In a rare and exclusive interview CBR talks to Steve Mills, senior vice president and group executive, IBM Software, which contributes $20bn to IBM’s revenue and 40% of its profits. Steve Evans asks the questions.
Acquisitions are obviously a big part of your strategy – the most recent being BigFix. Why is the data centre security/management space so hot right now?
The things that we acquire are focused on the software business and strategy we have today; we’re always looking for the customer pain-point and where we need to make a decision on what we make or buy. It starts with the customer’s problem and we make a decision on how to address those problems. We certainly have lots of talent at IBM so we can make things or do we buy – maybe there are some good companies out there that are in that space and already have a strong product offering and customer base. That means we can accelerate our participation in that market much faster than building.
BigFix is an industry-leading provider of PC, laptop, endpoint device management and device management, it touches on aspects of configuration and security; there are a whole load of reasons why you need to update and patch these devices. The broader space is how we help our customers manage the endpoints they have. The increase in the number of endpoints – such as the handheld explosion – requires sophisticated technology to help manage.
We have a very strong systems management business; we’re very focused on monitoring, management, control, and we have a security portfolio around identity management and intrusion protection. BigFix brings additional capabilities to enable us to push out to the devices.
You mentioned the choice between acquiring software and building it in-house. Can you go into more detail about that thought process?
You can’t build everything and you can’t buy everything. If you had enough time you could build everything, but that’s not practical from a business point of view. We’re trying to grow the software division, it’s already a big part of IBM and we believe we can make it even bigger.
Much of the value customers derive through technology is through software. The computer is what they run it on, but software is what the computer does, so they are endlessly looking for things for computers to do that can be labour and money saving. One of the big benefits we get through acquisitions is that we already have a big software business – we’re bigger than any company we buy – so we can extend its reach across the globe straight away, that provides an economic lift. Every company we buy gets bigger than it was prior to being purchased.
We always buy from an invest perspective so it’s not that we’re just trying to accumulate things; we don’t take talent out, we keep it in and add to it. We acquire things that sit adjacent to things we’re already doing. That’s because we want to get a lift in our existing portfolio from the value and benefit the new acquisition adds to what we have.
So does it often work out cheaper to acquire software rather than develop it in-house?
On a time-based view, yes. You have to look over a period of time over a life-cycle of development, initial delivery, building up the installed base and you have to keep improving the product. You can look at the amount of money that will cost and essentially spend it today on a company that is already established in a way that could take us five years to achieve. The price is also critical; there are companies that we don’t buy because the prices are so high that you can’t deliver payback; it’s not superior to the build scenario.
With the acquisition/build debate being driven by customer needs and how quickly you can deliver – does the sheer size of IBM make it at all difficult to innovate?
No, on the contrary. We have outstanding depth of skill and talent when it comes to basic computer science and the maths that supports that. No company has more software patents than we do, so we are the most prolific company in the world in terms of software invention. But invention is one aspect of creating a leading IT company; innovation is defined by its application in context of the problem that the customer has. It’s not the invention itself, it’s how it’s applied.
Innovation is derived from that constant interaction with customers – understanding the problems they have, putting the inventions together and delivering the innovation.
Apple, for example, delivers products that consumers like. People view Apple as an innovative company in terms of packaging, they have a real eye for use and feel and how their consumers react to their product. Most of the inventions in Apple products come from others; they don’t manufacture directly anything that they’re delivering. They use a load of third-party suppliers. Their innovation is how they put it together. How they make it usable and how they turn those inventions into value for the consumer.
That same model applies in the same context of industrial business-oriented solutions that the average person doesn’t see everyday. That’s what we do in IBM. Our market isn’t the consumer market, it’s the business buyer.
What’s the acquisition roadmap over the next five years?
We’re going to buy more. Looking at our pattern of acquisitions we look to companies that fit very well with what we have; everything is a thoughtful analysis. Most of the companies we buy are private, the things that get the most press are the big public companies but it’s the smaller companies we buy that make actually dominate the acquisition profile.
Is that tech or people driven?
It’s market driven first and foremost. We then look for technologies that fit with what we have; if we have to rebuild the product because it doesn’t fit we’re not going to buy it. In many cases the companies already have an established customer base but frankly the smaller the company the fewer the customers. You pay proportionally. It’s not always critical to buy larger companies. Obviously we bring in talent, that knowledge of clients and technology is important to us. Many of the companies we buy will open new doors for us.
Not every acquisition works out though. Have you had any that simply didn’t work out? What did you do about it?
