IBM's Makeover-the Key to Steady Profitability

IBM (NYSE: IBM) knows a thing or two about profitable business models.  About a decade ago Sam Palmisano began the transformation of IBM, downplaying its emphasis on hardware and bolstering its software, consulting and services businesses.  IBM has spent more than $20 billion since 2003 on more than 80 acquisitions. Fifty of those acquisitions have been software companies, all of which were profitable.  IBM’s latest results have shown how this strategic change has preserved its profitability, even in these hard times.

IBM recently announced a year over year 13% drop in sales but a 2.3% increase in gross profit margin and 12% increase in net income for the quarter ended June 30 2009.  IBM’s results look pretty good, if not downright impressive, when compared to its competitors. Others in the industry haven’t fared as well.  Microsoft recently announced a dismal 18% drop in revenue and 30% drop in operating income for the quarter year over year.  And Cisco recently warned that it expects an 18% drop in sales and deep drop in earnings for the current quarter.

The result is that even now, despite the economic downturn, IBM still has the resources to expand its business. It also has the where-with-all to offer aggressive discounts, as it goes after SUN’s customers.   And it recently made a stellar acquisition with SPSS. The SPSS acquisition promises great opportunities for IBM and its partners.  It’s a high end predictive technology which is well established and well regarded.  In addition, there could be opportunities to expand SPSS capabilities into full-blown vertical solutions.

SPSS fits nicely with the rest of IBM’s portfolio and reinforces the emphasis on consulting and selling complete solutions.  As IBM Chief Financial Officer Mark Loughridge noted, "We look for the consulting arm to lead our entry to the client," driving sales of other products. So, leading with consulting has been key to client acquisition.  The demand for business intelligence solutions has remained strong even during this downturn, and IBM partners are in a position to reap the benefits.

Indeed, channel partners should also take note of IBM’s profit model. The portfolio and sales model have worked out well.  Leading with consulting, offering business solutions and emphasizing higher margin products such as software have all worked in IBM’s favor.  These can boost profits for channel partners, too.

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