LiteBytes from Lustratus Research

IBM 1Q09 results implications

When I posted last week on looking ahead to the IBM first quarter results, I put my head on the block by stating that I felt the results would hold up pretty well. The formal results were announced yesterday, and I am pleased to say I live to look into my crystal ball another day, at least when discounting the effects of swinging currency markets.

Firstly, I had suggested that the IBM services arm would probably benefit from users wanting to cut costs and looking for help to do it. In fact, IBM claims that overall signings were up 10% at constant currency, and up 27% in the larger projects category. This bodes well for future revenue recognition as these projects flow through. I had also pointed to the desire for quick hit benefitsdriving the IBM WebSphere-based SOA offerings such as BPM, and indeed while overall IBM software was down 6% (up 2% at constant currency), WebSphere revenues grew 5% (14% at constant currency). My forecast was that hardware would take a bit of a hit, but that this shouldn;t damage the overall numbers too much. Once again this seems to be borne out in the IBM announcements, pointing to a 23% drop (18% at constant currency) of its Systems and Technology segment where the hardware products live. However, overall this had little adverse impact on IBM's overall figures as predicted because IBM has swung its business model much more heavily in favour of software and services now. 

Looking ahead, these results can only be good news for IBM, even though revenue at common currency was down 4%. From a global market perspective this should also prove encouraging to other IT vendors, particularly those with investments in the high-growth enterprise middleware area and those providing advisory professional services. However, companies reliant on hardware revenues will probably suffer most. 

The final interesting point was that IBM claims it is sitting on $12B cash in hand....I wonder what it plans to do with all that money at a time when assets are cheap and it has just missed out on SUN....

Steve 

What software buyers are looking for in 2009

With the global downturn in full swing, there are a lot of concerns over how software markets will perfom. However, one trend is emerging as a vital ingredient if software companies are to succeed, and those companies that have recognized it are already benefiting.

Software buyers in 2009 are finding an industry vertical specialization to be essential to support any investment justification. The problem for many users is that although the technologies and products available offer the same sorts of benefits as before, in order to get any purchase through the system it has become critical to have a strong business backing all the way. Nothing will move if a business sponsor is not pushing for it. Of course, investments have always had to be justified, and a business alignment is a key part of this process, but in the economic downturn this focus has moved from being part of the justification to being the overriding element. A business sponsor has to be brought on board right at the beginning if the particular project has any chance of success.

As a result, companies that do more than pay lip-service to describing business benefits are prospering. The software vendors that offer truly vertical solutions, tuned for particular industry needs and taken to market by field teams with the relevant industry domain knowledge, are the ones that are succeeding. One proof point is Pegasystems, who I blogged about a few days ago. Onereason that Pegasystems has maintained such strong growth in 2008 with its BPM offerings is a strong industry vertical sensitivity. 

Another excellent example is IBMand in particular its Information Management division. Information Management software is regarded as unsexy - although still important, it has tended to be neglected in the rush towards application-oriented strategies and initiatives. Enter a new IBM management team that has restructured the go-to-market approach for Information Management software to an industry-vertical one, generating models of particular industry challenges and processes, looking at the specific needs of these industries and carrying the industry-vertical business messages to prospective buyers. Whether serendipitous or the result of impressiveexecutive insight, this approach has almost exactly dovetailed with the software buyers' needs for a more relevant, industry-related message in order to secure investment. The result is that IBM is claiming significant sales and successes in its information management software business segment, even in the current environment. 

Other software companies would do well to take note. If you want to sell software this year, you have to help your prospective buyers by going to market with clearly aligned business vertical offerings and messages.

Steve   

Pegasystems points the way forward

There is a lot of chatter in the blogosphere at the moment about whether SOA (service-oriented architecture) has run out of steam - whether companies have stopped investing in it, got disillusioned with it or cast it aside for the latest new thing.For me, this is a silly discussion - SOA is about a way of doing things more sensibly, just as structured program was many years ago. It is really all about architecting system design around the concept of a pool of shared services, and cleaning up the linkages between different programs and applications.

