More Legacy Vendor Turmoil–IBM Drops Profit Target, Reality Bites

Author

Ben Kepes, Contributor

October 22, 2014

Seemingly on a daily basis we get another example of how tectonic shifts in the technology world are impacting on vendors. Yesterday it was the news that, counter-intuitively, increased sales of its cloud products look set to hurt SAP’s 2014 profit levels. In guidance SAP said it now expects that it will see a 2014 operating profit of 5.6 billion to 5.8 billion euros, down from 5.8-6.0 billion euros previously estimated.

The last weeks have seen big announcements of legacy vendors taking other actions in order to regain competitiveness – eBay, HP and Symantec all planning on splitting their organizations.

And today it is the turn of Big Blue. IBM announced on its third quarter earnings call that it will no longer be gunning for its oft-stated $20 earnings per share target. This is a big deal since it was an aspirational goal set back in 2012 by previous IBM CEO Sam Palmisano. Back then the cloud revolution had begun, but hadn’t gathered the sort of steam that we see it take on today. Witness the poor performance of IBM services and software areas – arguably potential candidates for high-performance. From the release:

Pre-tax income from Global Technology Services decreased 11 percent and pre-tax margin decreased to 17.7 percent.  Global Business Services pre-tax income decreased 15 percent and pre-tax margin decreased to 17.5 percent

Like so many other legacy vendors, IBM is trying to chart a course that sees it go from big, bulky, monolithic solutions to dis-aggregated ones. Whereas its traditional revenue has seen tightly coupled hardware and software backed with big maintenance contracts, today’s world sees enterprises mix and match – a bit of commodity hardware here, some open source software there and perhaps some consulting services to tie it all together, but not to the extent that IBM is used to.

It’s the same issue that companies like HP, Cisco, EMC and so many others face on a day to day basis and, frankly, it’s a problem that isn’t going away – this is the “new normal” for technology vendors.

The existential question here is whether these vendors actually have the ability to change or are they locked into a business model that simply won’t allow them to complete. IBM and its ilk have cash reserves and momentum, but as we’ve seen so many times before, the rise of cloud, big data and flexible solutions is inexorable. There’s plenty more pain coming for these vendors.

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