IBM Spinning Off Infrastructure Managed Services Group To Focus On Cloud Is A Good Move

By Patrick Moorhead - October 27, 2020

IBM has been making a flurry of improvements to position the company to better take advantage of the cloud opportunity.  In the past year, IBM acquired Red Hat, deeply integrated many of its products, and installed new CEO Arvind Krishna and President Jim Whitehurst. The company isn't done. Yesterday, IBM announced that it will spin out its Managed Infrastructure Services unit of its Global Technology Services division into a new public company that it is calling "NewCo" for now. Net-net, I believe this move will better position the "new IBM" for a cloud future defined by hybrid and multi-cloud, AI, and quantum computing. 

The news

IBM announced it would execute a tax-free spin-off of the Managed Infrastructure Services business of its Global Technology Services segment called "NewCo". NewCo will focus on IT infra modernization, service delivery excellence, operation efficiency, and cash flow generation. Factually, this makes NewCo the #1 market share managed infra company at $19B annual revenue with a $60B backlog that employs 90,000 working on 46,000 customers in 115 countries. 

What I'll call the "new IBM" is designed to attack the hybrid cloud better and will focus on technology and platform innovation, digital transformations, and higher growth opportunities.  This includes the current businesses: Cloud & Cognitive Software, Global Business Services, Systems, and Global Financing segments, and the IBM Public Cloud and TSS businesses of Global Technology Services segment.

The new IBM will have zero ownership in NewCo, a clean break.

Why this is good for IBM and its customers

Before I founded Moor Insights & Strategy, I served as an executive for numerous technology companies. What I learned through experience is that "gear design" matters for a company. By this, I mean that across the company, gears need to lock together well and not be of too many different shapes and sizes or you get grinding gears or a complete shutdown. This gear design dictates the speed, velocity, and what employees work on. It even dictates the kind of employees you hire. The fact is that the managed infrastructure market and cloud market have a very different gear design.   

As we have seen from companies like Amazon's AWS, the cloud market focuses on quickly cranking out new product and features across mostly homogeneous infrastructures. Managed infra services is very people-heavy, less "new" product and feature-oriented across a very heterogeneous infrastructure. Those services customers don't appreciate the churn and change as much.  

This is not to say managed infra services customers don't want improvements- they do, but they want a different set of innovations at a different pace. These customers would prefer automation of what they currently have and lower costs and efficiency versus and the next container feature or quantum breakthrough to drive ever-changing business models. I think the managed infra service customers will embrace this move as I don’t think they weren't feeling the right level of “love" when it came to priority investments. As I said with "gear design," NewCo will have a singular focus and I think it will better serve its customers.

This enables the new IBM to focus on the massive $1T opportunity that includes pure cloud infrastructure, software, and services. Don't make a mistake and think that "cloud" only means the public cloud. Everyone agrees that "cloud" encompasses the hybrid cloud that spans public and on-premise private cloud. Only 25% of enterprise data is in the public cloud which leaves 75% of it on-premise in traditional infrastructure and a bit of private cloud. Amazon’s AWS, Google Cloud, Microsoft Azure and Oracle all believe the hybrid cloud is the future which is why they, like IBM, are going after this space. 

With the Red Hat acquisition and integration, I believe IBM has its best chance ever to successfully service the hybrid cloud, especially in regulated industries and vertical clouds. The company is trusted by enterprises, has always had deep vertical expertise, has differentiated infrastructure with Z, POWER, and Quantum, has a leading-edge cloud platform with Red Hat and now has a singular focus- the hybrid cloud. I really like this move.   

My coverage of the new IBM doesn't end here, it's only beginning. Stay tuned.

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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.