Business Is IBM’s Middle Name

July 11, 2011 Timothy Prickett Morgan

IBM did not for one second like being criticized for not doing enough for its midmarket independent software vendors, resellers, and other partners to help them peddle hardware, software, and services to midrange shops. But Andy Monshaw, who is general manager for the cross-group Midmarket Division at Big Blue, which sits inside of its Sales and Distribution organization, has been at the company for 27 years and he knows how to handle such a situation.

Monshaw picked up the phone and talked to The Four Hundred to explain what IBM is, in fact, doing for the midmarket and how it has not only changed, but improved.

What was immediately obvious in talking to Monshaw last week is that we have a definitional problem. To many people, saying midmarket or midrange didn’t just mean a customer set–companies with fewer than 1,000 employees–but also a particular set of platforms that they used. To most of us, midrange means System/3X and AS/400 machines, but to some IBMers and their customers in days gone by, midrange meant a System/9370, System/4081, or System/9221, or other “midrange mainframes.” And starting in 1989, of course, the midrange included RS/6000 RISC/Unix boxes and their follow-ons, and less than a decade later, you could argue that X86 and then X64 servers were also midrange boxes. So when IBM thinks of the midrange, and the set of resellers and ISVs who play in the market, this broader definition is what Big Blue is talking about and focused on.

If anything has been made clear in my more than two decades of watching IBM, after its near-death experience in the early 1990s, Big Blue is not interested in anything but preserving its cash flow and will sell anything that makes money and will stop selling anything that stops making money. Period. You can hate that or not. It’s nothing personal. It’s just business, and Business is, after all, IBM’s middle name.

So, how is the midrange business and what is IBM doing in it these days?

The midmarket business for IBM might be a bit bigger than you think. It includes all customers who have spent at least 1 dollar at the company in the past year, who have fewer than 1,000 employees, and who don’t have a mainframe of any size. (A small company with a mainframe is still treated like a bigshot by IBM and given extra handholding and attention.) If you add all of those companies up in the 220 countries in the world where Big Blue does business either directly or through channels, that gives you 438,000 customers. I would have guessed around 350,000: around 120,000 for the OS/400 base, around 100,000 for the AIX base, and the remaining 130,000 using solely System x machines or BladeCenters running Windows or Linux. Any overlap in the numbers–an OS/400 shop with Windows machines–gets called an OS/400 shop in my scenario, even though I realize it is really a Venn diagram of overlapping sets.

IBM instituted two big changes two years ago, and these are helping the company’s cross divisional business grow. The first change was for IBM to realize that it could not have a direct sales force in the midrange. “We concluded that no matter how much we invested in direct sales, we could never cover more than a thin sliver of the market,” explains Monshaw. And so, IBM stopped trying and took those sales people it had dedicated to the midrange and put them in charge of helping resellers, ISVs, and other midrange partners.

The other big change was that IBM stopped doing lead generation for its resellers, ISVs, managed service providers, hosters, and other midmarket partners peddling the company’s wares. “IBM used to spend a great deal of money to create leads for partners,” says Monshaw, not being specific on how much. But what Monshaw would tell me is that IBM now dedicates “well north of $100 million” to advertising and co-marketing funds for midrange partners. He adds that for every $1 that midmarket partners commit of their own money to advertising and marketing, Big Blue will match it with 75 cents. And the net result is that IBM does hundreds of millions of dollars of business a year in revenues with thousands of local-level ISVs and resellers. “The article you ran suggests that we ignore the ISVs and that is factually incorrect,” Monshaw says, referring to Winners and Users: IBM’s ISV and SMB Choices from the June 27 issue of The Four Hundred.

“The biggest reason that partners want to participate in our midmarket programs today is that this is no longer an infrastructure sale, but a solutions sale,” says Monshaw. “Those are lofty words that often ring hollow when people say them, but lead generation is not the world anymore.”

In fact, says Monshaw, IBM has gotten considerably more sophisticated about its sales and marketing efforts and is heavily engaged in social business–the use of social media and networks of influencers that customers rely on to get its solution message out there. IBM puts sales and marketing up into three buckets: paid, owned, and earned. Paid means advertising and direct marketing, and owned means the IBM and partner Web sites and auxiliary sites like Facebook pages and LinkedIn accounts. The key, however, is the earned bucket. That includes bloggers, journalists, industry luminaries, analysts, and other key people in the midmarket and industry sectors that actually influence a buying decision at a customer site. In this world, the local business partner with specific industry vertical experience is key.

“This is how you need to connect to midmarket customers, and we have been investing in this space,” says Monshaw. “A lead passed through an influencer can be 100 times more effective in resulting in a sale than a paid lead from advertising.”

So what’s the upshot in the midmarket after these two changes? First, ISVs and resellers now believe that IBM is not going to compete with them in the midmarket–just at the moment that Hewlett-Packard and Dell are beefing up their direct sales forces to chase more business and quite possibly irk their channels.

Second, IBM’s midmarket business is “significantly outpacing” IBM’s overall growth and the company is “absolutely, positively gaining share” in the midmarket, says Monshaw, adding that “growth without gaining share is just activity.”

Monshaw reckons that about 10 percent of the business that IBM does in the midmarket is transactional hardware sales, which is IBMspeak for a customer that buys a server, storage, networking, or an upgrade to some system and does its own integration of that solution into their data center or data closet. Another 10 percent of midmarket sales come from transactional software deals, where customers buy, install, and integrate an IBM product. The remaining 80 percent of midmarket revenues come when customers are looking for a more complete solution from Big Blue and they are consuming in a “services mode,” not just buying a point product this one time.

IBM’s does a lot of midmarket deals for ERP, CRM, and SCM suites from Microsoft, Sage, SAP, Oracle, and Infor, and the business analytics tools from IBM–Cognos and Cognos Express, ISS, and ILOG–drive a lot of deals as do the Cast Iron integration appliances and the Lombardi business process automation tools. IBM and its partners also sells a lot of backup and recovery solutions to midmarket customers. The company’s X64-based System x and BladeCenter platforms sell well in the midmarket, of course, but Monshaw wanted to be very clear that IBM has “a very healthy Power Systems business” in the midrange. As for the IBM i platform, where applications are being refreshed, the machine is doing well, and that stands to reason given the System/3X’s and AS/400’s strong heritage in applications.