IBM in the software era: Big Blue man gives HP a seminar
From atop vast pile of cash
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.
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.
Hardware company with a problem
O'Rourke recalls of the late 1990s IBM was a "hardware company with a software problem" while there was company infighting. At his first company conference following the Tivoli deal O'Rourke reckons he wasn't allowed to show off his company's software product because it was running on a Toshiba laptop instead of the standard issue IBM machine.
Joining IBM again in 2006, O'Rourke says felt "much better" as it had made the change from a big monolithic company into a software and services company. He served as vice president of Rational between 2006 and 2010, and was actually charged with executing Mills' Agile mandate and coming up with metrics to measure the results.
Rational isn't just something IBM uses internally, it sells Rational too and IBM has come up against the challenges of Agile and open source.
Ten-years ago this month IBM helped create Eclipse, the Java and C++ open-source IDE effort. A decade on, IBM remains the Eclipse Foundation's single biggest contributor, with 40 salaried committers at Rational. IBM is also arguably one of the largest beneficiaries of Eclipse, with Rational based on it. Eclipse, though, is also a major competitor to paid-for tools just like Rational thanks to the fact it's an open-source project and the code is free and open to anybody who wants to use it.
IBM's man calls the challenge posed by Eclipse "our whole proposition for our IDE." That proposition apparently involves two things. Taking Eclipse "from and individual to a team product tool" through the addition for 64 plug-ins over IBM's RAD software and also added value in team collaboration and metrics though things like Telelogic, bought by IBM in 2007.
"Eclipse as a technology has some fantastic capabilities but they are basic because they are geared to being generic for everybody," O'Rourke says. "Eclipse gives you lot - a lot of developers use basic Eclipse in small teams and companies, but if you want to build mission critical systems in an airline, like bank or missile guidance system, you need Rational." Telelogic's customers were in these very sectors.
He adds while Rational can't beat open-source Eclipse on price, IBM can step in as organizations "get more accountable for their software."
While IBM remains committed to Eclipse it sounds like the giant is attempting to move on into new areas with Jazz , announced in 2008.
Like Eclipse, Jazz is a platform, only it's been built to be collaborative from the ground up with things already built into its DNA such as server-based code and defect tracking. Eclipse started as an version of the IDE concept for personal productivity. O'Rourke claimed 60 per cent of the Rational unit's business comes from Jazz. Eclipse was a product of its age, when tools companies claimed they could make the individual developer more productive in sitting in their PC cockpit.
"The story of Jazz was we took the people who invented Eclipse and asked how would you make this work for a team," O'Rourke said.
IBM's transition into a successful software company hasn't come simply from inheriting other companies' franchises. The giant's had to change its culture and become more nimble internally in response to some of the very trends - Agile and open source - that it's helped encourage and people generally applaud.
As part of the agonizing over its future, HP's been adding to its growing collection of software company scalps: Autonomy was the latest.
O'Rourke, the IBM insider, turned outsider, turned insider again, has some simple advice for HP when it comes to making it big in software. "HP has to learn something as IBM did. They have to decide what business they want to be in...their problem will be overcoming the internal issues." ®