IBM Hardware Woes Have VARs Singing The Blues

News that IBM is furloughing its U.S. hardware staff for a week in late August has not been sitting well with IBM channel partners that see it as part of a larger gloomy trend for Big Blue's hardware business. But most say, despite a spate of bad hardware-related IBM news, they stand behind the company and think it's headed in the right direction -- the cloud.

This week IBM said it was furloughing its hardware Systems and Technology Group as a cost cutting-measure to help bring the software, services and systems giant back to a profitable business model. The news comes on the heels of a trifecta of bad IBM news that included: IBM's x86 server business is falling, it reportedly laid off 1,700 employees earlier this summer, and it has been rumored that IBM has been shopping around its server business.

"IBM is battling to stay on track, but its hardware business keeps dragging it down," said Patrick Moorhead, principal research analyst at Moor Insights & Strategies. He said IBM is struggling to step up its offerings to deliver services for data centers and wean itself from selling hardware -- namely x86 servers.

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That's something Steve Giondomenica, president of Chouinard & Myhre, a San Francisco-based IBM partner knows firsthand. "Many of our clients want to move to the cloud," Giondomenica said. "And in some cases, they have stated if they can avoid buying new hardware all together, that's their preference," Giondomenica said.

For years, IBM has repeated the mantra that it's ready to move away from delivering physical processing and storage equipment and instead move to delivering cloud software and services offerings -- a challenge every other tech titan is struggling with.

Tom Hughes, director of alliances for the Technology Solutions Group of Ciber, a Colorado Springs, Colo-based IBM partner, said his customers may not be sprinting to the cloud, but more are consolidating servers onto more powerful platforms rather than just buying new ones. "Bringing both hardware and software [together] as one solution has never been more important to IBM's growth," Hughes said.

"Everyone is challenged by the same market," said Bill Gleich, president of Jeskell Systems, a Laurel, Md.-based IBM partner. He said VARs like him feel it, just as IBM does on a macro level. "Server commoditization puts the pressure on us to deliver managed services, not just bigger boxes," Gleich said.

NEXT: Biggest Hardware Challenges Facing IBM

Ciber's Hughes, Jeskell's Gleich and Giondomenica, of Chouinard & Myhre, said the tealeaves for IBM's hardware business are easy to read. Here is what several VARs identify as IBM's biggest hardware challenges:

1. IBM needs to pivot faster to the public cloud.

IBM's PureFlex converged systems is a good start, but it's not enough, said VARs. IBM earlier this week expanded its IBM Flex Systems converged infrastructure solutions with the addition of three new POWER7+ processor-based models and a new x86-based model to provide more power for cloud-based and other operations.

However, analyst Moorhead questioned whether the new systems could compete with Hewlett-Packard's Project Moonshot servers.

"Where is IBM's equivalent of HP's Project Moonshot?" analyst Moorhead said.

Moonshot is HP's first densely packed low-power server for hyperscale computing environments. The servers are based on low-powered alternatives to Intel's Xeon processors, and are designed to scale performance quickly.

2. Layoffs in IBM's Systems and Technology Group are hurting the company, creating a talent drain.

IBM in June reportedly laid off 1,700 employees. But, according to the Alliance@IBM website, run by IBM union members, IBM's summer layoff numbers are closer to 3,000. Those layoffs have some VARs worried. "IBM does a good job of backfilling, but there's no question years of expertise and top talent are headed out the door," Hughes said.

But, IBM has its back against the wall with little choice other than to stay in the game, Gleich said. He said his IBM-related hardware sales are still strong, albeit declining.

In the larger market, the global server market was worth $11 billion, according to IDC's first-quarter numbers. That's down 7.7 percent from the previous year but still a big source of revenue for companies such as IBM and VARs.

"IBM is not in dire straits, but it is entering a challenging time," Moorhead said. IBM reported revenue from its hardware Systems and Technology segment was down 12 percent from the second quarter of 2012. According to its last second-quarter 2013 financials, revenue from IBM Power Systems was down 25 percent from the previous year.

In April ,CRN reported IBM was shopping around its System x server business to Lenovo. Lenovo reportedly passed on the deal, insiders said, but IBM is still looking for buyers of its low-end commodity x86 hardware, not its higher-end PureSystems and iDataPlex x86 servers.

"There are a lot of SaaS offerings out there that companies can turn to and circumvent CIOs, VARs and IBM, as no infrastructure is required," Giondomenica said. "If they don't need hardware or need less of it, that's a sea change disrupting existing business models for VARs as well as IBM and other hardware manufacturers. The key is helping our clients transition to the 'data center of the future,' which is very different from the one we've known for so many years and will, in most cases, include less hardware."

PUBLISHED AUG. 8, 2013