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Indirect proposition: Inside IBM UK software supremo's profit plan

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Customers are thinking twice about the need to purchase a license for a piece of software. Instead, they realise they can rent time on or outsource the job to a service provider's servers instead, or they can virtualise the software on their own high-density servers.

A byproduct of cloud is that customers’ expectations are becoming more pronounced when it comes to actually buying new software. They expect ROI in six to 12 months, not two to three years as they did in the past, Smith said.

In IBM's recent third quarter results, Software Group worldwide made $5.8bn while its sales grew – albeit modestly, by one per cent.

But, still, software did do better than hardware and services: hardware fell a whopping 17 per cent and services was down four per cent

The biggest sellers in the software group were Rational developer tools and something IBM is calling Social Workforce Solutions, which includes Lotus - up 12 and 14 per cent. Information management (DB2, Informix and BI tools), and Tivoli systems management grew two per cent respectively.

But what of the WebSphere middleware portfolio – home of the app server? This was the toast of enterprise sales during the 2000s. Now it's the biggest loser, with no growth at all during the third quarter.

Compare that to early 2004, the heyday of the battle of the Java application servers and middleware. Back then, WebSphere revenue was growing by 24 per cent a quarter.

And remember that one per cent Q3 growth for Software Group that was reported late last year? Back in 2004, WebSphere’s income helped the software group hit quarterly growth of 11 per cent to $3.5bn.

“I’d be fooling you and everyone else if I didn’t say it wasn’t more of a challenge in this current environment - you have to work an awful lot harder on articulating a business proposition” - Stephen Smith

IBM is making some money from cloud, but not much from what we can see.

IBM doesn’t break out revenue from its cloud business but in the third quarter said cloud revenue grew 70 per cent to “more” than $1bn. Of this, $460bn was delivered “as a service” - meaning from IBM’s own Smart Cloud with the rest of the money, we assume, coming from sale of IBM software, hardware and services to help others set up and run their own clouds.

“I’d be fooling you and everyone else if I didn’t say it wasn’t more of a challenge in this current environment - you have to work an awful lot harder on articulating a business proposition,” Smith told us just before the Q3 results were announced.

“ROI is more aggressive, but it it’s something we relish. You have to work that harder, it’s so competitive out there now. It’s driven by economic factors and the rate and pace of change is so fast,” Smith said.

The answer for IBM’s challenge is to reach a broader market by selling more software through partners.

Smith told The Reg he’s shifted resources away from face-to-face and direct sales to third parties to achieve scale. His goal is to sign up more partners in 2014.

“It’s where I see the growth coming from and what the market is demanding as we look to branch into non and less traditional IBM areas,” he said. “Traditionally, software has been a very high touch face to face approach that we have relied on... we are now looking to go to market with our partners.”

“We don’t have the scale to deal with the amount of demand there is. A key part of strategy from a 2015 perspective in the UK is to extend out through the ecosystem system and market he challenge, the ISVs, the resellers a key part of what we are drying to drive.”

He said sales have been re-tooled, with the software group in the UK and Ireland hiring and training the “right” kind of salespeople.

IBM has been laying off staff - 6,000 have gone globally since 2009 and 300 from the UK and Ireland last year as part of cost cutting and restructuring.

Smith wouldn’t comment on plans in the UK and Ireland for further layoffs, but did claim his sales team was growing.

He said his team has been hiring, while IBM is looking at more training, so sales can make “a more complex value proposition” rather than “traditional product based sales".

He added: “What you are seeing in IBM it’s fair to say is a rebalancing in terms of the skills to respond to the market opportunities. We are making huge investments in people.”

Smith and his team in the UK and Ireland now have 12 months left to see whether the strategy of partners and a smarter workforce pays off. ®

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