IBM: Standards, Customer Alignment, and Ecosystem based competition

Yesterday, I attended IBM's Venture Partnering Symposium at the Thomas J. Watson Research Center in NY.

The event focused on exposing VCs to IBM's software and systems strategy and detailed a "how to" guide for start-ups to work with IBM. See www.ibm.com/isv

I left IBM impressed by the cogency and power of their strategy, which is predicated on:

• standards-based software and hardware
  
• open source and open systems (shared specifications)
• ecosystem based competition
• customer solutions

For example, IBM seeks to align customer and vendor interests by recognizing that IT buyers will increasingly favor commodity hardware (blade servers), open standards and open source (which lower switching costs), and solutions rather than tool-kits.

Ideally, IBM's Software unit provides standards-based software solutions that run on IBM's Systems groups commodity hardware built by IBM Global Services into vertically-relevant solutions. Contrast this with Microsoft's approach of proprietary, closed source software that creates major switching costs, with no MSFT enterprise delivery arm to ensure that components are effectively built into customer solutions.

Microsoft's interests are increasing orthogonal to those of their customers, while IBM's commoditization of certain elements of the software stack and embrace of standards continue to align IBM with the best interests of their major customers who aspire to fungible, easily integrated, standards-based software components. This is a hard riddle for MSFT to solve.

IBM also highlighted the power of ecosystem-based competition. For example, to maintain an enterprise-scale operating system costs $500m per year (according to Paul Horn, IBM Research). By moving to Linux, IBM invests $50m per year (1/10th the cost) in Linux and benefits from a cumulative pan-industry investment of $1,000m, 5,000 developers, etc. IBM's embrace of Linux allows it to free human and financial resources away from low-value commodity functions to higher value opportunities, whereby the cost of operating system development is reduced and investments in new classes of infrastructure software and innovation are funded via an industry/ecosystem pooling of resources and effort.

Paul stated, "companies that innovate on top of open standards are advantaged because resources are freed up to higher value work and market opportunities expand as standards proliferate." IBM is focused on raising its collaborate/compete ratio - the greater the community focus on shared resources and advances, the lower the cost of the components that drive composite solutions, the greater the customer value, and ultimately, the greater the profits.

Where does this leave start-ups without a services arm (IBM GS) to drive revenue?

There is a wisdom of crowds with respect to innovations, extensions, documentation, best practices, etc. - we need to ask, how can we leverage the power of crowds in order to increase the value of what we bring to the table?

But there is an attendant danger - IBM is commoditizing the stack to drive the standardization of componentry and the cost of solutions. Fungibility has negative implications for start ups, but the concept of ecosystem based competition rather than company level competition is interesting and worth thinking more about.

Standards are the stated rules of engagement - which reduces friction. We need to think about how we tap into the benefits of ecosystems based on collaboration and openness, while delivering sufficient incremental value to build viable businesses that improve the performance and availability of applications and systems.