The Four Hundred

IBM is giving Paulo Carvao the business--the iSeries sales business in the Americas, that is. Carvao, based in IBM's White Plains, New York, offices, is the newly promoted vice president responsible for growing iSeries sales. The profit and loss statements for the Americas market, which is 90 percent dominated by sales in the United States, will be his tea and poison. We sat down with Carvao at COMMON and asked where he is going to take this business.

As the guy sitting atop iSeries sales, how is the view from up there? You obviously have challenges. Give us a brief overview of what you see, in terms of assets and liabilities.

The first differentiating asset, when comparing iSeries to the rest of the industry and the other IBM platforms, is our installed base. We have 250,000 customers with close to 490,000 systems installed worldwide. This is the largest midrange installed base in the industry.

Over the past five years, on a compounded annual growth rate, we have grown the base 6 percent year over year. That figure relates to new customers worldwide. Last year we added another 4,000 new customers to iSeries.

One of the questions I asked myself is, "How do I translate this into top-line, sustainable revenue growth?" Top-line revenue growth is one of the key factors in protecting the health of the iSeries ecosystem, which includes the business partners, the ISVs [independent software vendors] that continue investing in this platform, and the customers. Top-line revenue growth is my most important focus.

The top-line revenue for iSeries has fluctuated with the overall market dynamics and pressures, but it has not been on a sustainable growth pattern.

If we were to segment our product line and customer sets into high end and low end, I believe we are having tremendous success on the high end. Part of it is driven by strong technology announcements. Part of it is driven by a pendulum swing in the industry toward more server consolidation and a new paradigm of centralized environments. Companies are looking to simplify infrastructure and minimize costs by recentralizing.

Also on the high end, there has been interest from the customer base in high availability. This part of the business is doing very well. We will continue to invest heavily from a technology and development standpoint in order to continue fueling that growth.

Please talk about server consolidation and how it will help drive iSeries sales

Server consolidation will drive more large sales but fewer small sales. On average, this should be a cost savings for our customers. These cost savings could come from reduced investments in the hardware, but the real costs also include what goes beyond the initial acquisition costs for hardware and software. It includes the cost of running and administering, doing change management, and so on. It is a lower total cost of ownership. Server consolidation as a way of lowering the total cost of ownership and leveraging the opportunities we have on high availability requirements will drive top-line revenue growth for the next 12 to 18 months.

In a sense, yes, these drive large point-in-time sales, but will reduce dramatically the volume of transactions that I execute over a period of time.

To compensate for the reduction of units on the high end due to server consolidation, there will have to be greater volume on the low end.

The way we track the business is not from that perspective. We track the top line and the bottom line with the idea of creating more revenue and profit. How I mix them depends on the technology available and the market dynamics and other things.

I am not completely insensitive to the total number of iSeries boxes, because I want to maximize the number of companies that use this technology, not necessarily the number of systems that are in the market. I want to make sure I get as as many companies as I can.

If we do intra-company server consolidations, it may involve thousands of systems reduced to a handful of Model 890s, yet this company continues to be a loyal iSeries customer and continues to have its business running on that platform and continues to make technology investments with us. I am fine with that.

Aren't most of the increases in new iSeries customers coming from areas other than the Americas and the U.S.?

We have had a few new accounts--some success. The areas where we have had success are the areas where we have partnered effectively with ISVs for vertical segments. For example, we have done a good job with some public sector ISVs selling into local governments.

In Europe they have done a better job than here. But as we expand our ISV relationships, I believe we will be able to replicate that European success.

The numbers will come from the lower end, though, and will be ISV- and solution-driven.

Although our biggest assist is the installed base of loyal and happy customers, frankly, over the past few years, we have done a poor job of staying in touch with them. We have distanced ourselves a little bit from these customers.

Today, in the Americas, I have about 67,000 customers that fall into the dormant category. That means they are customers who haven't invested in the iSeries platform for the past couple of years or more. Typically these are smaller customers, and we have not had an ongoing dialog with these customers for the past few years.

We have begun to reestablish this dialog with the lower-entry customers and our business partners, with Green Streak. In that sense, Green Streak is more than a promotion that drives short-term sales. It minimizes the barrier to entry into new technologies. It also gives entry customers a chance to leapfrog some of the stages they left behind over the past few years. We get them into the new iSeries world. And through a very aggressive promotion, we give them a reason to reconnect.

If there are 67,000 customers in the Americas that you term disconnected, then how many customers are there in the connected category?

I would say it is a smaller number of customers. You could apply the traditional 80/20 rule. There are probably 20 percent of our customers generating 80 percent of our revenue, and 80 percent of the customers--these 67,000 that I mentioned--that are generating 20 percent of the revenue. I do not have the precise number. [With that general rule applied, the iSeries would have 16,000 to 18,000 customers in the Americas generating approximately 80 percent of the revenue.]

What will you be doing to establish long-term growth and make sure growth is sustainable?

