IBM announced its intention to spin off its infrastructure services business as a separate public company, allowing Big Blue to focus on hybrid cloud and AI. The newly formed entity, temporarily named NewCo, will offer project and outsourcing services that currently fall under its GTS business unit. NewCo will have a staff of around 90,000 employees and is expected to earn revenue of about $19B. While GTS has experienced declining revenue for some time now, IBM believes that the split will unlock growth and put it on a path to recovery.
Once the Red Hat acquisition closed last year and the tag team of Jim Whitehurst and Arvind Krishna were announced, it became clear that IBM was gearing up to become a leaner, more agile leader in the hybrid cloud space. One of two possible courses seemed apparent – either wither away for years until IBM was small enough to become nimble, or take bold action. IBM has opted for the latter and is likely to be rewarded for it. The new IBM will have revenue of around $59B, well short of its peak at over $100B, but sacrificing turnover for margin and growth gives it a more positive long-term outlook.
Stripping back IBM to become smaller, faster growing, and more profitable, will help solve many of its greatest challenges. Significant investment into growth segments will become more palatable without the financial burden of the declining infrastructure services unit. The well-needed cultural change and drive to think like a start-up will become more practical in the new IBM.
NewCo to Build New Cloud Partnerships
IBM’s infrastructure services unit has had some great success in larger, complex, hybrid cloud deals recently – but at the lower end of the market there have been many head winds. Public cloud providers have eroded what was once a lucrative compute and storage services market. At the same time, application service providers, like Accenture, TCS, and HCL have been pivoting towards infrastructure. Untethering infrastructure services makes a turnaround story more likely, giving NewCo greater flexibility and speed, which clients have been crying out for.
The greatest benefit to NewCo will be the ability to freely partner with other cloud providers, like AWS, Microsoft, and Google. Although IBM has made noises about being willing to embrace its competitors, this was not necessarily implemented on the ground nor was it reciprocated.
It is no secret that GTS and GBS have had a rocky relationship since day one. The split will reassure clients that each of them is agnostic and relieve any internal pressure to partner unless it is best for the client. While elements of this decision look like the unfolding of a long-term strategy that began under Ginni Rometty, it does, however, leave open the question of why GTS and GBS were more closely integrated over the last few years. This also means IBM is moving in the opposite direction to its competitors, who are shifting towards offerings that cover the full stack of services from infrastructure up to applications.
What Lies Ahead for IBM
One detail that is not immediately certain is the fate of IBM security services, which could be integrated with security software at IBM, spun out with the rest of infrastructure services, or even split into consulting and delivery. An important differentiator for IBM has been its ability to build in security at the beginning of transformation projects making final placement a difficult decision.
It might be tempting to predict that next IBM would couple its Systems unit and Support Services to be spun off or sold although Mr. Krishna ruled that out. Over the long term, these are both financially underperforming units but there is an advantage to building the core infrastructure that critical workloads are run on.
Each new IBM CEO has had a make or break moment and Mr. Krishna has decided that his will come early. For the company to thrive for another 100 years it needed to place a big bet and it could not have come soon enough.