So on this basis SOA is not dead, but an active and important architectural underpinning of a number of different initiatives, many of which have been rolled into the 'SOA' term - things like BPM (Business Process Management), SaaS (Software as a Service), Business events management, BAM (Business Activity Monitoring and many others. But has the failing world economy stopped the whole SOA family juggernaut in its tracks anyway?

The answer Lustratus picks up from its clients is a resounding NO. BPM in particular seems to be seen as a powerful way to respond to the needs of operating in an economic recession. Indeed, Lustratus pointed to BPM as a shining light in its forecasts for 2009. Validation of this claim is evident when looking at the performance of Pegasystems a major provider of BPM solutions and technologies. Pegasystems is an important indicator of BPM health because it is one of the few remaining pure-play business process software vendors left. In its recent annual results announcement earlier this month, it showed a revenue increase for 2008 of over 30% to over $200M, and importantly a 50% increase in new license revenue. It is in such good financial shape that it has even just announced a quarterly cash dividend! Admittedly it is only paying 3 cents a share, but in these times this is not to be sneezed at.

Of course, these results in isolation may not be conclusive. After all, the Pegasystems rise in sales might simply indicate it is stealing market share from its rivals. However other big BPM players such as IBM are also claiming strong performance in the segment, so it is much more likely these figures shine a light on the way forward for users as they struggle to do more with less, and get a better level of control and governance over their processes.

Steve

Is the time right for Progress Software to be bought?

In the course of my ongoing analysis of software infrastructure vendors, I was intrigued by the recent earnings release from Progress Software, and it caused me to dig a bit deeper. Basically, Progress is holding its revenue stream although not growing it, and I guess in today's environment that is OK. But when the performance of the company over the last few years is considered, a different picture starts to build up.

Basically, Progress made a lot of money from its OpenEdge database product, and this business is still providing a rich 'cash-cow' revenue stream. However, not only has this stagnated but it is starting to decay, with Q109 showing a sharp drop. Admittedly this is probably in part due to currency movements, but the trend is clear - this is not a growing business ans the writing is on the wall, at least in the longer term. Progress knows this, and so over the past few years it has been on the acquisition trail, trying desperately to find a new business that can grow sufficiently to become the new OpenEdge. It has tried the area of Data, with its DataDirect division growing through acquisition, but this business has reached a steady state with little or no growth. It tried the area of messaging, being the company that brought the term ESB (Enterprise Service Bus) to the world through its SONIC line of business, but having got a great mindshare and market position it lost focus and this business is now fatally damaged, with others such as IBM, Oracle andMicrosoft taking up the mantle. Recently it acquired the APAMA complex event processing business, Actional (SOA management) and IONA (a datedintegration business based in Ireland). It has since found some success with the excellent APAMA offering in the heartland of financial market data processing, but has struggled to replicate this success in other industries and use cases. Actional has also had some success but it is immutably tied to the SOA star which is having its own problems. And IONA, similarly to Progress, has a nice legacy integration business based around Orbix but has failed utterly over the years to create anything else worthwhile.

The result is that although the IONA purchase has increased revenues in the Progress 'integration infrastructure' business unit, this is likely to be a one-off improvement and once again Progress is going to be stuck with an aging cash-cow and no clear rising star to take over responsibility for driving growth.

This might seem a recipe for Progress itself to be acquired. Up to now, this has been unattractive due to the share price, but in thecurrent climate the acquisition looks a lot more interesting. My view is that there are probably two strong candidate acquirers for Progress: 

• Companies looking for attractive maintenance businesses where profit can be maximized by cutting expenses and taking the money until the product line sunsets

• Companies not currently in the integration space but wanting to get into this lucrative area and looking for a ready-made product set (perhaps to underpin a professional services business)

Who knows what will happen in the current turmoil? I may be way off the mark, but if I was a company fitting either of these two categories, and I had the money, I think now would be a good time to strike. After so many false dawns, I suspect the Progress management team might not resist too hard....

