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Vendor sponsored Analyst conferences are oftentimes long on self-congratulatory hyperbole and short on substance. That wasn’t the case with IBM’s Systems and Technology Group Analyst conference held last week in Rye Brook, NY.

The STG conference, led by Rod Adkins, Senior Vice President of the STG Group, showcased the division’s solid accomplishments over the last several years and detailed the current and future product roadmap and investment strategy. Investments focused around three major areas: Systems, growth markets and strategic acquisitions. Adkins could have easily added a fourth category: patents. The U.S. Patent Office granted IBM’s STG division 2,680 patents in 2010 and it could exceed that number in 2011. One only has to scan the headlines and peruse the ongoing patent purchasing frenzy and the plethora of lawsuits involving all of the major vendors to realize the pivotal role patents play as both and offensive and defensive weapon. IBM, in its Centenary year, holds more patents than any other U.S. technology vendor.

STG 2011 Milestones

Noting that STG is aligned with IBM’s overall growth strategy, Adkins detailed the division’s milestones throughout the first three quarters in 2011. They included:

  • Seven consecutive quarters of growth: Much of the increase was directly attributable to the high end systems such as the System z platform, enterprise storage and high end tower servers.
  • The Power Systems platform has won over 2,400 competitive displacements since the 2009 first quarter contributing $2.4 billion in revenue to IBM’s bottom line in the last 36 months.
  • The Power Systems momentum continued through Q3 2011, when it won 250 competitive displacements in the quarter and 750 displacements year-to-date, Adkins said. Those new customers netted IBM $740 million in revenue so far this year and boosted Power Systems sales by 15 percent.
  • System x server revenue is up 9 percent through the first three quarters of 2011 high end revenue growth of 33% YTD and eight consecutive quarters of double digit growth
  • Storage up 12% YTD including storage software over 2,100 new storage customers on the XIV platform.
  • Analytics 35% quarterly growth through 3Q11 via Watson, optimized Smart Analytics
  • Cloud: revenue thru 3Q more than double same period in 2010; introduced Smart Cloud Entry; cross IBM integrated cloud offerings and new business partner enablement
  • Overall, STG represented 27 percent of IBM’s growth markets revenue in 2010.

STG Bolstered by Product Performance, Management Stability

STG’s strong performance, helped boost the company’s stock which is now trading at $194.50, very close to a 52-week high. Big Blue’s across-the-board strong performance got a further lift when it was revealed in November that Warren Buffet, invested $10.7 billion, equal to a 5 percent stake in IBM. Buffet’s investment was no doubt sparked at least in part, by the fact that IBM’s Return on Equity to shareholders is 69.84 percent, according to Capital IQ.

While both IBM and STG’s financials tell a compelling tale, they are not the whole story. IBM in general and STG in particular, clearly owe their strong showing to the features and performance of the products. However, IBM’s ability to deliver strong after-market technical service and support, the stability of its business and its’ ability to steer clear of the management tumult that has plagued rivals like Hewlett-Packard also play a large part in its success.

For the past three consecutive years, IBM AIX and Power Systems have recorded the highest uptime and reliability ratings in ITIC’s annual Server Hardware and Server OS Reliability Surveys. In the latest updated ITIC October 2011 poll, IBM’s AIX v7.1 UNIX OS running on the company’s Power System servers scored the highest reliability ratings and recorded the least amount of overall downtime from Tier 1, Tier 2 and Tier 3 outages among 18 different server OS platforms. Reliability is key metric that contributes to lowering or raising total cost of ownership (TCO).

Corporate customers interviewed by ITIC say they are equally impressed with the quality and celerity of IBM service, support and documentation when IT staff lodge technical support calls.

The stability of IBM’s upper management and its ability to provide smooth, orderly leadership transitions resonates well with customers, Wall Street, press and industry analysts. After a decade as Chief Executive Officer Sam Palmisano will step down and will be replaced by Ginni Rometty, IBM’s senior vice president for sales, marketing and strategy, overseeing IBM’s Global Business Services unit, on January 1.

The solid management also extends to STG. Adkins, a 30 year IBM veteran, has successfully headed the group since 2005 and this plays a key role in customer retention. The STG management team has consistently delivered a clear message that includes tactical product launches and long-term strategic direction. This is stark contrast to the upheavals at competitors like HP and Oracle where tumultuous management changes occur with alarming frequency (HP) and large, often hostile mergers and acquisitions and nebulous product roadmaps (Oracle) have left customers scratching their heads regarding future product directions and undermines confidence.

Nowhere is this more evident than in the well documented and highly publicized disaffection of the Oracle (former Sun Microsystems) SPARC server installed base. IBM’s STG group has been able to exploit that dissatisfaction which accounted for a large portion of the Power Systems and System x’ competitive wins during 2010 and 2011.

Adkins and Steve Mills, Senior VP and Group Executive, in STG Software and Systems also outlined the group’s strategy for gaining new business in the ongoing tough economic climate where IT budgets are static. STG continues to invest heavily in research and development (R&D) to drive efficiencies and economies of scale to assist organizations in reducing IT management and labor costs and to cut power and energy consumption. Depending on the size and scope of the individual customer’s infrastructure and workload, Adkins claims that Power Systems servers running IBM’s DB2 are one-third the cost of Oracle DB. Similarly, he says, the System x can lower management costs by up to 50 percent and IBM’s storage platforms can assist businesses in lowering powering and operating cooling costs by as much as 60 percent.

Analysis

In order to maintain and extend STG’s current level of success through 2012 and beyond, IBM is now tasked with topping itself.
STG executives should continue to focus on:

  • Differentiating the products: STG is a large group that encompasses servers, storage, cloud computing, software and systems offerings. It’s easy for even stalwart IBM customers to be overwhelmed by the sheer number of products and announcements. The STG Group must strive to highlight the most important product updates and announcements to customers. C-level executives and IT departments are overwhelmed by too much information. IBM’s STG group should emphasize the two or three most crucial products and services per quarter and communicate that via their sales and reseller channels and user groups. IBM has always been good about providing guidance but it must do even better.
  • Delivering competitive acquisition, licensing and technical support costs: The biggest singular criticism leveled at IBM is the high cost of its after-market technical service and support. No one expects IBM to offer superior services at Flea Market prices. However, IBM has one of the largest service and support organizations in the world. IT could and should build goodwill in 2012 by offering special promotions, discounts and bundled incentives to loyal STG customers and prospective customers. A sizeable segment of the end user population is currently and will be strapped for capital expenditure funds for the foreseeable future.
  • Appeal to Small and midsized businesses: IBM is well entrenched among large enterprises in high profile verticals like financial services, healthcare and government, to name just a few. Small and midsized businesses however account for nearly 60 percent of all businesses. SMBs with fewer than 300 users lack the clout and deep pockets of their enterprise peers. Nonetheless, their numbers and capital and operational expenditure power are enormous – particularly in emerging geographical regions like Africa, which is a big focus for IBM’s STG group. Indeed there are many SMBs in IBM’s vertical bailiwicks. IBM, its current and potential customers would all be well served by the availability of specific purchasing and licensing programs that provide aggressive entry-level price points and value-added licensing deals for SMBs.
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