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IBM Continues Its Emphasis on Small and Medium Businesses with New Services Offerings

Finally Heard, Part II!

$100 Billion/Year to Be Spent by Small and Medium-size Companies on Integration Technologies and Services

PHOENIX, Nov 3 - IBM continues to build momentum behind its strategy to focus on the specific needs of medium-sized businesses, Big Blue said today in a release.  This time, the emphasis was on services, already IBM's biggest and most profitable business segment.

"These companies are also investing in better information management solutions to help them integrate information and processes internally and externally with their customer and suppliers," IBM said. "IBM estimates that medium business customers at the 'integration' stage of e-business will invest $100 billion on integration technologies and services within each of the next three years."

"Looks like they're listening to you," one Annex Bulletin reader said about the IBM release.  Indeed.  Here's what we said in an article titled "Finally Heard!" - about the first small and medium-size (S&M) market initiative that IBM launched in January of this year:

It's like a seven-year itch that finally got scratched.  It took seven years of harping about it (see below), but finally a major IT vendor has heard us.  And it is the most unlikely computer provider - the biggest and the bluest of them all (IBM) - that made the first major move toward reaching out to small and medium size enterprises in the hopes of fueling its own growth. 

IBM announced today a new $500 million-initiative designed to stimulate the demand in the small and medium company market, estimated at about $300 billion per year.  And Big Blue is doing it just as we had recommended - using the Internet and its vast (90,000 companies) business partner network.

(see Annex Newsflash 2003-1, Jan 29, 2003)

Today's announcement expands IBM's "Express Portfolio" of products and services specifically priced and designed to meet the needs of medium-sized businesses.  Ten new offerings focused on the integration and information management requirements of "on demand" computing are being unveiled. 

The company also announced it has now signed over 100 independent software vendors (ISVs) as part of its ISV Advantage initiative, through which IBM works collaboratively with business partners to build an open-standards based on demand operating environment for their applications.

Once again, that's a strategy that we have been advocating for years when tackling the S&M market.  Given the relatively high sales expense of using the "blue suits" to market to S&M companies, we said back in 1999, for example, that using e-commerce and partnering with smaller companies to reach the S&M prospects was the way to go:

Which is exactly what we suggested EDS should try to do, if it is to win back its IT services crown from IBM over the long hall:

“So what should EDS do instead?  Reach deeper DOWN in its customer pyramid, and try to woo smaller and medium size businesses, especially in Europe. 

Why especially in Europe?  Because Europe has many more smaller and medium size companies than does the much bigger U.S. IT market, where the concentration of wealth and market power is far greater.”

(Annex Bulletin 99-20, 6/26/99)

Why did we suggest that? Because IBM is only paying a lip service to the small and medium companies market, while milking its cash cows - the Fortune/Forbes 500 companies - for all they are worth.  Except that they are worth less and less every year, as smaller companies and even individuals, empowered by the Internet and the PC revolutions, are winning an increasing share of business from the giant incumbents (see “Death of the Corporation,” July 1999).  So smart executives who play to win over the long haul, will focus on faster growing small company and consumer markets (emphasis added).

Another reason we suggested this change of tack for EDS was that IBM leaders obviously have their Fortune 500 blinkers on.  Which means that EDS would face less competition and, thus enjoy, higher gross margins from such smaller deals.  And this, in turn, would help offset the higher SG&A expenses of business with smaller companies (emphasis added).

(Annex Bulletin 2000-6, 2/04/2000)

Well, EDS, like IBM of the old, evidently never really followed through on our advice, even though it made a stab at it back in 1999-2000:

Byrne Mulrooney, an EDS executive in charge of partner relationships, said in a telephone interview this week that a year ago, the company created an indirect channels organization “to take our experience and management capability and enable channel partners to be successful.”

This organization has been addressing the fast growing segments of the market that EDS has not traditionally served, leveraging EDS’s strengths in the back end, and our partners’ strengths in the front end routes to new markets, Mulrooney explained.

Some of the EDS new sales growth figures, especially during the second half of last year, are directly attributable to this new strategy.