Steve

  

The internal market approach to SOA investment

I was reading a blog post from my good friend John Schmidt, Chairman of the Integration Consortium and now with a day job at Informatica, about trying to get funding for integration initiatives (in his case he was focusing on funding for an integration competency centre, a personal hot button), and I was very taken with John's view of using an 'internal free market' approach to getting funding approved.

John points out that while 70% of IT budgets are non-discretionary, just keeping everything running, most companies have at least some budget for investment, but that the problem is the investment portfolio is spread across many different parts of the business, greatly reducing any individual department budget to the point that walking in asking someone for $1M of their own budget is going to be a serious impact to that budget holder. But John advises a creative approach:

So why not look at the portfolio of internal projects in an enterprise as a “market”.  Why not apply some of the concepts that have proven so successful in the free market economy to the internal operations of an organization.  Since everyone needs integration, if you could simply get a good understanding of the demand in the internal market, you could build a business around it.

This made me think of the Lustratus report I wrote recently on justifying integration investment in an economic downturn, by putting a laser-beam focus on ROI. Adding John's internal market approach seems to provide another dimension to the ROI focus I was recommending. In other words, while the ROI paper looks at how to justify operational budget investment for SOA, the same problem that John describes may rear its head, and it may be impossible to find someone to slice their own investment budget even though the business case is strong. But by combining the ROI focus with an internal market business case, success is much more likely. Effectively, the running costs can then be covered by a small chargeback to each project to reflect the improved productivity they will all experience, or whatever other gain each department saw as part if its internal market needs.

Steve

Breaking the SOA logjam

One of the 2008 forecasts in the annual Lustratus look ahead is that SOA decision-marking has become fractured in most companies, with clashes between architects / IT who 'get it', and business-oriented budget holders who don't. In fact, this problem is turning out to be so severe that it is causing SOA adoption to stall at many companies - although enterprise-wide decisions may have been taken to adopt SOA, projects steadfastly refuse to enact this because of the extra costs, at least initially.

The roots of the difficulty here are twofold: understandable cynicism and the need to reach critical mass of SOA deployment before benefits start to show. However, there may be a light on the horizon, as discussed in more detail in the Lustratus Whitepaper, 'Justifying SOA to the Business', available for free from the Lustratus webstore. For business audiences, it may be that the enhanced business visibility offered by SOA could be a compelling benefit to justify the extra investment, and this visibility becomes apparent immediately the project is complete - there is no need to wait for critical mass to be achieved before seeing the benefit.

Hopefully, this angle of attack may succeed in breaking down the SOA adoption log-jam, enabling companies to flow smoothly to widespread SOA adoption.

Steve

Will TIBCO be next on the acquisition block?

So, now that BEA has finally fallen to Oracle, who will be next? My money is on TIBCO.

TIBCO Software has done extremely well since it came into existence from its origin as as Teknekron. Initially an EAI (Enterprise Application Integration) company, it quickly expanded to take on challenges such as Workflow, Business Process Management (BPM) and service-oriented architecture (SOA). More recently it added Business Intelligence and Analysis to its portfolio, strenghtened by the acquisition of Spotfire last year. TIBCO products are well-respected, and it has a strong and loyal customer base.

But with BEA going, and webMethods being taken out by Software AG, it is more or less alone as a pure-play middleware player left. In addition, anyone looking at the results for its 2007 fiscal year (ended Nov 30th 2007) will immediately realize that it is an attractive target. The question isn't really whether TIBCO will be bought, but by whom.

Names being kicked about include all the usual suspects - IBM, Oracle, SAP....but I reckon that HP might snatch the prize. It missed out on BEA, but perhaps on reflection TIBCO is a closer match to its needs.

