Winners and Users: IBM’s ISV and SMB Choices

June 27, 2011 Dan Burger

The manner in which IBM co-exists with its independent software vendors (ISVs) says a lot about how Big Blue has changed its business plans in the Lou Gerstner-Sam Palmisano era. The IBM i user base is a good example, even though it is unique in many ways. None of IBM’s other platforms have or had the participation of so many application and tool vendors. From the time the AS/400 was introduced, it was the application server. And it was extremely successful. Thanks, in large part, to the ISV community.

In those halcyon days of business computing, particularly in the United States and Europe, applications, utilities, and development tools stoked the hardware sales furnace. IBM cultivated its ISVs and the number of firms brought into the fold rose to an estimated 10,000. (Yes, there were a lot of mom and pop shops included in that number, so it is somewhat exaggerated.) A significant number of those smaller providers not only survived, but they adapted and they thrived by filling in gaps left by IBM and the largest ISVs–the primary ERP vendors most notably. It was the best of times for everyone in the growing AS/400 family.

The landscape is considerably different in 2011. The ISV community has shrunk in numbers, but much of that shrinkage is due to the fallout of marginal firms. Mergers and acquisitions have also played a role. The business application development market is also much more mature. Vendors in the IBM midrange have been doing this right for a long time, but the lead this platform once enjoyed over other platforms in not what it used to be. Another factor is software doesn’t drive hardware sales the way it used to. Hardware is much more commoditized. So it’s pretty clear we aren’t in Kansas anymore. But let’s not jump to the final chapter of this book just yet. The need to evolve is always there. There’s no coasting to the finish line.

But what do the changes in the IBM i ISV community tell us? Last week I had an interesting conversation with Doug Fulmer, a guy who had a great seat at the ISV show during its grandest era. In those days, Fulmer was an IBMer with responsibilities in the area of ISV development and support. He’s as pro-AS/400 as anyone you’ll talk to, but he’s also pragmatic, which means he’s pretty even-handed at referencing past events and connecting them to current events. He left IBM shortly after the official unification of System i and System p into Power Systems and moved his career into the IBM i reseller business with a company called Clear Technologies. Within the last year, he joined Help/Systems, a company with a long history in the IBM midrange and one that evolved as well as any.

So Fulmer has seen the IBM AS/400, iSeries, System i, and Power Systems i business from multiple angles: IBMer, channel partner, and software vendor. He’s also an SMB guy. His heart and his head connect with the ways and means of small to midsize businesses–to give you some perspective on his perspective.

In the early days of the AS/400, IBM did a helluva job building its ISV community. One of the methods it deployed was called The Tools Network, and Fulmer was a key member of that team.

“The Tools Network was originally created by Rochester for AS/400-oriented tool partners,” Fulmer explains in a quick history lesson. “It was started in response to all the complaints that there were no apps and no tools for AS/400 customers. The primary intent was to demonstrate there really were a lot of very good solutions available to AS/400 customers. A secondary intent was to connect those partners with customers around the world. IBM provided money–we had very little–and encouragement–we had a lot–to the tool partners to keep them investing.”

“Over the next five years, Gordon Haubenschild and I identified about 200 or so partners, who marketed about 700 tools. Some partners were a lot bigger than others. Some tools a lot more useful than others. But the point was that we demonstrated that there was a very large tools community with lots of tools.”

“Connecting the vendors to the customers was always a challenge, but we had a presence at COMMON and other business shows, had ads and articles in AS/400 trade publications, and in general we were having good success.

“Just before I left the program, IBM decided that we should expand the Tools Network to AIX and Intel, which I believe was a big mistake. But IBM was in the process of further consolidating toward what is today the Power platform. They were consolidating programs of all kinds to eliminate duplicate efforts and costs.”

“Upper management–outside Rochester–either had no clue how different the platform cultures were or didn’t care. There was also a movement afoot to focus more on ‘solutions’ and more on SOSWOS (sell our stuff with our stuff), which increased attention on IBM Software Group (SWG) and decreased attention on partners. The SWG people cared little about the hardware platform, and virtually not at all about the software community surrounding iSeries [the first in a rapid-fire succession of name changes]. SWG viewed those ISVs as a threat. I was bad-mouthed regularly for talking about non-IBM tooling, especially when it ‘competed’ with IBM software.”

