IBM Identifies Hot Markets for iSeries Growth

by Mary Lou Roberts

As one might expect, IBM tries to keep careful tabs on hot and emerging market segments across all of its product lines. The go-to guy for up-to-the-minute analysis data for the iSeries market is Chip McClellan, IBM's senior marketing manager for market segments. I talked with McClellan recently and learned a lot about where IBM and its business partners will be investing time and energy in the near future and what 2006 might look like.

Mary Lou Roberts: How does IBM go about looking at the market?

Chip McClellan: We look at the market a few different ways. The first way is by industry, and IBM breaks up the market into 19 distinct industries. They are pretty much the ones you'd expect, like banking, retail, wholesale and healthcare. Then, within each industry, we break out by size. The small to medium enterprise is one with fewer than 1,000 employees and the large enterprise has more than 1,000 employees. The third way that we look at it is by geography, where we break the world up into areas like the Americas, Europe, and Asia, and within that we look at the country level or region.

We have these splits because we work very hard to do a very quantitative first pass in our database so that we can have a very reproducible kind of result--something subjective we can year after year look at the results and see how the trends are moving. We then look at a market in two additional ways. We talk about how important that market is to us strategically, and we look at how well we are doing in that market. If we looked at the market just on the basis of revenue, for example, we'd always be driving through our rear-view mirror; we'd always be going where we'd historically been strong. But because we look at the strategic view as well, the segmentation breaks out markets where we are not so strong but where there are important markets that we need to invest in and develop our strengths over time.

MLR: Do you personally do this work for all of the IBM server platforms or just for the iSeries?

CM: My focus is on the iSeries part, but IBM does this work in what's called a "common segmentation framework." All of the product lines across the Systems and Technology Group and even across IBM use the same general framework. The model might be different, selecting what segment is most strategic for the strongest results, but the approach is the same so that we can actually look across each group and see where we've all selected the same markets and where no one has selected a market. So we try to do this work in a way that allows looking across the portfolio.

MLR: Are you analyzing where growth is already coming from in the market or where growth can come from in the future?

CM: My focus is really to chart the course for going forward. Let's say we pick an industry that we want to invest in because we believe it is strategically important to us, and we think that there's long-term growth. We need to work for some period of time to build up growth in that market. It's a little bit different for xSeries. The Intel platform is fairly ubiquitous in the market. They leverage the Windows infrastructure and Linux on Intel infrastructure as well, and their ISVs are working on that, so they can make inroads in industries fairly quickly if they chose to focus there. On the iSeries, however, if we want to make progress in an industry, we need to invest in the solutions that the ISVs are going to create for i5/OS, and that takes some time. The good news is that with the iSeries Initiative for Innovation, we are getting the money and the focus that we need to drive that kind of growth and investment.

MLR: What are the important strategic markets for the iSeries?

CM: As we look at markets that are both strategically important and that we do well in, you're going to see the usual suspects. In Europe, for example, we see retail and wholesale are very important industries for us in both of those respects. If you look across the world and took a worldwide slice of small and medium business, retail and wholesale really are a very strong market for us. The only thing you'd add to the worldwide view in small and medium business is automotive. Rather than companies like Ford and General Motors, we're talking about the second- and third-tier parts suppliers, the auto dealerships and the auto parts wholesalers.

Looking at the Americas, in addition to retail and wholesale, you will find banking is a big deal for us--in particular mid-market banking, where we have some 16,000 mid-market banks that run on the iSeries worldwide. That's actually an area we think we're going to have some real strength in next year.

In Asia/Pacific, some other interesting things show up. In large enterprises there, you can end up getting into banking and financial services. It's interesting that in the United States, the big banks tend to run on the mainframe, the zSeries. But some of the biggest banks in the world in Asia tend to run on the iSeries.

MLR: Why did the U.S. banks go in one direction, but Asia went in another with the iSeries?

