IBM and Red Hat – the Elephant dances in to the Bazaar

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Earlier this month IBM closed its $34bn acquisition of Red Hat. A company that already had a significant commitment to open source software, from Eclipse to JanusGraph to Hyperledger and more, has now become, arguably, the largest and most influential open source software vendor. The Elephant has danced in to the Bazaar. I’m mixing my metaphors on purpose. First from Louis V. Gerstner’s book “Who Says Elephants Can’t Dance?” on how he saved the company from extinction in the 90s. It explains how big companies can change course, and quickly. The second from Eric S. Raymond’s “the Cathedral and the Bazaar”, with his contention that the more widely available the source code is for public testing, scrutiny, and experimentation, the more rapidly all forms of bugs will be discovered – contrasting the old model of proprietary, closed group code development in the Cathedral to the Bazaar model of open source software. How is this combination of “Big Blue” and Red Hat going to work? Isn’t it a clash of cultures? Will the sum be more than the two individual parts?

One of my Bloor colleagues was at a recent major software vendor’s annual event where a very senior exec, who we won’t name, suggested this was “Ginni’s last throw of the dice!” (that’s Ginni Rometty, IBM’s CEO since January 2012). Another Bloor colleague wondered whether, at 17 times the cost of their acquisition of Softlayer, would it provide 17 times the value? $34bn is a very big number, a very bold move, and now the acquisition has made its way through the regulators and is really happening. Let me explain that my views are coloured by the fact that I spent the first nine years of my working life at IBM straight out of university and I’ve been operating in the tech space ever since. It was a different time and a different company back then, but maybe not that different. I left when it started to make the wrong moves that resulted in it needing Gerstner. But remember, this is a company that has been around for over a hundred years. A company that invented the hard drive, the floppy disk and Fortran (which happens to be the first programming language I learned as a physicist at Uni). A company that has lived through every information technology disruption. A company that invests heavily in innovation and research, having received a record 9,100 patents in 2018, which was its 26th consecutive year of registering more patents than any other technology firm.

With most other major acquisitions like the PricewaterhouseCoopers IT consulting business or SoftLayer, which at the time was the biggest privately held cloud infrastructure provider, they have been integrated and digested in to the IBM company as quickly as is practical. With Red Hat, which was founded around about the time that Louis Gerstner was first taking on the Elephant, it is taking a different approach.  It is committed to preserving Red Hat’s independence, neutrality, and industry partnerships as well as its culture, which is necessarily very different to the new parent company. More on that later. In terms of operations, Red Hat’s CEO Jim Whitehurst will report directly in to Ginni, and is already being talked about as a potential successor to her. The two organisations will run side by side as separate entities, but there will also be bi-directional flow. Red Hat’s commitment to open source will remain unchanged, but it will have access to more enterprise customers as well the open source communities that IBM operates in. IBM will learn even more about open source and increase its investment, including optimisation of IBM products and open source projects to run on Red Hat products like Red Hat Enterprise Linux and OpenShift.

From my point of view this is win/win for both entities, so the sum will be more than the constituent parts. Over the last few years IBM has been evolving its strategy to major on cloud computing and cognitive computing. Its argument against cloud providers like AWS, Microsoft Azure, and Google Cloud is that only 20% of enterprise workloads have so far moved to the cloud – the easy 20%. The rest are the difficult 80% of workloads that are complex, legacy style applications, often mainframe based, that have been running banking and big business for decades. How do you transform those? That landscape is IBM’s heritage and heartland. It has the enterprise expertise and relationships, that others don’t. IBM has been talking hybrid cloud and multicloud to these customers for a while, and the Red Hat move is like an injection of steroids to the strategy. When you add in its automation and cognitive positioning with Watson, and the real-world success with enterprise grade blockchain implementations like TradeLens and the Food Trust network, I’d argue that IBM is positioning itself as the “Enterprise Cloud Company”. It is embracing an open source, multicloud world without the lock-in of the past. The reality is that any medium or large business today is using many different SaaS solutions, public clouds and private clouds to run their business. IBM has opened up more choices with Red Hat, and it needs to be investing in its multicloud management offerings to capitalise on the opportunities that the enhanced strategy will create.