Seeing this as Fulmer watched it play out, you could say IBM shot itself in the foot by alienating the iSeries ISVs–particularly in the small to midsize market where IBM was sailing in uncharted waters. It could be seen as a greedy move to keep its cash cow closer to the barn. However, by today’s business standards that tend to be more oriented toward squeezing every ounce of profit out of every asset, this might be seen as a necessary house-cleaning effort. Even the software vendors themselves sell there wares on the back of promises that their solutions will result in customers enjoying more cost-effective business.

“The biggest problem on the ‘solutions’ side came when IBM decided it didn’t have enough money to invest in support and co-marketing for thousands of partners, outside of what it considered the Top 100 solution providers,” Fulmer says. “From an expense-revenue perspective, that may have made sense. But it was not helpful to the partner community. Today, there is almost no money to support ISVs that are not on the Top 100 list globally. And even if a partner has a very large presence, they may not get any play if IBM has a competing product. I would say IBM has dropped the ISV ball altogether and its server sales have suffered relative to the Windows and Intel world because of it.”

IBM has always been strongly influenced by a large enterprise bias. It’s obvious by the way it considers organizations with fewer than 1,000 employees as being in the small to midsize category. By dipping into the top end of this expanded SMB classification, it appears as though IBM considers itself an SMB player. It’s a bit like painting stripes on a donkey and calling it a zebra. All I’m saying is that IBM doesn’t seem very comfortable in the SMB space, nor does it seem very focused in the SMB.

This is despite the fact that close to 95 percent of the AS/400s, iSeries, System i, and Power System i servers are the smallest boxes the company builds. What gets IBM’s attention is the 5 percent of the machines–the almost mainframes–produce about 75 percent of the revenue for this platform. And that’s why the obviously named Large User Group is catered to in much the same way that Fulmer described the Top 100 ISVs. I think it’s fair to say IBM has struggled in its dealings with the 95 percent of the IBM i shops that don’t have the enterprise pedigree. Fortunately for IBM, the ISVs and the hardware reseller channel have been good caretakers.

How much of this was due to the amount of money and effort IBM put into supporting the ISVs and the channel and what will happen as IBM becomes less and less willing to aid its business partners are two questions with related answers.

“Over time, Rochester shifted its emphasis to the enterprise customer,” Fulmer remarks. “It delegated SMB to the partner channel, where costs could–in theory–be held down, and where local partners could provide the coverage that IBM simply could not afford to provide any more. Given that opportunity, the partner channel–which includes the ISVs that sell solutions into that space and the hardware resellers that provide the face-to-face coverage for most of those customers–grew and flourished.”

“It is still very alive and well. But I don’t think it is seeing net growth anymore. New customers, yes; but net new growth, probably not. Many of the key folks at the ISVs and other partners are getting older and retiring.”

“There aren’t many ‘new’ applications appearing in the space. There are new versions of existing applications and new function being added to existing applications and new technology coming to bear in the space, which keeps the wheels turning. But how the ISVs are faring depends on how you define success. There are fewer players, there is more consolidation, but the players that remain are getting stronger.”

“Some of the hardware resellers are putting more emphasis on Intel and Unix than IBM i, because the margins in SMB are getting smaller and smaller. But my view is that as one reseller walks away, another jumps in to take their customers if possible, so even the hardware reselling players are doing OK. As the space commoditizes, everyone is going to have to get used to lower margins and smaller paychecks. But that isn’t all bad.”

About five or six years ago, IBM made its last attempt at re-energizing the ISV ranks. The cornerstone for this was the Application Innovation Program, which was essentially an application modernization program. Another name for it could have been the Anti Green Screen League. IBM came to the ISVs with money and incentives. If the return on that investment was measured, it hasn’t been mentioned.

“IBM does the occasional program, like the Solution Edition,” Fulmer says, but by and large IBM is just not doing much to help the ISVs anymore. Part of the problem is that the hardware is becoming a commodity, so there isn’t a lot of money–generated by hardware sales–available to share with ISVs.”

“Part of the problem is that IBM has surplused a lot of people that actually know how to do things, so there are not skills available to help. Part of the problem is that IBM has spent so little time directly in SMB that it doesn’t know what it looks like anymore. That’s not a blanket statement. There are guys in the trenches in Rochester who are not totally in the dark, but I would guess that over a beer in a dark saloon most of them would tell you they don’t have the time they used to.”