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  1. Technology
March 1, 1999


By CBR Staff Writer

By Timothy Prickett-Morgan

If there was one message that IBM wanted to drive into the minds of the 4,000 business partners that attended its annual Business Partner Executive Conference (BPEC) in New Orleans last week, it was that IBM expects BPs to grow so it can make good on its promises to shareholders, Wall Street analysts and customers that Big Blue will start growing as some of its more nimble competitors in the computer market have done over the past few years even if they are, for the moment like Compaq and Hewlett- Packard, not growing as fast as they have been. The point is, IBM wants to make money, and to do that it needs to drive more sales through its indirect business partner channel, which numbers some 45,000 organizations worldwide and which dwarfs IBM’s own direct sales force of 25,000 employees. BPEC got its official start when chairman and CEO Louis Gerstner gave the keynote address to a packed auditorium. Gerstner, sounding very much like a father with high expectations addressing his children, told the BPs in attendance that he was thankful of all their efforts over the past five years to help modernize IBM’s offerings and sales techniques as well as helping it make money, but that he needed to ask them to do better. Gerstner reminded BPs that at BPEC ’94 in Nashville, Tennessee, he had asked BPs to hang in there with IBM when many in the industry said that IBM was pretty much done for. In 1999, Gerstner says that IBM is not only in much better shape as a provider of computers, software and services, but that it is also positioned to be one of the last vendors standing when an inevitable consolidation in the computer industry takes place over the next 18 to 24 months. Whether the computer industry undergoes a radical transformation or IBM becomes one of the leaders in this new industry remains to be seen. But Gerstner made it clear that if IBM was to succeed, BPs were going to be one of the keys of that success. The numbers bear this out. In 1993, when Gerstner first took the helm at IBM, BPs accounted for about 10% of IBM’s $60bn in revenues. In 1995, BPs pushed about 20% of IBM’s sales. Last year, business partners were the drivers behind 38% of the company’s $81.7bn in sales. That’s a 15% compound annual growth rate that is substantially larger than IBM’s overall growth rate during that time. Gerstner says that its business partners accounted for close to 56% of its sales in the small and medium business (SMB) market, which is not surprising since it is BPs who, for the most part, sell low-end AS/400s, RS/6000s, Netfinities and, to a smaller extent, low-end Integrated S/390 and Multiprise mainframe servers. Last year, for instance, BPs were responsible for about 70% of AS/400 sales, a level that was up from 58% in 1997 and which IBM hopes to push up to 75% during 1999. That was possible because IBM passed on 95,000 sales leads to BPs in the AS/400 market. IBM passed on another 35,000 leads to RS/6000 partners who in turn were responsible for about 65% of IBM’s RS/6000 revenue in 1998, up from 61% in 1997. In the very small business segment, IBM says that virtually all of its revenue comes through BPs. IBM also says that it passed on over 5,000 support leads to BPs from its S/390 mainframe base, which accounted for 12% of the company’s overall S/390 revenue, up from 3% in 1997; IBM expects this to grow to 15% of S/390 sales in 1999. IBM also says that it passed on over $700m in systems integration and services subcontracting to BPs last year, over $175m of that in large accounts in North America. About half of the worldwide services contracts handled by BPs on behalf of IBM were at its large enterprise customers. The total amount of IBM services delivered through the BP channel was up 40% in 1998, and was also up 40% in 1997. Most of the services revenue was in the system setup, maintenance and technical support hotlines. BPs were also involved in 80% of the ERP deals IBM took down last year, too. IBM also made $22bn of working capital available to BPs in 1998, up from $17bn in 1997 and going to $25bn in 1999. A lot of this money apparently ends up financing systems and BP inventories, but IBM is not being specific about where this money comes from and where it goes to.