CM: There are a couple of reasons. First, the iSeries business is driven by our ISV partners and the solutions they provide. If you look at some of the partners we have in Asia, in particular Silverlake System Europe. They produce an ISV solution that works very well for a large Asian bank, and that runs on the iSeries. Also, if you look at some of the solutions that run some of the large banks here, they tend to run on the mainframe. Our coverage model is such that we tend to want to support customers in the direction they are going, so what we've ended up with is a mainframe kind of culture in American banks and a stronger presence with the iSeries there. That's not to say that there aren't mainframes running large Asian banks too--there are. But we see the iSeries used for banking in Asia where we really don't see it anywhere else.

MLR: Are you looking at making banking a bigger thrust for iSeries here in the United States?

CM: Let's say we wanted to do that. Without the solution provided by an ISV, we can want to do that all day long and we're not going to make a lot of progress in that area. There are certainly banks in the U.S. that, as they grow, we see our business growing with them. So we do have a focus in banking and we do want to grow our business there. But do I think that we might go to one of the big banks and see if we can get them to switch? No, probably not. Part of this is based on the fact that most of them are very happy zSeries customers today. So we wouldn't be adding a lot of value. Our strength really is in the mid-market.

MLR: Where else are you seeing the biggest opportunities and the most potential for growth with the iSeries?

CM: By geography, as far as organic growth of the market, we are talking about Central and Eastern Europe. Also, the two markets of the world that are actually growing in terms of the size of the slice of the market are China and India. Those are the four places where we see strong organic growth, meaning that we can go to these markets and participate in the growth of those markets. In the United States, we've seen very strong, double-digit growth in our revenues this year, as was reported in our third quarter earnings statement. We're growing faster than the market, so to get that growth, we're taking business away from someone else. That is inherently a little harder, a little more expensive to do.

MLR: What are the specific industries that you want to invest in for the iSeries next year?

CM: Here's one that pops up now that we didn't have on our hit parade last year, and it's showing up in all three geographies: government. It is a market that is being driven in part by government spending on security, but also there's disaster relief, infrastructure projects when you look over in Asia, and there's a very broad-based investment in the public sector that we're seeing, and we have solutions that we think play very well there. We've had varying degrees of focus on this industry, but it has really come back, so you can expect to see us put a focus on state and local government in particular.

MLR: Are you specifically talking about local and county governments, or are you talking about federal governments, too?

CM: The focus we see for the iSeries is state and local government and the equivalents in other geographies as well. The federal government type of organization is a little harder nut to crack. The cycles tend to be longer. There's an IBM coverage model you have to work through. We'll be looking at where that makes sense as well, but state and local government is where we will focus.

MLR: Are you including in that things like police departments and court systems?

CM: Absolutely. In fact, those are the kind of solutions that I've seen are systems for tracking assets and police dispatching applications--applications that are that specific. Some of the ISVs tend to be ones you've never heard of before. But to some extent, that's the strength of the iSeries. We have 2,500 different ISVs and more than 6,000 applications, with many of them fitting a very specific industry need.

MLR: Any other particular verticals?

CM: Another one that I'm focused on is hospitality and gaming. What's big about that is the overseas opportunity. They are changing the regulations in Great Britain and are allowing the Las Vegas-style of gaming for the first time. There's a huge project going on in Macao that's going to put a casino strip inside the Chinese-speaking world with a billion Chinese people nearby. It's going to be massive. So we'd add the dimension of looking overseas. The good news there is that a lot of the vendors we have here like Agilysys, Bally Gaming and Systems, and SSA Global, are leveraging their presence here in the U.S. now overseas.

MLR: What about healthcare and life sciences. Is that a hot market?

CM: It's interesting. Where the iSeries plays is in the customer care and billing solutions in hospitals. I'd love to tell you that we are getting into other areas of the hospital as well, like document imaging, but for now, that tends to be more of a Unix play. But as we see strength there, we'll look to make investments. We were out a few weeks ago meeting with venture capitalists in the Boston area and we looked at solutions that are new to the market and some that haven't made it to the market yet, and we're looking to bring some pretty exciting new solutions into some of these focus areas.

MLR: What else is in the iSeries plan for next year?

CM: The last way that we look at the market is from a solutions view. Where am I going to find new growth? If you look at the solution view, you can see more of a horizontal view of areas of growth within an industry or solutions that cut across industries. To give you an idea, we look at where companies are making a significant investment in cross-industry solutions like ERP; infrastructure solutions with things like security, systems management, networking, and collaboration; and industry-specific solutions. We look at new solution spending, where people are spending money for the first time, not on upgrades or maintenance.

