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IBM in the software era: Big Blue man gives HP a seminar

From atop vast pile of cash

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Euro recessionary scares aside, success for IBM is increasingly coming from software.

Software sales aren't just growing, up 16.9 per cent during the giants second quarter, so is profitability with software group margins up 88.4 per cent. Sales were down quarter on quarter in Q3, but still grew just over 12 per cent compared to 12 months ago.

The key brands are Websphere middleware, Rational tools, Information Management databases, Tivoli systems management and security, and Lotus groupware.

These all grew 21 per cent to nearly $4bn during the second quarter and, as The Reg calculates, profit margins for these five products at just over 80 per cent.

In other words: IBM's making almost pure profit on software.

This all comes after IBM pulled off the greatest sleight of hand in computing history: going from near total reliance on the mainframe and hardware - spectacularly unloading the PC business in 2005 for $1.75bn. No wonder the world's largest PC marker Hewlett-Packard, which likes to maintains it's also the sixth largest software company, is jealous and is dithering about its own future now the world's love of the PC is moving to smart phones.

IBM bought wholesale three of those brands behind its success - Rational, Tivoli and Lotus.

But acquisition isn't the whole story, and there's a big difference between ownership and turning these brands into a success.

Mike O'Rourke, Rational's vice president of strategy and product management, pointed out to us in a recent interview just how much both his particular division and IBM's culture has changed during the last 10 years. IBM paid $2.1bn for the Rational modeling and tools business in 2003 and was understood to have snatched it away from Microsoft, and Rational isn't just something IBM sells.

O'Rourke took over Rational in 2006 when, he says, IBM software delivered just 47 per cent of new and maintenance versions of products on time; today it's 95 per cent.

"In 2003 Rational was an individual tools team, a products team - that worked great, as open source wasn't really around and Agile was not a big movement," he told The Reg. "But there's been a lot of effort and energy to change - to become more team and organization based."

O'Rourke credits a mandate from IBM's uberhead of software Steve Mills in 2006 to adopted Agile software development practices internally as a turning point.

Human touch

IBM had used the waterfall development process with software betas sent out to collect feedback; in a Rational unit of 25,000 people and 80 products and meant just a small number of issues and bugs could be tackled.

Under Mills' Agile edict: "We made it so as if you change requirements everybody in the team knows it; we got metrics and measures that say when you change too late in the process it creates unstable code. Project managers can know when requirements are changed... we made it so that if I'm getting stake-holder back sooner I'm getting the precision sooner in the end it comes to prod management as a human disciple."

The change in IBM's operation and its culture is palpable for O'Rourke, who's on his second tour of duty with IBM.

O'Rourke was with Tivoli when IBM bought it in 1996 for $743m. He left around the time of the dot-com boom in 1999 and was sucked back in again when IBM bought his next company, BuildForge that was added to Rational, in 2006.

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