Also this month (on 16 July) IBM and AT&T announced a multi-year strategic alliance. Under the agreement AT&T will use IBM’s expertise to modernise AT&T Business Solutions’ internal software applications, enabling migrations to the IBM Cloud that will optimise their core operations and modernise their internal business applications to accelerate innovation. The very next day Microsoft and AT&T announced an extensive, multiyear alliance. Microsoft will be the preferred cloud provider for AT&T’s non-network applications. The deal will provide much of AT&T’s workforce with the robust cloud-based productivity and collaboration tools available with Microsoft 365, as well as migrating non-network infrastructure applications to the Microsoft Azure cloud platform. There are other network ingredients to both deals, but these announcements reinforce the importance of the Enterprise multicloud message. My take is that AT&T is choosing IBM as the cloud partner for transforming its core business and applications. In addition, it is choosing Microsoft as its cloud partner for office productivity and related applications. It’s a multicloud world.

A few words on culture (which we know eats strategy for lunch).  Gerstner famously said it “isn’t just one aspect of the game – it is the game”.  IBM has digested a variety of different organisations with different cultures but has kept to core values of building strong, long lasting customer relationships, forward THINKing, and innovation that matters. When it has needed to, like in its 2003 ValuesJam when 50,000 employees joined in a 72 hour global online discussion, it has gone to its employees to define the essence and values of the company. I believe it would be a mistake to do anything different than keeping Red Hat separate, and it should continue with that approach for the foreseeable future. I wouldn’t change Red Hat’s branding to include “An IBM Business” as it has with The Weather Company. The working relationship will evolve. The extra value will happen. There will be cross fertilisation of symbols, stories, rituals and the other ingredients of culture. Ginni and Jim need to let that happen organically rather than forcing change, and the strength of both organisations will continue whilst they work in sync.

We live in a complex, multicloud world. This does feel like a Cloud Computing inflection point where we move on to tackle the difficult 80%, and I believe IBM are well placed for this next phase. It will succeed if it plays to both its own and Red Hat’s strengths separately. It needs to recognise that the game is in organisation and culture – that’s where the value is created, and not product.

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This Post Has One Comment
  1. Interesting article. I’ve been involved to a greater or lesser degree with IBM since the 1970s and I’ve seen it make mistakes, reinvent itself, change, not change fast enough and so on. The point is, that it is still here – and it has delivered fundamental technology to the world (from relational databases to scanning electron microscopy) to a degree that companies like Microsoft can only dream of.

    IBM has been around since the start of business computing and, like the mainframe, gets written out of the story (by interested rivals, mostly) at regular intervals. But, like the mainframe, it is still here and still evolving.

    Of course, we still need the small, agile innovators, but the IT industry has always been good at believing its own hype. I think this quote hits the nail on the head: “only 20% of enterprise workloads have so far moved to the cloud – the easy 20%. The rest are the difficult 80% of workloads that are complex, legacy style applications, often mainframe based, that have been running banking and big business for decades. How do you transform those?”. That 80% is where the economy is, and it is paying for whatever digital transformation we are achieving. Rip and replace is not a viable transformation strategy.

    “Evolution is essential” indeed; but it is pretty important that firms maintain customer service levels and don’t go out of business while evolving. Digital transformation, with high growth rates, isn’t difficult for a small startup with few customers to start with, but the “20%” isn’t running the world’s business… As you imply, when digital transformation initiatives fail, it is mostly due to failures in vision and in managing organisational and cultural change – not because the organisation bought the wrong technology (assuming that it still evaluates new technology as to “fitness for purpose”, rather than just buying whatever new toy has the biggest advertising budget).

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