RETRENCHMENT, NOT RETREAT AT IBM

January 26, 2001

COMMERCIAL NEWS

Somers, NY, — Barnaby J. Feder reported for The NY Times: What do you get if you give thousands of employees sophisticated technology, plenty of money, experienced marketing support and access to corporate and institutional customers in every corner of the planet? For the managers in charge of business software sales for IBM in the 1990’s, the answer was pretty embarrassing.

“We were offering hundreds of applications, spending close to a billion dollars a year, getting 5 percent to 10 percent market share and not making much money,” said Robert C. Timpson, general manager of IBM’s relations with outside software developers.

Finally, in the spring of 1999, IBM concluded that enough was enough. Since then, it has killed off or sold 90 percent of its business software portfolio. But no one at the company’s campus here viewed the retrenchment as a retreat.

Quite the contrary, the retrenchment cleared the decks to pursue growth through strategic alliances, a path Louis V. Gerstner Jr., IBM’s chief executive, had preached since 1995. Mr. Timpson’s group immediately set out to bring together a wide range of IBM product and service divisions to negotiate collectively with leading independent software companies.

It was an appealing project for Mr. Timpson, a 54-year-old Manhattan native who joined IBM shortly after graduating from Harvard University in 1967 and, contrary to his initial expectations, never left. A career that began with riding around Harlem with New York police officers to figure out what IBM equipment they could use had taken him to the far corners of the world – his most recent post involved overseeing 24,000 employees and all of IBM’s business in Asia.

“Now we are in a culture where it’s more important to be fast than perfect,” he said. “You have to be willing to let things go to outsiders.”

The fervor for the new approach has allowed IBM to forge 50 strategic partnerships in just over a year with various business software specialists, starting with Siebel Systems, the fastest growing vendor of programs that help businesses track and manage their relations with customers.

IBM says the alliances added $700 million last year to sales of hardware, services, database programs and middleware (a layer of software that links and manages large portfolios of software or diverse computer systems.) In public statements, IBM says it expects the partnerships already on board to funnel an extra $10 billion annually its way by 2003.

“Our internal goal is higher – and rising,” Mr. Timpson said last week.

Analysts say the strategic alliance program is too new to be having a visible effect on IBM’s market share in its battles with rivals like Sun Microsystems in server computers, Oracle in databases and BEA Systems in middleware for companies shifting large parts of their business to the Internet. But it has their attention.

“It’s got some traction and it’s got some teeth,” said John Madden, an analyst at Summit Strategies, an information technology research company in Boston.

The initiative by IBM provides insights into the challenges of competing in the software industry and forming strategic alliances. But it is doubly intriguing as a case study of playing catch-up in corporate America.

For much of its history, IBM thought that it best served customers, and its own profits, by offering ever more complete packages of products and services. Indeed, the plunge into business applications software in the early 1990’s resulted directly from the desire of IBM sales groups to offer one-stop shopping for big customers trying to use their computers to automate an expanding range of business tasks.

As a result, only 5 percent of IBM sales outside of personal computers were attributed to corporate partnerships in 1993, the year Mr. Gerstner arrived.

Today, more than a third of revenue flows from nearly 100,000 alliances of varying intensity. More impressive than the numbers, experts say, is the expertise that IBM managers have gained in making the alliances work.

“It’s a well-oiled machine,” said Peter Pekar Jr., an alliance specialist who recently worked with Lucent Technologies in negotiations to set up agreements with I.B.M, EMC and Sun Microsystems to work together on standards for high-speed data transfer products and services.

“They knew every pitfall of putting alliances together, which wasn’t the case 10, or even 5 years ago,” he said.

Indeed, IBM, long a laggard, has now become a leader, experts say, in a sector that has become notorious for its less-than-rigorous approach to cooperative ventures. Too often, they say, information-technology companies do little more than issue vague statements of intent, all the while failing to commit resources or management time to the project.

