is to IBM, it’s clear that SWG [Software] is core to the business moving forward. Its unique-to-IBM ability to extract outsized profits is the foundation upon which the company’s profit growth depends. Strengths, however, can also represent weaknesses if they open doors to disruption.
In IBM’s case, it’s important to consider the wider market context. Across a wide variety of software segments, the evidence suggests that the realizable margins attached to software are in decline. From collaboration software to middleware to databases, margin oriented revenue models are under attack from volume focused alternatives. The precise competitive mechanisms may vary – cloud, open source, SaaS – but the result is a more competitive pricing market for software. While demand for software is more or less inelastic, credible free or low cost options almost inevitably lower the realizable revenues for software. The resulting lower margins are perfectly acceptable for volume based businesses, but much less for those built upon high margins such as IBM.
Stephen, as is his wont, ends on cautionary note, but my take on his analysis is slightly different – I think IBM still has plenty of room to improve its margins – by the simple expedient of building better products – using better design. IBM definitely isn’t selling “just software” – it invented end to end stacks, and it knows how to move money and cost around these stacks better than anyone. The current grand reintegration of everything suits IBM pretty well. While Oracle is losing money on hardware, IBM is not. They key to margin, and so winning, is packaging.
I am fond of saying that The Best Packager in any Tech Wave Wins and Wins Big.
Great UX is a function of masterful packaging. Its not about building the best components but doing the best job of integrating them. Open Source, somewhat counter-intuitively, is a driver of the New proprietary – Apple is built on FreeBSD foundations, for example, while Google runs its own customised Linux, and so on. The cloud accelerates the new proprietary – because, not being classed as software distribution, it allows for open source code to be embedded to deliver a service, without requiring any reciprocity.
IBM is of course a past master of integrating open source into its proprietary middleware products – WebSphere Application Server embeds the Apache Web Server, for example. IBM’s Smarter Computing products don’t only embed open source however- IBM’s Cloudburst private cloud provisioning engine, for example, embeds VMware’s hypervisor.
Microsoft got the memo, too. See Microsoft Surface and the Future of Software. Google meanwhile is selling Android devices that compete with competitors.
The week before Stephen’s post RedMonk team attended Analyst Insights in Stamford, CT, an event where IBM SVP Steve Mills, who now runs both Software and Hardware at Big Blue, explains the state of his business to a bunch of industry analysts. Its always hard to know what to focus on after a couple of days of torrential information, but Stephen’s post frames things nicely, especially given’s Apple’s special place in the industry, and given the importance of great design to its success. How many margin points is great design worth?
Apple, famously, invests less in R&D than its competitors (as a percentage of revenues). In 2012 Apple spend $3.4bn on R&D, 2.18% of its $156bn revenue for the year.
It seems to me however that a more important metric would be how much Apple spends on design vs its key competitors. Certainly from an IBM perspective it potentially makes sense to increase investments in design and value-added packaging, whilst reducing overall R&D spend. Unlike Apple, IBM invests more in R&D versus its peers. So from a CEO perspective you’d want to increase value, without increasing investment – design is potentially a means to do just that: refactor the corporation.
IBM certainly isn’t alone in recognising the power of better design. Design is finally breaking into the boardroom.
Samsung has underlined its emphasis on design as a differentiator by making former Creative Chief Choi Gee Sung its CEO last year.
It’s also worth noting SAP’s significant new investments in Design. It now has an inhouse mobile design agency building apps for clients!
So Welcome to the IBM Design Supremo: How do you make 400k people care about User Experience?
I discovered something very interesting at Analyst Insights. IBM now has a General Manager of Design, a role across all 400k employees and all business divisions. I would be sceptical but the person in question in Phil Gilbert. I have written a couple of posts (here and here) already about Gilbert’s impact on IBM BPM apps, but now his role spans the entire company. Its worth spending some time on Gilbert and his role to help you get a better understanding of why this general manager role isn’t just “special projects” or “gardening leave”. While Gilbert didn’t say so, he could have easily have left IBM to another opportunity. But he’s clearly all fired up about the new design role.
Robert Le Blanc, IBM SVP Middleware who appointed Gilbert, is a tough operator. I understand Ginni Rometty IBM’s CEO is also committed to Design. So that’s the top down covered. The bigger challenge for Gilbert will be bottom up. How can he instil design culture at any significant level in a company so big, and where he is going to find enough talent to help drive the change? In turns out Austin, Texas. Well some will be found there, anyway. IBM is going to open a new Design campus in the Austin, and is looking to attract top talent from around the world to the team. IBM is now competing for agency talent, and I love the fact.
IBM also plans to invest heavily in Design in the metro centers where its a big deal – thus in New York there are two strands to IBM’s Design heritage- industrial product design, and agency and advertising design. IBM will be opening a new design center on Madison Avenue.
Before signing off its important to stress what I mean by design, or at least what I don’t. Design is not a means to daub lipstick on a pig. Far from it. When Gilbert was tasked with making 40+ products in the IBM business portfolio management portfolio easier to use it would have been easy to re-skin all the apps, and say hey look they’re pretty now. Instead Gilbert drove a root and branch reform, consolidating all these products into just three, with properly modelled user interaction. And yes they do happen to be prettier. But the beauty is in the simplification, not the font choices.
disclosure: IBM is a client, and paid by T&E for the New York event.
If you’d like to know more I suggest you buy a ticket to the Monki Gras conference I am organising on January 31st. Phil Gilbert will be speaking at the conference, in what could be his first public appearance in this incredible important role.