The second of a two-part article by Timothy Prickett Morgan. IBM held a meeting in Beantown recently to make the case to industry gurus that it has not only straightened out its server marketing strategy, but that it has also figured out how to actually start growing its server businesses and, perhaps, even grow faster […]
The second of a two-part article by Timothy Prickett Morgan.
IBM held a meeting in Beantown recently to make the case to industry gurus that it has not only straightened out its server marketing strategy, but that it has also figured out how to actually start growing its server businesses and, perhaps, even grow faster than the server industry at large for a nice change. The arguments that IBM presented in favor of such growth are as complex as its customer base, but it all comes down to this: IBM is going to figure out what customers want before it starts selling it to them, sell those products to its customers and then support the living daylights out of them to not only keep those customers happy, but keep them coming back for more IBM goods and services.
In many ways, the AS/400 market faces the same kinds of challenges that the mainframe market does. There is a vast installed base of vintage machines. If even a fraction of the base upgraded to RISC machines and V4 software, IBM would have another stellar year. There are indications that this might be the year for this to happen. Allstate just signed up for 14,000 AS/400s, upgrading most of its rather large AS/400 network. In a good year IBM sells 50,000 to 60,000 AS/400s, so such deals are very big deals indeed. Last year, AS/400 sales were heavily concentrated in five industries; IBM has got to break into new markets if it is to ensure continued double-digit revenue growth in the AS/400 line. IBM sold $4.2bn of AS/400 servers in 1997 in a potential market about $37bn in size. The majority of 1997’s sales were at companies in the distribution, manufacturing, banking and insurance businesses. IBM’s highest market penetration last year was in the distribution industry, with 17% of the $9bn market. AS/400 sales to manufacturing companies was close behind at 16% of the $7bn market. The AS/400 did considerably worse – worse being a relative term, of course – in other smaller industries. By IBM’s own reckoning, there was $21bn worth of additional opportunities to sell AS/400s last year, for which IBM sold about $2bn in AS/400 servers. Obviously, IBM has to sell AS/400s to customers who might otherwise buy something else if it hopes to expand this business. According to Susan Whitney, the sales chief for IBM’s new worldwide server sales organization (up until now, IBM had four different server sales teams in each geographic region in which it did business, a very unwieldy sales organization), the key to increasing sales in all server brands – S/390, AS/400, RS/6000 and NetFinity – IBM will initially focus on six fast growing markets to boost its server sales. These are: Enterprise resource planning suites, made by others, not IBM; Business Intelligence, IBM’s new term for data mining and data warehousing; Enterprise messaging and collaboration; web application serving; e-commerce; and server consolidation.
The ERP software market is growing at 40% per year, and now that IBM is supporting popular suites on AS/400s and mainframes – Baan is coming in the fall, and SAP R/3 and PeopleSoft are already available – IBM figures it can get its share. Business Intelligence is really just the same old data warehousing song and dance done up with better and cheaper software than was available a few years ago when data mining appeared on IBM’s radar screen. IBM’s e-commerce and groupware software is available and as good as anyone else’s, and IBM has the hardware to support it and the desire to sell it. Server consolidation is a relatively new idea, and no one is sure exactly how that one is going to play out. Companies have dozens to hundreds of print and file servers that sit along side their production AS/400s and mainframes; IBM figures that with the right software, it could sell customers an AS/400 IPCS card or an extra mainframe engine to support the workloads on those print and file servers and thereby help these customers better manage their servers, which can be cranky and difficult to backup and maintain. IBM reckons, for instance, that there are over 1m PC servers doing nothing but print and file serving at its mainframe sites and that a substantial portion of these customers would rather just put it on the same box that supports their applications. IBM may be right. We’ll see. The key to all of this, of course, is not the market stratification, but the sales pitch to customers. Under the new sales organization, IBM will have one account rep who is responsible for its larger accounts, just like in the old glory days of IBM. Smaller accounts will share a rep, similarly just like in the past. Each rep will be responsible for taking care of that IBM customer and for getting the right specialist to make one recommendation – and only one – to that customer when they have a problem to be solved. These reps will have authority to discount at will to make customers happy with whatever platform they choose – an important change. Customers have to be tough even as IBM ‘gladhands’ them and not give sales reps any mercy. There’s never been a better time to negotiate with IBM. Supporting the sales reps will be a team of specialists in midrange or high-end servers, each with a further specialty in one of the six areas mentioned above; IBM will continue to have specialists in industry vertical markets as well. So now when an AS/400 customer says that it is thinking about upgrading their legacy software to an ERP suite, the sales rep feels the customer out for what they need and his or her team puts together a deal – in this case, most likely for SAP or JDE or SSA running on an AS/400 – quickly and with sufficient discounts to close the deal. Pronto. No more waiting 90 days for price quotes. Why will this work? Because the sales reps and their support staff get paid based on how well the server organization does, not on how well their specialty does. Everybody has to make the customer happy to make their numbers. It really does leave the customers in the driver’s seat for the first time. If customers want NT servers, IBM closes the deal, it doesn’t try to push AS/400s first and then follow with RS/6000s and then finally get around to proposing an NT server after it has lost the deal to Compaq or HP.
Radical sales departure
This may sound simple, but this new strategy is a radical departure from IBM’s historical way of trying to sell and support customers. It is the best sign in many years that IBM has what it takes to go up against Compaq, HP ands Sun in the server market. IBM is confident enough in this new marketing plan to start talking to Wall Street about its increased revenue prospects for 1999 and beyond; it is also, through television and other media, trying to get mindshare out there on Main Street among nerds and end users alike. On May 14, IBM chairman Louis Gerstner told a few hundred analysts on Wall Street to look for IBM to get double-digit revenue growth over the next few years, despite the fact that IBM’s revenues have been flat for the past two years. IBM has to increase services, server and software revenue to offset the revenue declines it faces in the PC market and for all of its products in Asian markets. IBM believes that it can continue to get 20% growth in the services business as well as get double digit growth in its server businesses; add to that IBM’s fast-growing OEM hardware business (which sells disk drives and chips mostly) and even with declines in the PC business, Gerstner says that double-digit revenue growth for IBM is not just possible, but inevitable. The question, of course, is can IBM be profitable. Even if PC revenues stabilize and services revenues grow, neither of these businesses bring much to the bottom line – and some years, they add up to hundreds ofms in red ink that has to be offset by AS/400 and mainframe sales.