Steve

Trouble with evaluating SOA ROI

I was trying to think how to get another TLA in that title, since I think you get a prize for having three three-letter-acronyms in a row. However, the topic is definitely getting a lot of attention as companies try to decide whether SOA is worth the effort. The problem is, SOA benefits span a wide range, and are often difficult to assess. And yet, as John Soat notes in Information Week, real customers are showing major gains with SOA.

My take is that it is important to sort benefits into a spectrum of tangibleness (if such a word exists). So, reducing redundancy should have an actual dollar value reduction in maintenance costs - a tangible number. Delivering the agility to deal with new regulations more quickly is difficult to estimate in dollar terms, but could even be a survival issue. Seems to me the key is to find a way to include the full range of elements in any justification or evaluation.

Perhaps one way to add a dollar value benefit on some of the intangible benefits is to ask the executive in charge of the area most affected how much they would be prepared to pay to solve the issue. So, it might be interesting to ask the CFO how much he would invest to ensure the company could comply with new regulations within the assigned deadlines. This, then, becomes a tangible number that can be plugged into the case.

Steve

Proving the value of technology/business alignment

The holy grail for IT management has been to prove that IT investment makes the overall business more successful.  To those of us in the business this makes intuitive sense but can be hard to prove.  Unfortunately, those wishing to believe that IT adds nothing but cost have had a strong hand ever since Nicholas Carr famously kicked the IT industry where it hurts in 2003 in the Harvard Business Review by claiming that IT doesn't matter - backing up his claim with an analysis of business success against IT investment.  (To be fair, Carr argues that it is needed to be competitive but won't give one company a strategic advantage over another - which is a subtle point and one easily missed)

Of course one of the central planks of SOA is that of alignment between business and IT produces significant benefits for the business.  This again makes intuitive sense but can be hard to prove.  Therefore, I was delighted to see some research into the benefits of deep IT/business alignment by the BTM institute.  Their recently published report comparing Global 2000 with what BTM call "converged business technology management" and those without. While SOA isn't explicity mentioned, reading the report (available here) it is clear that a company succesful with a SOA strategy will tend to fall within this definition:

"[In such companys] This means that technology not only enables the execution of current business strategy but also anticipates and helps shape future business models and strategies"

In reviewing the study, CIO magazine highlights 4 dimensions:

"governance and organization; strategy and planning; strategic investment management; and strategic enterprise architecture"

Again very much inline with SOA thinking of what is important.  And finally, what is the win for converged business technology management?

“This is not about a project or ROI, but it’s about overall performance of the company,” Hoque [chair of the BTM Institute] says. For example, those companies with converged business technology management had 12 percent average annual revenue growth, compared with 4 percent for their industry groups. They also achieved 36 percent average annual earnings per share growth versus 7 percent for the industry groups.

Pretty impressive.  Of course, this report covers a period when SOA was only emerging and did not focus explicity on SOA.  What will be interesting to see over the next five years is whether firms where SOA is entrenched do better than those who have not taken the SOA route.

Ronan

IBM, DataMirror ... and Teilhard?

When IBM announced it wanted to acquire DataMirror, they probably didn't even notice that there is an ongoing lawsuit between DataMirror and Teilhard Technologies - after all, this 'battle of the midgets' would hardly register on the giant's radar. For the vast majority of people who don't know what I am talking about, Teilhard is a tiny Canadian company that has a patent to do with heterogeneous data exchange. I previously blogged about this when Oracle announced a settlement with Teilhard, earlier this year. Those people with a life probably do not know that this same company has a lawsuit running with DataMirror (actually, it has been running for three years now).

However, it seems to me that IBM coming into the game could well stir the pot. Would IBM mind if a company it had acquired were to lose an infringement case? Would it decide to get its own legal behemoth involved? If a settlement was agreed, would IBM's presence inflate the figures? In the end, would IBM care at all?

If IBM did decide to take an interest, things could get quite amusing. After all, although Teilhard is suing DataMirror, DataMirror has filed a counter-claim. If IBM chose to notice this tiny irritation and do something about it, perhaps this whole thing could backfire on Teilhard.

Steve