In a serene, oak-paneled conference room at one of IBM’s oldest R&D sites – where engineering firm Vickers once produced engines for the Spitfire fighter planes – head of IBM Software Steve Mills was forced to defend the firm’s acquisition strategy.
Speaking at IBM’s Hursley, UK laboratories, he insisted that its 70 software acquisitions since 1993 are not evidence that the firm has difficulties coming up with its own innovations.
You ask about the acquisitions and suggest there were things that we did not do, he said in response to our question, but I could equally spend a long time on things that we did do. We built the core WebSphere technologies and many other core technologies.
The alternative play [to software acquisitions] is that we build it all within IBM, but the companies we have acquired have had their own talent and been highly focused on a particular idea. We buy companies that we know will give us revenue pay-back in three years or less and be accretive within two years or less.
We also balance the cost of acquisitions with whether or not they will be materially better than other uses of the cash that IBM has in the bank, Mills said. But equally there is the benefit of being able to get these things at the rate, pace, speed that we want to include these things in our technology portfolio.
Acquisition decisions, Mills said, are about meeting customer needs and their requirements, which translate into different views of what customers need and why. It’s a process of discussing what customers need and also what we can’t make fast enough. There’s a partnering ecosystem as well, of course.
IBM has occupied the Hursley laboratories site since 1957, when it bought it off Vickers. The site’s historic grandeur is more in keeping with a luxury hotel than a modern R&D facility.
But the leafy surroundings just 10 minutes beyond the City of Winchester seem to keep the 3,000 staff on-site happy, while the likes of campus-wide Wi-Fi, its own bank and numerous food and drink concessions must surely help too.
Of those 3,000 staff, around half are doing what IBM calls deep research, while the rest is made up of consultants, pre-sales support and various admin functions.
Hursley is just one of IBM’s labs around the globe, with more deep research taking place in Raleigh, California; Shanghai and other locations. No other company is doing development in as many places in the world as IBM, said Mills. We have the technology for developers to work in distributed teams, working on a common, consistent architecture.
Mills said that Hursley is particularly focused on transaction processing research: Transaction processing doesn’t get as much ink [in the media] as the internet, Second Life and so on, but transaction processing powers banking, shipping, automotive, as well as the guts of many other businesses. The technologies researched here are at the heart of what goes on in mission-critical systems.
Despite the reaction that the leading science must be done around search engines and Google, you’ll find that what’s done here is far more complex and deep science than anything at Google, said Mills.
He added that the firm’s research focus has been shifting over the course of the past five to 10 years from predominantly hardware to predominantly software. Software represents an ever-larger percentage of IBM’s profits, Mills explained. Our software business did over $18bn last year and grew at 7% in constant currency. There are 50,000 people in the software business round the world, and in terms of the size of our software portfolio we are the biggest software firm in the world.
It must be tricky to put a value on much of the work done in what IBM calls its deep research laboratories worldwide. One could argue that it’s not getting its money’s worth when it has had to make over 70 acquisitions since 1993, with recent big buys including Princeton Softech, Telelogic, Data Mirror, MRO and many more.
But the fact that IBM files more patents annually than any other technology company, gives reason to believe that its labs don’t do such a bad job after all.
It’s clear that IBM is often out-maneuvered by younger, more nimble or simply more focused firms that it often goes on to acquire. Perhaps the fact that it makes numerous acquisitions is simply a reflection of the fact that it’s a good way to use some of its cash as Mills says. But ultimately it is also evidence that no one company can have all of the best ideas, regardless of how much money and effort it spends on R&D.