Move is part of Big Blue’s larger strategy around hybrid cloud and AI
The Lowdown: CEO Arvind Krishna, who in April took over the position from Ginni Rometty, said Thursday in a letter to employees that was posted on IBM’s website that the success the company has had after acquiring Red Hat last year for $34 billion and pushing its open hybrid cloud platform helped fuel the decision.
The Details: The spinout of the managed infrastructure service unit of IBM’s Global Technology Services (GTS) division is expected to be completed by the end of next year. The new company – which Krishna said he is “initially referring to as ‘NewCo’” – will have almost $19 billion in annual revenue and more than 4,600 clients, with 75% of the Fortune 100 among them. It also will have more freedom to create partnerships and alliances, though it will remain IBM’s preferred partner for infrastructure.
For IBM, the spinoff will mean a greater focus on software and solutions. Services currently account for 60% of Big Blue’s revenue. Once NewCo is created, software and solutions will make up the majority of IBM revenue. In addition, IBM will also have more than 50% of its portfolio in recurring revenue.
A key to this is IBM’s Red Hat acquisition, which gave it the tools to push further into a hybrid cloud market that Krishna called a $1 trillion opportunity. With Red Hat, IBM has built an open hybrid cloud platform based on Red Hat’s OpenShift platform that spans on-premises environments, private clouds, and public clouds and demand for the platform is growing fast, the CEO said.
IBM has since launched its collection of Cloud Paks, which are AI-driven modular cloud solutions that leverage container technology for such areas as systems, integration, and applications for hybrid cloud environments. The company since the Red Hat deal also has built a cloud specifically for the financial service industry and further bolstered its hybrid cloud and AI capabilities by buying Spanugo and WDG Automation.
Last month, IBM and Red Hat rolled out an online marketplace for customers and channel partners to find third-party software offerings built on OpenShift.
The Impact: IBM’s sharper focus on the hybrid cloud space will be a boon for its growing ecosystem of channel partners and ISVs, which will benefit from Big Blue’s innovation around AI, analytics, automation, and security in the cloud platform.
Background: IBM for more than a decade has shed businesses as it increasingly focused on such areas as the cloud and its Watson AI initiatives. A case in point was the company’s decision in 2014 to sell its x86 server business to Lenovo for $2.3 billion, a move designed to rid IBM of a commodity hardware unit in a highly competitive and low-profit market where the trend increasingly was away from big iron systems and toward smaller servers.
The Buzz: “To drive growth, our strategy must be rooted in the reality of the world we live in and the future our clients strive to build,” Krishna wrote. “Today, hybrid cloud and AI are swiftly becoming the locus of commerce, transactions, and over time, of computing itself. This shift is driven by the changing needs of our clients, who find that choosing an open hybrid cloud approach is 2.5 times more valuable than relying on public cloud alone. We also know that there’s tremendous value in focus. Our intent is to concentrate our energy on the things that matter the most to our clients so we can move them the furthest. As a more focused company, IBM will innovate and move faster, and invest more strategically in the future of our business. Going all in on our open hybrid cloud platform and AI solutions will create value for our clients, our company, and our shareholders. This change best positions IBM for improved growth.”
“We have positioned IBM for the new era of hybrid cloud,” said Rometty, IBM’s executive chairman. “Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat. At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivaled expertise in complex and mission-critical infrastructure work. As two independent companies, IBM and NewCo will capitalize on their respective strengths. IBM will accelerate clients’ digital transformation journeys, and NewCo will accelerate clients’ infrastructure modernization efforts. This focus will result in greater value, increased innovation, and faster execution for our clients.”