Let me make the very bold statement: all of our acquisitions have worked out. That might seem over the top but the reality is that we have a unique formula – we know how to bring companies in, we don’t stamp out their identity and their capability. Every company we’ve bought has got bigger and provided a lift to our existing portfolio. It’s a matter of degree. There have been notably examples in many industries where acquisitions have resulted in less than what was there before. Oracle bought PeopleSoft, which is smaller today than it was before Oracle bought it. Oracle itself has got much bigger but the companies they’ve acquired have got smaller. Sun is in the process of getting dramatically smaller. That profile is one that you can find in many industries.
With Sun, then, do you think you would have grown it had you acquired it?
I think that’s speculative. Sun clearly was struggling as a business. It is fundamentally a hardware company in the microprocessor business selling SPARC systems running the Solaris OS. To sustain that you needed effective, long-term design and fabrication capabilities to create sophisticated microprocessor-based systems that were competitive in the market. Throughout this last decade Sun struggled with that; they effectively lost their design roadmap and had no real potential to remain competitive as a Unix workstation company. The outcome there was fairly clear. You could argue that IBM had that capacity so perhaps Sun with IBM may have been a more interesting combination from that perspective.
Oracle bought it but they don’t have the capacity, it’s not in their genetic make-up to design and build high-density microprocessors and they certainly don’t have fabrication capabilities, which is where many of the problems come in today. So you do have to wonder why they’d do that and what their roadmap to the future is. It’s very evident that Oracle is executing a move away from SPARC to Intel; they’ve shared no roadmap with SPARC and have no answer to that for customers. What they’re promoting to the market place through their Exadata offerings are Intel-based.
So you question how well Sun will fit at Oracle?
Well, we know it doesn’t fit in terms of their software model and we’re watching them lay-off employees and raise maintenance and support prices. From a financial perspective I’m sure they’ll deliver on their commitments to Wall St. Given the size of the install base, you’d think that taking out people and raising prices would generate a huge amount of profit. It’s not a sustainable, long-term model but it’s a short-term model that Wall St likes.
That suggests you did take a look at Sun before Oracle swooped.
There were a lot of rumours out there! I’m not going to get into what we’re doing specifically, but there are a lot of things we look at, we’re a big company with a lot of capacity for business development. In the software space I look at a couple of hundred companies a year and seriously look at 50 or 60 and we buy a dozen. You look at a lot of things very closely.
It seems that big technology projects are often held up by software issues. Why is it seemingly so hard to deliver software on time and on budget?
There are a lot of challenges around big projects. The bigger the scope the more risk you take that you’ll struggle to achieve that. We practise a much more incremental approach to software development, we manage the risk and tell the customer when we think they’re doing too much too fast. If you go for short duration projects and iterative delivery of functionality you can build it up over time. That can end up being more correctly designed for what you intended, because you learned along the way. You can spend a lot of time trying to get it perfect in the lab but the reality is you need to get it out in the marketplace, because of the different way our products are used.
It’s a strong part of human nature to want to blame the software if you have a horrible experience rather than blaming yourself. It’s human nature to blame the tools but a post-mortem of any of these problem projects you hear about would result in a much broader perspective.
Do you think it’s a fair criticism of IBM to say that you’ve sometimes been slow to embrace disruptive technologies in favour of a more traditional conservative strategy around client-servers and mainframes?
The things we do are very much geared towards sophisticated business applications and processes. It’s not consumer-facing, we’re not serving the small business market. We’re not hanging a shingle out on the web like Amazon – cheap computing facilities on their infrastructure. It’s a perfectly valid model but we’re serving different markets. That’s not to say we’re not innovative or aggressive in the market, it’s just that what we go after is different than what others go after. They may go after things that seem to get more popular press attention. We’re not a consumer company.
No one knows that the world’s monetary software runs on our technology; you couldn’t move a dollar around the world without IBM. The shipping systems, all kinds of critical business and government infrastructure runs on IBM, but no one sees that.
Who would consider your fiercest rival?
It’s different companies in different segments, certainly with software it’s Oracle and Microsoft. BMC and EMC are both competitors, as are CA, HP and Accenture. But we’re not overly fixated on our competitors. It’s the customers who pay the bill.
Finally, do you have ambitions to be CEO of IBM one day?
That’s not what I do. I’ve been doing this for a couple of decades and I’ve been running the software business since 2000. If I had a desire to be a CEO I could have chosen to go off and do that. I’m committed to building IBM’s software business. I love to build things, it gives me a great deal of personal satisfaction. I’ve been very happy doing this and have had no interest in doing anything else. I happen to think I have the best job in the software industry. My boss has to put up with the responsibility of being CEO, I get to build things, have fun and spend the money. I have an enormous treasure trove of talent that works for me and to be able to create and be unencumbered around that creativity is an extraordinary thing.
After this interview was conducted Steve Mills took over the running of the hardware division alongside his software remit. Read more about that here.
