Industry shift to services fuels IBM spree

IBM uses its fat checkbook to cash in on services-oriented architecture--and run from downward price pressure.

IBM has become one the software industry's most generous sugar daddies, ever-ready to buy smaller companies with technology that it covets.

The computing giant announced plans in the past three weeks to acquire three software companies: FileNet, MRO Software and Webify. If they all go through, the bill will total more than $2.3 billion.

And that's just the announcements made in the last month. If all recent deals go through, IBM will have shelled out more than $9 billion (all in cash) since 2003 on acquisitions, with the bulk of the money going to 31 software companies.

Beyond the benefit of added revenue, the thing that has unleashed IBM's purse strings is the computing industry's shift to service-oriented architectures, said the company's IBM's top software strategist Kristof Kloeckner.

"Services-oriented architecture in this case is really not just a buzzword. In this context, it's an operational strategy," said Kloeckner, vice president of strategy and technology for the IBM Software group.

Acquisitions of software companies--coupled with internal development and aggressive partner programs--are giving IBM the broad product portfolio it needs for the move to services-oriented architectures, or SOAs, Kloeckner said.

"We provide the enabling infrastructure. This needs to be fairly comprehensive. What's included covers the technology shifts within the industry," he said.

Snapping up smaller software companies has been a standard play in the business software industry game book as IBM competes against Oracle, SAP, Microsoft and Sun Microsystems to be a one-stop shop for corporate customers .

Indeed, IBM could face a , or an IBM competitor like Oracle could purchase another stand-alone content management company.

SOA is an approach to designing back-end systems in a modular way and, usually, around industry standards. If done well, a company can reuse software components, rather than duplicate existing work, and more easily share information among disparate systems.

Business software providers, including SAP and Oracle, are rearchitecting their own products to usher in growing use of SOA.


To IBM and its massive consulting organization, the rebirth of the SOA concept during the past two years couldn't be better news, said Forrester Research analyst John Rymer.

"For IBM, SOA is the best thing that's ever happened. It's all about leveraging what you got. It can't be done strictly with products; it requires services. And the largest companies are the ones most aggressively adopting it," Rymer said. "The stars are in alignment."

Rymer noted that IBM's software acquisitions are increasingly being coordinated and funded with IBM's business consulting group.

For example, the purchase of privately held Webify was orchestrated by IBM software and IBM's services division. Webify sells a "framework" for building software applications, where much of the code is prewritten and designed for specific industries, such as insurance and financial services. Having reusable software improves margins for IBM's custom application development services business, Rymer noted.

The combination of software and services has become integral to IBM's strategy to growing its revenue and fleeing from low-price competition.

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