IBM CEO Arvind Krishna’s announcement about a strategic move to spin off their managed infrastructure services business on October 8, 2020 is reverberating across the business and technology landscape. However, keeping the magnitude of the announcement aside, this is in line with IBM’s time-tested modus operandi of divesting slower growth and maturing businesses, such as their exit from the PC business. While this strategic shift is considerably late compared to other players, it is the right move that leverages their Red Hat acquisition to target the fast growing multi-cloud market.
Our research indicates that enterprises are embracing multi-cloud environments rapidly. Avasant’s Cloud Platforms 2020 RadarViewTM shows that 80-90% of Global 2000 enterprises already have a hybrid IT environment. 65% of these environments consist of three or more cloud platforms. The pandemic has accelerated the adoption of cloud across most sectors, especially in media, healthcare, retail, and education industries. Even regulated industries for which cloud adoption has always been a compliance quagmire have started exploring use cases to leverage cloud services. Overall, we expect that more than 95% of all enterprises will have multi-cloud environments with more than four different cloud platforms by 2023.
This shift has posed a challenge for IBM’s Managed Infrastructure Services business, resulting in a year-on-year decline in revenues for the last couple of years. Structurally, a majority of their immense book of business (over USD 60 B in backlog deals) is in the legacy infrastructure management space, which is slowly but surely declining. On the other hand, hybrid cloud management services, which will drive growth for the foreseeable future, have a markedly lower revenue share. This dichotomy could have been one of the critical catalysts for this decision.
For the last three years, IBM has been pitching to enterprise prospects that they can support all competing cloud platforms seamlessly. However, enterprises have been wary because of the perception that once IBM enters an environment, it slowly pushes its products, such as the IBM Cloud, through lockin clauses and proprietary technical architectures and requirements. But as a separate entity, NewCo will not be encumbered by these perceptions, and it will be able to pivot its business towards the higher growth hybrid cloud management services while retaining the cash cow of legacy infrastructure management and modernization.
While assessing the leading cloud platforms as part of our Cloud Platforms 2020 RadarView, IBM Cloud clearly had to play catch up with AWS, Azure, GCP and even Alibaba Cloud. It needs to focus on not only on expanding exclusive IBM Cloud accounts, but also, more importantly, to ensure that they are a top contender for enterprise multi-cloud environments. In his strategic update, Mr. Krishna estimated that there is a 7X to 10X downstream opportunity for any enterprise dollar spent on IBM Cloud. And while this might be optimistic in multi-cloud environments, it is still a significant reason to increase focus on cloud services and products that work seamlessly with all other existing cloud services. After the spin-off, we expect significant investments in both product development and dedicated go-to-market around IBM Cloud platform.
While many structural aspects of the deal are yet to be clarified, the biggest question in the market is about the impact this will have on client organizations that currently leverage IBM’s Infrastructure managed services. Will this spinoff temporarily shift management attention or cause attrition that could impact their service abilities? Should clients leverage change of control provisions to terminate or amend their IBM service contracts? Will clients with hybrid cloud environments managed by IBM, have to restructure those agreements? These considerations will also be top of mind for clients currently in the process of selecting or negotiating with IBM for a new services contract. As more structural details are released, some of these concerns may be alleviated, but until then, it will create a certain level of uncertainty amongst clients with significant IBM service portfolio. One thing is for certain though, IBM leadership will be doubling down on its commitment with its clients to keep them secure and comfortable.
Overall, the spin-off comes across as a smart move that aligns well with the direction in which the Cloud-First market is moving. It is designed to place IBM and NewCo in a position where they can both target high growth opportunities that align strategically with the evolution of enterprise hybrid IT environments. However, whether the move comes just a little late or whether IBM can recapture the momentum from its competitors, will be an interesting story to be scripted over the next two years.
Analysis and opinion by Anupam Govil, Senior Partner at Avasant and Swapnil Bhatnagar, Research Director at Avasant.