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IBM Becoming First Responder

The details of IBM's second quarter earnings report may reflect IBM's near-term future more than its long-term prospects. Sister-site CNET has a summary of the top-line numbers, highlighted by strong margin and earnings growth despite overall lower revenue than in Q2 2008. Revenue was $23.3 billion, a 13 percent decline (7 percent decline in constant currency terms), but diluted earnings were $2.32 per share, up 18 percent, net income rose by 12 percent to $3.1 billion, and net margins rose three points to 13.3 percent. IBM also raised full-year 2009 EPS expectations to "at least $9.70 from $9.20."

Analysts have noted that IBM's strong showing was chiefly the result of a strategic shift to more profitable lines of business, principally software and services. BusinessWeek's Steve Hamm summed up this thinking thus:

Under CEO Sam Palmisano, IBM is operating very well under miserable business conditions, and his decision to jettison less-profitable divisions in the past half-decade at a time when rivals were adding heft in several areas is paying off.
Here's the problem with this version of events: not even all aspects of either its software or services businesses did well (or held up well given economic conditions). The ones that did -- middleware and strategic outsourcing -- show the extent to which IBM is seen by customers more as an emergency first responder than a long-term care provider (to stretch an analogy).

Even within the middleware division, the lines of business that did well (Websphere, Rational, Tivoli) can help customers do more with what they already have. Websphere is a connector of other systems, Rational helps developers create software in-house, and Tivoli helps administrators manage the systems they already have. None of this is terribly exciting or forward-looking. It's hunker-down software.

IBM should also take note that, while collaboration and social networking is all the rage, revenues from its Lotus division fell by 14 percent (8 percent in constant currency), the absolute worst performance in its software segment. Yes, the collaboration and social networking flavors of the months are by-and-large untested, free, and deemed not serious by some serious people. But no one, not even serious people, think collaboration and social networking won't be an important part of business going forward. At best, IBM will have some very serious catching up to do, and these results show that IBM's customers aren't enamored of IBM's view of collaboration and social networking.

Within the services division, which is supposedly emblematic of the genius of Palmisano's visionary leadership, strategic outsourcing and business transformation outsourcing (BTO) grouped together saw signings increase by 3 percent, but that was entirely thanks to the strategic outsourcing part of the business, which rose by 38 percent in constant currency terms; BTO revenues fell by a whopping 32 percent. By IBM's own definitions of those divisions, strategic outsourcing is about cutting costs by using IBM's cloud computing infrastructure, whereas BTO initiatives "go beyond the limited role of trimming costs and make outsourcing a strategic element in business transformation."

In other words, the short-term business of selling band-aids and performing battlefield amputations did well, whereas long-term convalescent care and wellness planning didn't. This doesn't augur well for when the economy recovers and customers start looking for growth. Will they entrust their recovery to the same company they turned to when their survival was at stake? You would think they'd be grateful (or convinced of IBM's capabilities). But maybe not -- after all, England didn't find Winston Churchill so much to their liking once WWII was over either.

[Image source: Kansir via Flickr]

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