We did some research for our customers on this and asked them how important it is that the workload runs on the iSeries. We then asked them if they had this workload running on the iSeries. And as you might imagine, there are some workloads they say are not that important that it runs on the iSeries. One example of this is file print. They don't care if file print runs on an Intel server or if it runs on their inexpensive Linux box in the corner or on an appliance or on the iSeries. It's file and print. But when you look at ERP, for example, it's very important to them that it runs on the iSeries, and it does run on the iSeries.

MLR: What did your research show?

CM: There's one outlier in this research, where they said it's very important that this application runs on the iSeries but I don't have it running on the iSeries today and that's customer relationship management [CRM]. The number one new solution-spend for 2006 is CRM. In the mid-market, it's a solution area that's emerging. People realize that getting to know the customer better, being able to do the kind of customer retention and relationship marketing and cross selling and realizing more value from interactions with the customer is a key need.

MLR: Any others?

CM: The second big area is human capital management, or HCM. That's sort of the flip side. So I'm looking for growth there. That's a good example of an area where we don't have a lot of solutions. So that's an area of growth that is important to our customers, and that's an area where we will focus some of our investments in our iSeries Initiative for Innovation to either encourage some of our ISVs to develop those solutions or to acquire them. That's kind of the difference between us and the xSeries. If the xSeries saw that as a focus area, they could get there very quickly because they could draw upon Windows or Linux ISVs and off they'd go. For the iSeries, either you have to invest and get to i5/OS or you have to qualify them as certified Linux or AIX for the iSeries.

MLR: Are there more?

CM: The other area where I see growth is in security and compliance. We're seeing an evolution in the way customers think about security and compliance. In the past, particularly in small and the low end of medium [sized businesses], people tended to think about security compliance in terms of keeping the bad guys out: anti-spam, anti-spyware, antivirus, and firewall kinds of solutions. And, to be honest with you, we don't have a ton there. The iSeries is fairly resistant to viruses. Bytware has a solution to keep viruses out of the shared file systems, but if you're going to get a firewall, you can just go out and buy one of those appliances.

But today, if you look at the high end of the mid-market, you're starting to see folks thinking more about the compliance end. Do I have the right policies in place for business continuity? Do I have the right people, the right data, so I can do my job in a secure and compliant way? The cool thing is there are some great solutions that can help there--companies like Raz-Lee, PowerTech, and Skyview Partners, and more. We're going to see a lot of growth in that particular segment as we go into 2006.

MLR: Do you do any iSeries research looking forward five years to see how OS/400 stacks up versus Linux versus AIX?

CM: Yes, we've done some of that research. I don't have a hard percentage, but I do have this analogy. If someone was going to build a mall near your home, the first thing they'd do is to secure one or two anchor stores--a Sears, a K-Mart, a Macy's. Once they get the commitment from those two stores, they'll start building. As they build, they will look to fill out that mall with other stores.

For the iSeries, the business processing solution that's running in i5/OS is the anchor store. If you don't have that, you don't sell an iSeries. I don't think you can sell an iSeries to run only different infrastructure workloads. So when I look at what the iSeries will be five to ten years from now, I think we'll be looking at a situation where we've developed i5/OS to be the world's best platform for business processing solutions, and we'll work with our ISVs to get them to leverage that platform to differentiate it from other platforms.

Over time, customers will get more comfortable with the multiple partitions and multiple OS capabilities, and you'll start to see more systems where they fill in that mall with some of the other stores. Maybe a Linux partition for firewall and network security. Maybe there's an AIX partition that runs h capital management. That's the evolution that's going to take place. Today, we've shipped 28,000 machines so far with partitions. That number's going to go up dramatically, and what you're going to start seeing is a more heterogeneous machine. But the anchor store is always going to be that i5/OS with the application that got you to buy the machine.

Mary Lou Roberts, a 35-year veteran of the information systems industry, is a new contributor to IT Jungle. In addition to her work as a reporter in the iSeries space, she has spent her career as a marketing and communications professional working exclusively with information technology publications and companies. She can be reached at WriterNewf@aol.com.