Dropped distributors

With all those numbers in favor of BPs, it may seem that IBM would want more BPs instead of less. But IBM is keen on thinning out the number of companies that it has in the sales channel so it can have an easier time managing what they do and predicting what they are going to accomplish. Gerstner says that IBM has dropped to 9 major distributors and 4,000 direct BPs from 15 distributors and 8,000 direct BPs in 1997, and the IBM chairman indicated that he fully expected further consolidation in the BP channel. What Gerstner didn’t say is that IBM would, in fact, be one of the major drivers behind this consolidation. First, through requiring BPs to get certified to sell and support its products. (IBM is right that BPs need to do this, but didn’t give BPs much warning last year when it started enforcing certification.) And second, by encouraging consolidation among BPs because only the biggest, fastest growing BPs are going to get IBM’s attention in 1999. Buell Duncan, who just took over as general manager of IBM’s global business partner channel in December, had the unfortunate job of letting BPs in on this at BPEC. IBM is aggressively setting the revenue bar higher, he said, I am asking every business partner to grow revenues by 25% during the first quarter. There was a moment of stunned silence, then Duncan continued to rattle off statistics and eventually came back to the point that IBM’s best support and preference will be given to those customers who drive incremental growth for IBM. Abby Kohnstamm, senior vice president of marketing at IBM explained in her address at BPEC: E-business is the single focal point for the company, and is the single largest marketing effort ever undertaken by IBM. Kohnstamm is a former co-worker of Louis Gerstner when he worked at American Express many years ago, and is arguably one of the most powerful executives at IBM, especially since she has been successful at what she set out to do that is to revamp the IBM brand. Exactly how much IBM is spending is unclear, but the original e announcements, which coincided with the launch of the Apache AS/400e servers in August 1997, was estimated at $90 to $100m. The $2bn annual IBM advertising budget that Kohnstamm controls has been, as most of us have seen on television and in the papers, heavily concentrated on e-business. It comes as no surprise, then, that among IT managers (and from the presentation Kohnstamm made at BPEC, random people polled on the street, too) IBM is five times as likely as Microsoft to be associated with e-business, and twelve times as likely as Netscape Communications. Hewlett- Packard and Sun Microsystems don’t rate above the noise level in IBM’s polls. This is obviously a big mindshare. Kohnstamm says that IBM had about 30,000 e-business sales leads in 1998, half of which were passed onto BPs and which resulted in 18,000 engagements, which presumably means IT managers and BP representatives talking about deals rather than actually signing them. All IBM will say for certain is that it has worked on more e-business projects than its any of its competitors and that its experience in those e-business deals is feeding back in a positive loop, making it easier to do more e-business deals. Kohnstamm says that 800 BPs have approval from IBM to use the e trademark, and that another 1300 are on deck to get it soon. Nonetheless, the question still remains as to how IBM can turn this mindshare into market share, and more importantly, revenue and profits.

Sell what’s on the truck

Of course, good chefs eat what they cook. IBM has spent millions on transforming itself into an e-business, and it is far from complete in this transformation. IBM sold about $1.2bn in products through the web in December 1998, up from $50m in January 1998, and expects to grow that to well over $10bn by the end of 1999. About $800m of those December web sales at IBM were through its PartnerCommerce extranet for BPs, which IBM believes could grow to $4bn in sales in 1999 as it roles out the product, which has been in limited beta. Moreover, IBM’s web procurements from its suppliers grew from zero to $629m during 1998, and IBM expects that it will grow to $12bn of its total $35bn in procurements in 1999. IBM processed over 14 million web transactions last year, and will likely do orders of magnitude more transactions this year. IBM can better help BPs move to the world of e-business by showing them what it is learning as it transforms itself, and show them how to keep more of the money they bring in by lowering transaction costs and pumping up business through the web. But that will only take IBM and its BPs so far, especially since all the other major computer vendors are working on the same areas. Building e-businesses that sell e- business products is what every company is doing, or trying to do, and attaining that just puts a company on equal footing. That’s where e-business and the new high-performance selling initiative, headed up by Bill Etherington, senior vice president in charge of sales and distribution at IBM, come into play. The e-business sales pitch is simple enough: IBM has the servers, the installed base and the know-how to extend legacy applications to the web. This is obviously a high growth area – IBM says that e- business-related expenditures for hardware, software and services will grow at 20% annually between 1998 and 2002 to $600bn, representing about half of IT expenditures at that time. Expenditures for traditional applications are only expected to grow at 5% annually. That’s still close to $550bn, but it is not where the growth is, and many competitors will be fighting for that money. IBM wants BPs to take the mindshare the company has and run with it. To do that, IBM has developed high performance selling. The sales model here has the usual amount of IBM gibberish, such as having a customer focus, being obsessed with customer satisfaction and so forth. But Etherington says that IBM is really trying to change things. He wants BPs to know that he will clear up confusion in the distribution channel concerning IBM’s products and who is supposed to be pushing them where. In return, Etherington expects, as one of his Bronx, New York sales reps once told him, to sell what’s on the truck. That means stop worrying about what Sun or HP have and to sell what IBM has. He wants BPs and sales reps both to focus on selling ERP, SCM, CRM and EAI solutions, but to also make sure IBM servers and network equipment is under them. It’s not enough any more to just be in on the deal. IBM wants BPs to own their deals, and thereby extend IBM’s grip on commercial computing. This is a very tall order, and if BPs don’t get it yet, let’s make it real clear: That is an order.

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