Ginni Rometty, left no room for doubt in drafting International Business Machines’ path to the future: “I believe we have reached a turning point in our journey,” the CEO said, addressing the company’s investors in March of this year.
“IBM is now emerging as a cognitive solutions and cloud platform company.”
The greater promise in that statement is that Rometty, IBM’s CEO since 2012, want’s to bring back the 100-year old technology company’s grandeur, and to use data and artificial intelligence to do it.
“Data is the world’s new natural resource,” she said to the investors, and the company wants to “literally build cognition into everything digital.”
IBM has been through massive transformations before. Its founder, Thomas Watson, famously predicted in the 1940s that “there is a world market for maybe five computers,” and the company again misjudged the shift toward personal computing in the 1970s, opening the door for emerging rivals like Apple and Microsoft to capture the budding market.
But the latest plan for IBM’s future represents one of the most challenging stories of the Internet era. Aggressive competitors now dominate the historic business segments that once made IBM one of the biggest IT companies in the world: hardware and services. When Rometty made those comments in March, IBM’s share price was coming off its lowest level in 5 years after a plunge that had brought it back to 2010 levels.
The loss in market value, accompanied by a year-over-year decline in revenues for 17 straight quarters, showed that what once made IBM great in the world, computer hardware in particular, was no longer a competitive asset on the international market where know-how circulates quickly and cheap labor can be found quickly.
For this reason, Big Blue in 2015 said it would set up new “strategic imperatives” and invest in research and development, in particular cloud computing — which is basically software that runs over the Internet — data gathering, and in so-called cognitive solutions, which include artificial intelligence and machine learning.
For its ambitious plans IBM has a catchy name: Watson. Named for the company’s founder, the program is actually a galaxy of applications that have uses both practical and fantastic.
Watson actually predates Rometty’s time as CEO. It first grabbed headlines in 2011, when a computer competed with Jeopardy champions Brad Rutter and Ken Jennings.
Very few knew about the IBM creature until it beat its human competitors and received the first place prize of $1 million. That’s how much of the world learned of the potential of cognitive computing.
Since then IBM has continued to use Watson’s science-fiction like applications in order to build a brand around it, while also expanding practical uses. It is used by premier hospitality and planning firm Legends to gain insights into its hospitality operations, and one of Asia Pacific’s largest multinational law firms, MinterEllison to identify new business opportunities.
The Imperial College in London uses Watson to analyse and predict crime, while the trucking company Paschall in Murray, Kentucky, uses Watson to reduce turnover and increase retention among its drivers.
Mark Kolanowski is the manager of Marketing Analysis at Benco Dental, the largest privately-owned dental supply distributor in the US. After using another IBM analytics software – SPSS – for 12 years Mark discovered Watson “a couple of years ago at an IBM conference,” he says.
“They were just rolling out Watson analytics and it sounded interesting: we were not looking for a tool to solve a specific problem, we just envisioned many scenarios where it would be useful,” Kolanowski says talking about the first time Benco approached Watson.
Benco has been using Watson for marketing purposes enabling Kolanowski and his team to better understand their data.
“In one project we were looking at our discount pricing structure; if someone was buying at a specific volume he was entitled to a discount, but nobody ever bought at that volume. Watson helped us understanding and redefining our volume discount strategy ensuring that we were offering appropriate discounts on our products,” the manager explained.
Kolanowski describes Watson as a tool that “helps solving problems, and allows to make progress and smarter decisions,” a tool to “better match supply and demand through the analysis of data.”
Data analysis is of course not a new phenomenon, and the ubiquity of smartphones and apps that track every second of our behavior has triggered a gold rush to obtain digital footprints that can be translated into insight about people’s habits, connections and attitudes.
But IBM wants to do more: through its management and analytics softwares – such as Watson – it is extracting meaning from data and metadata, creating new information from the way data are processed.
The question whether the Big Blue can win its battle to survive the disruption in a hypercompetitive market resonates among analysts. While not everyone is ready to give IBM credit for the change, Morgan Stanley, in a report last October, explained why the answer is positive: “Can IBM win the cloud game?” reads the report, “Not how you think. We don’t expect IBM to compete with AWS or Microsoft Azure on price or speed however we do believe IBM’s portfolio of platform-as-a-service (Blue Mix), customized Infrastructure-as-a-service (Softlayer),and recently acquired cloud / analytics / engagement offerings that can run on public cloud platforms position it to hold customer dollar share in a way that more commoditized hardware peers […] cannot.”
After years of losses, IBM decided to switch from being a prey to a hunter, and the results were not long in coming.
While the company’s overall revenue continues to shrink, the pendulum is finally swinging in the right direction for the Big Blue.
In the last quarter of 2016 the company beat analysts’ skepticism, reporting $8.75 billion in revenue from technology services and cloud platforms segment, of which $2.3 billion came from strategic imperatives, that’s a 42% increase year-over-year. In the last year IBM stock jumped from $135 to $166 up 23%.
“To move our clients into the future, we’ve been making significant changes to our business,” said Martin J. Schroeter, senior vice president and chief financial officer during the 2016 first quarter call. This is where the challenge lies: a well-established company with an important portfolio of clients is looking for the right formula to keep its heritage and be up to the task in a continuously evolving market.
“We’re certainly investing quite heavily and we’ll continue to do that. We’re getting good returns on the investments we’ve made,” said Schroeter.