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IBM spin-off accelerates hybrid cloud growth

Spin-off NewCo will comprise Big Blue’s managed infrastructure services division but both companies will share the same DNA

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If there is one positive outcome from the Covid-19 pandemic, it’s the rush to a cloud computing platform. That’s happening across all markets, across all vertical segments and across all geographical territories. The fallout has also been positive across the board – with companies pushing more workloads to the cloud, enabling remote access around the world and lowering capital expenditure (Capex) overheads.

The total global spending on cloud services – including hardware, software and services – is set to cross US$1 trillion by 2024 while sustaining a double-digit compound annual growth rate (CAGR) of 15.7 per cent till 2024. That comes from an International Data Corp (IDC) study released in mid-October.

This cloud-centric trend in the “new normal” has given birth to a yet-to-be-named new entity, NewCo. In October, IBM Corp announced NewCo, a spin-off comprising its managed infrastructure services division. The separation will take place end-2021. By separating NewCo, IBM can focus on the hybrid cloud business; it will also potentially compete with the world’s biggest startup.

To be clear, NewCo won’t be a tiny newbie. The company is preborn a giant with US$19 billion in revenues, which is twice that of its main rival, has more than 4,600 clients (including 75 per cent of the Fortune 100 giants) in 115 countries and accounts for 20 per cent of IBM’s global revenues.

What will change

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“As a stand-alone company, NewCo will be able to build a more efficient operating model focused on service delivery excellence and designed to offer the next generation of transformational managed infrastructure services,” IBM CEO Arvind Krishna announced in October. “NewCo will also have greater freedom to forge partnerships and alliances in the managed infrastructure services space. This will open new avenues for growth.”

The two compelling technologies that companies most seek to leverage are hybrid cloud and AI (artificial intelligence). “These are underpinning the digital transformation of commerce, processes, and over time, of computing itself,” notes Brenda Harvey, IBM’s general manager for the Asia-Pacific region. “This shift is driven by the changing needs of our customers, who find that choosing an open hybrid cloud approach will deliver 2.5 times more business value than relying on public cloud alone.”

Ms Harvey, who is based in Singapore, notes that there is tremendous value in focus. “That is why, as part of this major change, we will accelerate actions to simplify and optimise our operating model for speed and growth,” she says. “The savings from these actions will also give us the financial flexibility to invest in our open hybrid cloud platform and AI capabilities and to bring innovations to market more quickly.”

Positive initiative

The NewCo spin-off is being viewed as a positive initiative by industry and financial analysts. “NewCo has an opportunity to pivot to a more agile organisation and execute on an open-platform-centric strategy focused on cloud and AI,” says Linus Lai, vice-president of IDC Asia-Pacific. “This is something which customers have highlighted as being important in their selection process for services providers. If executed well, the strategy will allow IBM and NewCo to create a world-leading, innovative cloud and AI company, and the world’s biggest pure-play managed infrastructure services company that can deliver on hyper-optimisation and the efficiencies of scale.”

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Once NewCo is split, what will IBM be left with? Consulting services, software and solutions, which together currently account for more than 60 per cent of IBM’s revenues. The fuel for growth will come from a significant acquisition that IBM made in July 2019 when it bought Red Hat for US$34 billion.

Red Hat pioneered enterprise Linux, which is now the most-used platform for software development. Red Hat Enterprise Linux probably contributed to more than US$10 trillion worth of global business revenues in 2019. “By 2023, an additional 640,000 people are expected to work in Red Hat-related jobs,” Jim Whitehurst, president and CEO of Red Hat, said in a statement last year.

The acquisition of Red Hat allowed IBM to build an open and secure hybrid cloud platform across all computing – on-premise, private and public cloud environments. “We have since launched our Cloud Paks and strengthened our systems portfolio. We built an industry-specific cloud to tackle the most stringent needs of the financial services industry,” Mr Krishna says. “We beefed up our hybrid cloud and AI capabilities by acquiring two other companies, Spanugo and WDG Automation. We will continue to form strategic partnerships as we have recently done with Tech Mahindra, Adobe and Schlumberger.”

What won’t change

For one, both companies will share the same DNA, which is a deep understanding of how to apply the power of computing, how to solve complex problems and how to help customers to develop solutions specific to their vertical segments or industries. The two companies will continue to share a strong bond with NewCo remaining IBM’s preferred partner for infrastructure. The Technology Support Services (TSS) business of the Global Technology Services (GTS) segment will be part of IBM. 

For another, it’s not about IBM or NewCo per se, but about enterprise customers. Vendors can’t win unless they help their customers succeed. “While the impact of the pandemic could have some negative effects on cloud adoption over the next several years, there are several factors that are driving the cloud market forward,” IDC reports. “The ecosystem of tech companies helping customers migrate to cloud platforms, create innovations in the cloud, and manage their expanding cloud environments will enable enterprises to meet their accelerated schedules for moving to cloud.”

And, finally, leadership in the enterprise tech space. “Leadership is not a birth-right; it takes perpetual reinvention, it requires working tirelessly to innovate, it demands a willingness to question tired traditions, and it implies making big, bold decisions to be on the right path,” Mr Krishna notes. “This is what we are doing today. It also happens to be an inherent part of who we are as a company.”

 

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