IBM software licensing agreements aren't all that easy to understand or negotiate. The same is true when it comes to renewing your IBM ELA. A key component to prepping for these kinds of negotiations is to understand how that vendor functions as a business, according to consulting firm ClearEdge Partners, based in Needham, Mass.
Having insight into IBM as a company, its attitude toward revenues and earnings, and where its business is headed will help you understand the approach of Big Blue's sales team when you meet them at the negotiation table. Just ask Eugene Cho, head of Transactional Software and IBM Practice at ClearEdge. Cho makes a living helping clients navigate the ins and outs of their IBM enterprise license agreements (ELAs) and renewals.
He uses what his company calls a "leverage management maturity model" to assist clients. The methodology includes nine steps, which Cho presented and tailored specifically to IBM software licensing negotiations in the webinar "Managing Leverage in an IBM Deal."
A previous article discusses how getting an early start on deal negotiations is key to success. The article explains how having a realistic timeline to prepare for your IBM ELA negotiation is also important, as is knowing exactly what your options are as you kick off negotiations. Another important step to the methodology is what Cho referred to as supplier knowledge.
In the webinar, Cho talked about how IBM generally functions as a business and what kind of revenue is important to IBM as a software vendor. The purpose of the exercise was to illustrate how this type of information can help with IBM ELA renewals as you prepare to discuss your enterprise software licensing agreement.
What is IBM all about as a business?
Cho said the first thing you must understand about IBM is that the company, from the top-down, is always looking to rapidly expand revenue. "If they could, they would mortgage revenue from 20 years down the line to compress it for tomorrow," he said, "and that drive for revenue growth is always a big thing."
Also, IBM, when functioning as a software supplier, acts very much like an enterprise hardware vendor. This means, Cho explained, that IBM "would much prefer capital because of its accelerateable revenue status. You can compress capital into the quarter that the deal is booked in, instead of smoothing it out as the services are delivered, much like S&S [Software Subscription and Support] or a subscription would be."
Meanwhile, from an operating expense perspective, IBM would rather be defined as a SaaS provider. "This is just a Wall Street thing," Cho said, because the financial market rewards IBM in various ways if IBM's "operational expenses come in the form of SaaS or other cloud revenue dollars."
Cho also likes to tell clients that IBM's lumping of cloud and cognitive technology revenue into a single bucket says a lot about the company. "This makes it almost impossible for anyone to understand just how much money is being booked as cloud money versus money for BI [business intelligence] tools or cognitive solution tools that are perpetual in nature," he explained.
Lastly, Cho said it is notable how IBM is always willing to direct money away from S&S streams -- that is, "if they can convince a client to come to the table for capital." As Cho noted in the beginning of this section, accelerating revenue is a top priority for IBM.
IBM as business looking forward
Cho cited how IBM's business is experiencing some seismic shifts. He said he thinks the company's 2019 HCL Technologies divestiture, which included marketing automation software, and Red Hat acquisition speaks to where IBM sees itself in the next five to 15 years.
Red Hat, for instance, is all about the cloud. "IBM quickly realized they are not going to be the winners in the public cloud game. That ship has long sailed," Cho explained. "They really don't believe they'll be able to catch up to [Microsoft] Azure, let alone AWS." As far as SaaS and PaaS revenue, "they have also quickly taken a look at the landscape and realized that's a place they don't want to be competing in," he added. IBM is leaving that domain to the likes of Salesforce.
Eugene ChoHead of Transactional Software and IBM Practice, ClearEdge Partners
Cho said IBM's exit from marketing automation software game by spinning HCL off as a private company is telling. "It means they have little to no confidence in competing in the heavily saturated application software markets," he said, "and the HCL divestiture is another supporting fact there."
The glue holding IBM's software future together
To Cho, Red Hat is the glue that IBM hopes will safeguard all its other revenue streams by lumping them all together "to convince clients to move to the hybrid cloud."
This is mainly to counter IBM's S&S stream, he added -- "that maintenance and support stream of money" -- and transform it into more earnings based on subscriptions. Services is important here, Cho emphasized. That's because IBM promised investors last August that every dollar spent in their hybrid environment would translate into $2 to $5 in services, he said, which IBM positioned as its high margin income area.
"You can see a future where IBM is trying to hedge bets between explosive revenue growth that is much more sustainable instead of having ups and downs like the capital market does," Cho concluded, "while also trying to have extremely high profit margins with a services arm that latches on and feeds off of that infrastructure-as-a-services revenue."
Next up, other essential aspects of IBM ELA software renewal preparation. First, understand all contractual and business risks by performing a thorough risk assessment and inspection of your ELA. Then do some forecasting and modeling so you know what software and services you need and when.
About ClearEdge Partners
Founded by senior sales executives from large IT suppliers and informed by current market analytics, ClearEdge enables CIOs and their teams to make more competitive IT investments. By combining rigorous inspection and IT financial expertise, they identify risk and opportunity, align internal teams and maintain leverage throughout the lifecycle of supplier relationships. As a result, their clients maximize the value of their investments by unlocking millions of dollars from legacy spending and redirecting funds toward IT modernization, digital and cloud transformation with confidence and speed.