IBM Losing Favor Among Some CIOs

August 7, 2013, 6:39 PM ET

IBM Losing Favor Among Some CIOs

Clint Boulton

IBM Corp., once viewed as the strongest and most authoritative of technology vendors, is struggling to maintain its standing among customers in a quickly changing market. “Traditionally most CIOs would normally have gone for IBM because you didn’t get fired for hiring IBM,” said Yousuf Khan, CIO of Hult International Business School, which doesn’t use IBM technology. “It was solid, it had enough recognition, credibility and gravitas. You stuck with IBM because like other established players in the services space it was considered a safe bet.” CIOs don’t regard IBM as they once did, according to Mr. Khan. “When the negative news is happening at multiple levels … it will no doubt catch the attention of the CFO, the CEO, and the industry peers in general,” Mr. Khan said. Is that enough to compel CIOs to pause and think twice before they sign a deal with IBM? “Absolutely,” he says.There has been plenty of unsettling news about IBM as of late. On August 7, the premier of the state of Queensland in Australia, Campbell Newman, said he had banned IBM from entering into new contracts with the state until it improved its governance and contracting practices. The company has also been at loggerheadswith state officials in Pennsylvania, Indiana and Texas.

The health of the company’s business is suffering. On August 6, IBM said it would furlough workers in its hardware business, where sales fell 12% during the second quarter. In a report released the same day, Credit Suisse Group AG analyst Kulbinder Garcha downgraded IBM to underperform, telling investors IBM’s existing businesses are “effectively in decline.”

Blame some of the declines on the rise of cloud computing, a market IBM is investing in even as the cloud erodes some of its core businesses. IBM still relies heavily on its mainframes and Unix servers for 34% of its gross profits, but they are  losing ground to x86 commodity machines used for cloud environments, according to Mr. Garcha. He estimated that IBM’s core organic growth will be -1.8% for 2013.

IDC analyst Crawford Del Prete said that IBM’s “Smarter Planet” initiative to improve municipal operations with hardware and software comprises mostly small projects rather than large, revenue-driving deals. He said that while IBM focuses on this Inc. and other cloud vendors are “disrupting them from a bunch of different angles.” He said IBM should buy into more market areas that are growing faster, such as cloud software and analytics. “Growth that really moves the needle is becoming very, very elusive,” Mr. Del Prete said.

IBM spokesperson Edward Barbini declined to comment for this article.

IBM is tackling the cloud challenge, through acquisition and product development. The company in April acquired SoftLayer Technologies Inc. to deliver software over a public cloud. On Tuesday, IBM struck a deal with Google Inc. to build server, networking and storage technology on its Power microprocessor architecture for cloud environments.

CIO sentiment about IBM ranges from frustrated to indifferent. Daniel Petlon, CIO of Enterasys Networks, a Siemens Enterprise Communications GmbH & Co.-owned company, said he uses IBM applications for configuration management, supply chain and expense reporting. But he’s switching to supply chain software from SPS Commerce this year because he said IBM increased the licensing fees on his data integration software after it acquired its maker, Sterling Commerce. “Typically when they acquire a company, they crank the license fees up at the first opportunity they get to do it,” Mr. Petlon said. He said this has made “me cautious about working with them.”

Mike Trzcinski, senior director of information technology at United Orthopedic Group, doesn’t use IBM technology and said he doesn’t really think about the company. But as a technical advisor to the U.S. Air Force a decade ago, he said IBM’s mainframes lived up to their reputation for reliability.

But Greg Fell, the chief strategy officer of startup Crisply, said that IBM was a great partner for him when he served as CIO of Terex Corp. and a manager of IT operations at Ford Motor Co. Mr. Fell, who used IBM business intelligence software at Terex and IBM servers at Ford, said he would work with IBM again because it never seemed to try “throw sales guys at him” to sell what they can like other vendors do. “IBM plays the long game,” Mr. Fell said. “I wouldn’t discount them from being successful.”  He said IBM has dodged the innovator’s dilemma for years with continued innovation.

At Hult, Mr. Khan said that although he doesn’t use IBM technology the negativity swirling around the company is disturbing to CIOs who require stability in their business partners. “That puts the CIO in a difficult situation,” Mr. Khan said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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