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IBM announced this week that it is spinning off its legacy Managed Infrastructure business into a new public company, thus creating two independent companies. I highly endorse this move and, in fact, advocated it for years. IBM is a big, successful, proud organization. But it has been apparent for years that it faced significant challenges in trying to manage two very different businesses and operate within two very different operating models.
“NewCo,” the spun-off company from Big Blue’s Global Technology Services business, will focus on modernizing customers’ legacy infrastructure and moving it to the cloud. The remaining company, still named IBM, will accelerate its focus on its open hybrid cloud platform and Artificial Intelligence (AI).
One might say that the company separation shows that IBM finally found its senses. But I closely watched IBM since 2013 act on its senses and execute on a multi-year strategic plan to transform its company. Big Blue had a two-pronged plan for remaking itself, as I blogged about over the years.
One prong was to divest the mature parts of its business (such as its chip business in 2014). The other part of the strategic growth plan was to acquire companies, such as RedHat, that would enable IBM to quickly shift its business into high-growth digital platforms and companies that would help IBM grow its expertise in analytics, automation platforms, AI and the cloud. IBM paid a hefty 63% premium in October 2018 for its RedHat acquisition because of its hybrid cloud capabilities and its fully formed digital operating model. IBM clearly saw that hybrid was the direction for large customers moving to the cloud.
Implications of the company split for all stakeholders and competitors
Why is the move to two companies operating independently a good move for IBM, its services customers, its employees and its shareholders? The fundamentals of the two businesses and their operating models were too different.
The open source AI operating model and the organization it takes to drive and succeed in that business is a different kind of organization than is necessary for managing and modernizing legacy environments. The two businesses required different kinds of talent, different kinds of incentives and had different needs for investments.
Let’s consider in more detail the implications for all IBM stakeholder groups as well as its competitors.
Implications for IBM customers. It was confusing for services customers with both businesses under one roof. Fundamentally, the businesses tried to do different kinds of operations, made decisions and investments differently and partnered with customers differently. For its AI and open source cloud platform business, IBM needed to be an agile IP-based firm. But its legacy infrastructure business required that the firm operate with stability and discipline.
Furthermore, the business engaged in modernizing and migrating customers’ legacy infrastructures to the cloud. But this is a risky proposition. It requires time to accomplish, requires disciplines and a different level of change management that is unlike partnering services for helping customers move down the open cloud platform and AI route.
The separation into two companies frees IBM to operate at its best in both the legacy modernization space and in the open source and AI transformation space. Now, both organizations can deliver even more excellence because they will no longer be conflicted in their paths and focus.
Implications for IBM employees. The move is great for IBM employees, as they struggled with the internal operating conflicts between the two different businesses. The separation into two independent companies simplifies their work lives and will allow them to execute better. It will also accelerate their career opportunities.
Implications for IBM stockholders. This move is great from a stock perspective because a technology-based company’s value rather than a services-based company’s value is usually much higher. Arguably, by combining them (as was the case before this announced separation), the stockholders faced less value. With the two businesses no longer combined, the stockholders will benefit.
So, it is a win-win-win, across the IBM spectrum.
Implications for IBM competitors. This separation of the businesses will bring much more formidable competition to the marketplace. Two IBMs, which are unconflicted, are truly formidable. If it results in the increased execution capabilities that I expect, I think competitors in both business spaces need to take this very seriously.
This most recent action in Big Blue’s strategic growth transformation over the past few years is significant. The action simplifies and optimizes Big Blue’s operating model, enabling speed and growth in IBM and NewCo.
I could not be stronger in my endorsement of the move to two independent companies and look forward to the changes in the market.