“The EDS-Centerbeam alliance (in which EDS took a minority equity position in this Internet provider) is a perfect example of this initiative,” Mulrooney said.  It builds on the momentum EDS had established with partnership agreements with Hewlett-Packard in March and with Microsoft in July (for “Application on Demand” applications), and with EMC in May (for “Storage on Demand” applications).

(Annex Bulletin 2000-4, 2/07/2001)

Well, Mulrooney is no longer with EDS.  And his four-year old S&M initiative appears dead in water, too, as far as any outsider can tell anyway.  No senior EDS executive has broached the subject in recent years.  But the "new IBM" (under Sam Palmisano's leadership) has now picked up the S&M ball and is running with it (also see “Small Is Now Big at Big Blue”, Oct 16).

Today's new IBM "Express" offerings are being released after more than 2,000 Business Partners had been through the "Early enablement"  program, with 350 ISV applications produced and enabled for "Express" as a result of the program.

The latest group of ISVs to join the ISV Advantage initiative include: Ascendant Technology, DST, GeoSpatial Solutions, GridNode, Gruppo Formula and hybris GmbH, IBM said.

"IBM market research indicates medium business spending on integration is growing faster than the market as a whole (emphasis added)," IBM said, adding that, "more than half of midsize companies are making investments in connecting to their customers and suppliers in real time."

Well, that the S&M market is growing faster than the market as a whole should come as no surprise to our clients, IBM included.  Here's an  August 1996 chart that quantifies our forecast published seven years ago (see “Louis XIX of Armonk,” (Aug. 1996).

wpe2.jpg (31149 bytes)

It will be interesting to see how many companies that have missed their chances to lead the IT industry into new markets will now end up following IBM?  

It takes courage to lead.  It takes deference to follow.  As Alaskan "mushers" (dog-sled drivers) may tell you, "scenery only changes for the lead dog."

 Happy bargain hunting!

Bob Djurdjevic


Past Reports

Here are also some additional Annex Bulletins in which we had urged our clients to reach down to small and medium companies for growth:

Finally Heard! (Jan 29, 2003)
... It's like a seven-year itch that finally got scratched.  It took seven years of harping about it (see Past Reports), but finally a major IT vendor has heard us...

Analysis of IBM Third Quarter Results (Oct 16, 2002)
... listening to our six-year “sermon” about the importance of diversifying away from the Fortune 500-type accounts to the small and medium-size enterprises ...

Boom Amid Gloom and Doom (Oct 10, 2002)
... in the US As we’ve pointed out on numerous occasions in the past, the growth of the American economy is from the bottom (small and medium companies), not the ...

HP Breaks ino IT Services Major League (Sep 17, 2002)
... Fortunately for HP, this also means that there is plenty of blue sky ahead, especially in its sweet spot - the small and medium companies market. ...

Annex Research IT Services Heptathlon 2002 (May 21, 2002)
... few of the top IT services vendors have heeded our advice to expand their range and reach deeper down in the marketplace, to small and medium size businesses. ...

Annex Bulletin - 2000-02 (EDS' e-Price Clubs) (2000)
... Because IBM is only paying a lip service to the small and medium companies market, while milking its cash cows - the Fortune/Forbes 500 companies - for all ...

Business Is Humming Nicely (Nov 3, 2000)
... Brown replied that indeed EDS had signed a lot of new contracts with small and medium size customers that are new accounts to EDS. ...

"Two Faces of Globalism; Yin and Yang; Princes and Paupers" (1998)
... Most of the cutting is being done by the multinationals, while most
of the hiring is taking place by small and medium size companies. ...

Annex Bulletin - "The Upsizing of America" (1998)
... media. The truth is - none of the above. It's coming from Main Street, the small and medium size American companies. The Bureau ...

Annex Bulletin - 96-42 - "Louis XIX of Armonk" (1996)
... IBM's chief strategist, whose talk followed Gerstner's, said that more than 50% of the 1996 IT revenue opportunity lies in the small and medium companies market ...

For additional Annex Research reports, check out... 

2003:  “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use "financial engineering" or similar  keywords.


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Volume XIX, Annex Newsflash No. 2003-11
November 13, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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