The iSeries does close to 90 percent of its business through the business partners. No other server vendor in the industry operates like this. On one hand, it presents some challenges, in terms of staying connected. On the other hand, this gives me tremendous leverage that nobody else has because there are thousands of other firms continuing to make investments in the platform and bringing the message to the marketplace.

As part of the growth plan, we have just hired several dozen people who will be contacting our customers. Every one of our customers will receive one IBM phone call per quarter on an ongoing basis. We are not making these calls to sell products. The point is to reconnect, to hear from them, and to share our news with them. As these conversations mature toward business opportunities, we will bring our business partners on.

This should be good news for the customers because they are hearing from the manufacturer; good news for the business partners because we are helping them cover the extended customer set and will be passing along business opportunities for them; and good news for us because we will be in touch with our customers. I believe that Green Streak is the beginning of this new relationship.

What are the prospects for selling the 67,000 disconnected customers new iSeries boxes?

We have done some analysis that segments this group into three categories: high propensity for buying, medium propensity for buying, and "other." [Laughs.]

Basically, it identifies how easy it would be for the customer to financially be able to migrate to one of the Green Streak boxes. For some customers it is a no-brainer, because you repackage everything and you have more for less. Those customers are in the high-propensity-buyer category.

In the other categories, it depends on the financial case or the amount of application transition that these customers may have to undergo to justify this transition.

That's part of what's being instigated with Green Streak, and it's also why the business partners' role is fundamental. These are one-by-one discussions for each customer, and each will have a different scenario depending, for instance, on application suite or specific configuration.

The first is the overall iSeries value proposition. The original AS/400 value proposition needs to return. The AS/400 was known for having the best TCO [total cost of ownership] for application solutions. It was accomplished by minimizing a company's operational costs. This message needs to be taken to the new e-business world and demonstrated. Our message for the iSeries is that it is for a total mixed-workload environment and not just effective in an OS/400 environment. We are more than that. We are the server for an infrastructure platform that can run OS/400 and Java and WebSphere, that can be your Domino server, that can bring your Linux applications in, and, in the future, AIX.

We did not have this a couple of years ago. All this capability is a clear differentiator. No other server in the industry has all this.

Our statistics say that probably 100 percent of our customers has mixed environments, deals with mixed workloads, and is dealing with the complexity of managing all this.

Second, we will be focusing on solutions--solutions for running businesses. It involves working more closely with our core ISVs. Not the top 10 or 20 ISVs, but the hundreds of ISVs who have taken the iSeries to where it is today. In the same way that we need to reconnect with the customers, we need to reconnect with the hundreds of ISVs that are solution providers for specific industry segments. I am planning significant investments for next year to enable them with new technologies. We will go to market with them and provide comarketing to jointly go after new customers.

Of course our relationships with strategic alliance partners--like J.D. Edwards, SAP, etc.--are very important, and we will continue to invest in those because they are fundamental for iSeries business.

Out of the 4,000 new customers on iSeries last year, I would bet that 99 percent bought a business solution that happened to run on an iSeries. This is the key for growth within the installed base and a factor that will drive additional revenue. If I want to take the installed base from 250,000 customers to 300,000 customers, it's got to be through solutions.

The challenge for the ISVs is to continue adding value for the customers today while at the same time transitioning them to the new environment. The ISVs migrate value from the low-level technology to the high-level business value in the application. Even back in the days of the System/36 and System/38, the ISVs were concerned about making the best hotel management applications or the best application for banks or the apparel industry or whatever. ISVs should still be providing the best business application. The fact that it runs on open systems actually minimizes the business risk. It should be a better option.

This is an evolutionary approach; it's not black and white--or today is this way, tomorrow that way. However, I can say that the technology toolset is ready now.

You say new customers are being brought in based on the TCO and business solution advantages. Is it important to have a lower introductory price point for the iSeries?

If we segment customers by buying behavior, instead of size, there are those that are interested in TCO. For those, we are the natural choice. In parallel with that, I had better make sure I am competitive, price-wise. Otherwise the TCO makes no sense. However, the cost of entry will continue to come at a premium, given the fact that we have all the other benefits of the platform. That said, it has to be a manageable premium.

For those that look at TCO, we're good. For the others--those that are really price-sensitive--I believe the market will include other options. But if I can get them to my hardware and open-platform middleware, then, as they grow, they will become more interested in an iSeries.

For a smaller customer, let's use a CRM example. Today there are many vendors that do small Domino CRM solutions. Instead of dealing with 10,000 users, they might sell a solution that runs on 25 seats.

Sure, this solution may run on a less expensive Dell box. But with iSeries, we add value without adding significant cost. We can offer a partition with a Linux firewall. On a second partition, let's load a file-print server. Now I am comparing this solution to something that would require a Dell server to run the CRM solution, another Dell (or HP or Compaq) server to run the firewall, plus another server for the file-print function. Now we are price-competitive, and possibly less expensive. Again, these are things we can do that we couldn't a few years ago.