“We call them fruit fly alliances because they are gone in a minute,” said William T. Lundberg, executive director of the Association of Strategic Alliance Professionals, a two- year-old trade group.

IBM alliances are the product of weeks, sometimes months, of market analysis and negotiation of what each company will do to meet specific sales targets over a three-year period. The company has about 40 steps that precede reaching an agreement, from identifying a partner’s strengths and weaknesses to making sure that a senior executive in an IBM business group is on board as an internal sponsor.

A chart in the conference room near Mr. Timpson’s office identifies another 80 steps or so that are crucial to making the agreement work once it is signed. Eventually, Mr. Timpson said, there could be hundreds of the alliances since I.B.M is working systematically to fill in every market segment on a giant “solutions map,” an elaborate grid that breaks down the world by industry, type of business problem the software addresses and whether or not the customer is a large company.

The grid is also chopped up geographically into four regions and, in some segments, by the type of computer system running the software.

A common hurdle during negotiations is the resistance of many partners to being pigeonholed into a market segment that suits IBM’s strategic vision. “Tom Siebel will tell you he’s the only partner IBM needs,” Mr. Timpson said with a laugh, referring to the founder and chief executive of Siebel Systems.

Even after they sign on, vendors continue to jockey for a bigger piece of the pie. Take Synquest, an Atlanta- based company that IBM singled out as a leader in supply-chain management software for midsize industrial companies. Synquest, which counts the Ford Motor Company among its customers, wanted to include larger companies in the deal, but IBM insisted that such an extension would undermine another alliance with i2 Technologies to sell supply-chain products and services to the larger companies.

“We feel our value proposition is better than i2’s, and we want IBM to have a shot at learning that,” said Chris Jones, the Synquest executive who negotiated the agreement. But while IBM stuck with i2, it made concessions, too, including backing off its initial request that Synquest quickly adapt all of its applications to IBM’s DB2 database.

“That would have taken all of our development resources,” Mr. Jones said. “We wouldn’t have been able to work on any upgrades.”

The IBM-Siebel pact illustrates the benefits for both sides. Before the alliance, Siebel software packages were not sold along with IBM databases. Last year, 45 percent of them were. In addition to the $40 million joint marketing budget and joint work on developing new products, more than 5,000 IBM global services representatives were trained to work with Siebel.

“There isn’t a software company in the world that can’t benefit from IBM,” said Steve Garnett, Siebel’s vice president for alliances.

Not everyone sees it that way, of course. Some newcomers are growing so fast they see no need to join forces with IBM, Mr. Timpson said.

At the other end of the spectrum, some longtime partners like J. D. Edwards & Company, the Denver- based systems integration and software company, have bound themselves so tightly to IBM over the years that figuring out new areas for growth via the strategic alliance pacts is, Mr. Timpson said, “one of the more interesting problems.”

The two companies are talking; J. D. Edwards says the signing of some sort of strategic alliance will be a “natural evolution” in the companies’ 23-year relationship.

Then there is Oracle, IBM’s fiercest rival on the database turf. Facing a maturing database market, Oracle opted several years ago to try to grow faster by developing its own business software products in virtually every area where IBM is now matching up with a partner. And it is pitching them as a cheaper alternative because they have been designed from the outset to be used with one another. Oracle argues that IBM’s mix-and-match approach results in far higher operating and maintenance costs.

Oracle risks, of course, irritating countless innovative independent software companies by competing with them. As IBM found out in the 1990’s, betting against the skills of so many players in a rapidly changing environment does not leave much room for error.

IBM acknowledges that it is too soon to be sure that it has a much better answer with its full-bore thrust into alliances, which could lead to plenty of conflicts of its own as markets evolve. But with the alliance culture now taking root in the company, Mr. Timpson is pushing to accelerate its expansion.

The next step: a program he calls Alliances Light that encourages IBM managers in regions where a local software vendor is prominent, say banking in Thailand, to negotiate local alliance agreements in line with a template provided by his office.

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