Thursday, May 30, 2024

IBM’s Reorganization: Bad News for Oracle

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One of the under-covered items from last week is that IBM quietly did what may, in hindsight, be the biggest change since their restructuring in the early 90s: The Software Group, under the direction of Steve Mills, will now control Hardware.

This potentially addresses one of the long-standing problems in IBM, one that goes back to when Software and Hardware were separated.This organizational change makes IBM into a new company, more closely aligned to what Oracle is building — but decades more advanced.

IBM Could Have Been a Better Apple

Years ago I deeply researched IBM’s struggles in the 1980s and early 1990s and the key trigger event that began the struggle was the consent decree that IBM signed decades earlier that separated hardware and software.This put in place policies and practices that over time made IBM less efficient. When the software and hardware units were separated it started the trend to create separate independent businesses under a corporate umbrella.

These separate businesses increasingly focused on each other and many of the avoidable problems that resulted in IBM’s near failure in the early 1990s can be traced back to internal conflicts that prevented IBM from seeing or reacting to them in a timely nature.

One of the most visible failures that resulted was OS/2, which initially was co-created with Microsoft and then failed to successfully compete against Windows.One of the primary reasons OS/2 failed was because IBM hardware units at that time were more closely aligned with Microsoft than they were their own software organization.

The resulting internal conflict had IBM fighting with itself more effectively than it could with Microsoft. The reason was that hardware took much of the competitive cost from the battle while Software, if OS/2 was successful, would have received most of the financial benefit.In other words, it wasn’t the management of the groups that crippled IBM in the fight, it was the structure of the company.

If OS/2 had been done as a company effort it could have been much more successful than the MacOS because it would have had the enterprise support that Apple lacks. And IBM might not have had to exit the PC business.

Last decade IBM resurged under Sam Palmisano and became one of the most powerful companies in tech but still far from their one time dominance.With this latest change they appear to be not only correcting a past mistake but improving on the model that drove their initial success.

Building a Better Apple

Apple, however, is still a hardware company and it is hardware design that appears to drive the firm, and software is subordinated to that hardware.This is a structure similar to the way it was in the 1970s when IBM was still peaking and Apple was conceived.

However, software, as we have seen from companies like Oracle and Microsoft, has become a much bigger differentiator and, even if you look at products like the Apple iPad and iPhone, it is the software side of them that really provides the most value.

If you were going to build a company this century you’d likely start with software and back into hardware. The software side is where most of the value would be.IBM appears to have picked something that most seem to have missed. That is that their original model of a more tightly integrated company is the more successful one and they want to take back from Apple the leadership position on it by updating that model for a software-driven world.

While IBM is clearly in a different space than Apple is initially (but that could change) the end result is that this reorganization could allow them most of the benefits Apple enjoys — but make IBM more aligned with where the value is today than in the 1970s.

In short, the new IBM could be better than both the original IBM and the new Apple.It goes without saying that to reach this potential good execution is critical.

The New IBM Could Challenge a Weakened Oracle

The result of this new organizational structure is one that more closely matches what Oracle is building with their Sun acquisition. But instead of having to merge two companies (one in serious trouble) with vastly different cultures, IBM is effectively merging two very similar and relatively successful firms under single management.

In short, even though they started this process long after Oracle did, their degree of difficulty is vastly lower and no one is questioning IBM’s ability to stay in the hardware business like they are Oracle’s.It is, after all, IBM’s historic core business.

With speculation that Oracle might buy up most of the independent Open Source companies — which would have crippled IBM had they not made this change — IBM is now positioned to challenge Oracle on every front with what should be a better integrated and more mature blended offering.

This isn’t saying that the fight will be easy. Larry Ellison and his team are powerful competitors. But it puts IBM in a position to act offensively and more aggressively than otherwise would have been the case.

In addition, if Oracle’s effort fails, it makes IBM the potentially greatest beneficiary of that failure.And given how badly Sun was crippled by the acquisition process and the fact that mergers like the one Oracle is attempting generally fail, this could turn out to be a huge eventual benefit for IBM and a major problem for Oracle.

Could the New IBM Rival the Old?

Before this organizational change the chance of this happening was very remote. With the change it becomes possible, though still far from certain.

The world is vastly different than it was in IBM’s youth. Yet Google and Cisco are reminders that market power is fluid and that taking chances often pays off with unexpected success.

Putting software ahead of hardware will dramatically change relationships with companies like Microsoft, put traditional competitors like HP and Dell who don’t have heavy software units on notice, and even suggest to Apple that they may have it backwards this century.

It will change IBM, not into the company they were, but potentially into the company they should be.As a result this week they are closer to reaching their true potential than they have been in decades.

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