IBM Takes On HP For The Midmarket

Speaking exclusively to VARBusiness earlier this month at PartnerWorld in St. Louis, Palmisano laid out a strategic vision that calls on partners to help IBM carve a bigger share of the midmarket—companies with 100 to 999 employees—and drive new opportunities around technology areas such as collaboration, virtualization, service-oriented architecture (SOA), blades and consulting services.

"We're investing heavily to boost our midmarket business through partners," he said. "We're pushing our territory sales model, our Express offerings, ISV partner applications. We're going to need partners to do it all in this space. It goes way beyond the role of a distributor or fulfiller of product."

During his keynote at the event (the first in three years), a gracious Palmisano thanked partners for their contribution to IBM's success in 2006, when the company posted record profits, earnings per share and margins larger than they have been in a decade, he said.

Palmisano issued one caveat, though: U.S.-based sales were not up to par when compared with a flourishing international business in 2006, though he did note the company's leapfrogging of HP in the storage market, to the No. 2 spot behind market dynamo EMC.

At the end of the day, however, Palmisano said success is about profit. And sustaining profitability means expanding IBM's footprint below the enterprise watermark.

"Everyone loves to obsess on revenue, but profits and cash flow at the end of the day are what sustains," he said, noting that IBM's profit pie is better balanced across its segments today than in previous years, with 40 percent coming from software, 37 percent from services and 23 percent from systems and financing.

In the only interview granted to U.S. press at PartnerWorld, Palmisano told VARBusiness that IBM values the global midmarket at close to $500 billion, and it's growing at 6.5 percent annually. In the next three years, IBM's midmarket sales are poised to surpass its financial services business, which has been Big Blue's leading revenue generator for the past 50 years, he said.

Today, about half of IBM's midmarket sales go through partners, Palmisano said, and the company is aiming to increase that percentage through its existing channel and by recruiting new partners to the fold.

All this means taking on HP, which has proven a formidable foe. "It's a strong task, because HP is the incumbent here [in the midmarket]," Palmisano told VARBusiness. "But you can't assume it will just remain that way."

Palmisano's contention is that the midmarket customer has the same IT solution needs as companies in the enterprise space, where he says IBM is the "undisputed leader."

"They want what the large guys want," he said, prior to his keynote. "If we can give them that, and use partners as the conduit, we'll get there [with respect to HP]."

This might not be such an easy task, particularly when it comes to wooing away partners that sell HP to the midmarket. HP CEO Mark Hurd hasn't been shy in asserting that he perceives IBM as vulnerable there. For partners, in many respects, reticence to cast their lot with IBM is more perception than anything else; they view IBM as too difficult to navigate or too focused on the enterprise.

NEXT: Three keys to IBM's strategy.

Take Advanced Technology Solutions (ATEC Group), a VAR that sells HP servers and blades to the midmarket.

"We used to sell IBM, but they were changing direction so many times that it was too confusing," says Tony Rametra, president of Albany, N.Y.-based ATEC, which specializes in selling into the health-care and education markets. "HP is more channel-friendly than IBM; they support us pretty well, and we do a lot of seminars and shows with them."

Last year, ATEC sold about $10 million in HP products alone, and the company is growing at about 20 percent a year overall, Rametra says.

Lenexa, Kan.-based Tallgrass Technologies, another HP VAR, last year saw an increase in HP servers and desktop sales into the midmarket. What's driving the trend?

"Price, quality and their channel partner efforts," says Chris Jones, account executive at Tallgrass. "We're looking to sell blades this year as well."

Blades, in fact, are a key part of IBM's strategy. Palmisano acknowledged that IBM's no longer the lone wolf in the blade space, but he was emphatic that IBM continues to take a lead there. The market, which analysts project to grow to $10 billion by 2010, goes far beyond selling just the servers themselves, he said. Rather, IBM is looking to partners to develop add-on products and solutions.

Palmisano said SOA is another major growth area for partners, driven in large part by customer demand for more flexibility, quicker ROI and shorter cycles of innovation.

Web 2.0 is an emerging space where Palmisano urged partners to get their feet wet. In June, the company is rolling out Lotus Connections, a Web 2.0-like software suite aimed at businesses. It will enable social networking technologies that today's users find in consumer phenomena such as YouTube, MySpace and FaceBook.

"This collaborative need we have as consumers is the same need that corporations have to work together," he said. "It's the same fundamental concept." One partner at the event that does consulting on IBM's collaboration portfolio expressed great optimism about Palmisano's vision, particularly his quest to grab more of the midmarket.

"IBM can make significant inroads in the midmarket, even against HP, from what I've seen," said Mike Nevin, managing director at Alliance Best Practice, a solution provider based in Solihull, England. "They're doing some great collaboration-related work through partners right now."

Interestingly, as Palmisano stood before a screen showing pie charts that break down IBM's many business facets, he took pains to reassure partners that IBM is not morphing itself into a General Electric-like holding company or a private-equity firm. The company is committed to driving innovation, integration and collaboration around IT solutions and making partners central to that. IBM's acquisition strategy will not abate, however; the company will continue on the path of divesting commodity businesses as it did with components, and looking to acquire firms that add strategic value to the portfolio.

"We bought 50 or 60 companies in recent years, and we very well may buy that many more," Palmisano said. He expressed some disappointment, though, that IBM hasn't yet succeeded in finding a more fruitful way to involve partners in the company's massive services arm, but the vendor plans to invest this year in initiatives that bolster hosting and consulting work done by partners.

Solution providers are genuinely pleased with Palmisano's message, hopeful that the midmarket investments will continue.

Logicalis is one of IBM's staunchest partners, but one that has a large HP practice as its legacy and has figured out a way to straddle the midmarket and enterprise worlds. Logicalis took on IBM products and services in 2004 and has grown that portion of its business from $8 million to $336 million in that time, according to Kirk Zaranti, senior vice president of sales at the Bloomfield Hills, Mich.-based solution provider. That represents 38 percent of Logicalis' total revenue, while HP comprises 30 percent.

"The midmarket is 55 percent of our business, and we see a lot of growth in that SMB space," said Zaranti, adding that Logicalis sells IBM's Express offerings and that business is also making headway in specific vertical spaces and other niches. "We've found that one of the benefits of working with IBM is the consistency of its channel program," he said. "It's allowed us to make investments in our business, knowing that the program will get us a certain return."