IBM pivots again

IBM Services is removing low-growth and low-profit areas, so growth in cloud transformation and AI-related services will no longer be diluted

IBM will spin off a large share of GTS’ activities, or 72% of GTS’ revenues, and 44% of IBM Services’ external revenue, into a separate company. IBM will establish a new entity over the coming quarters, temporarily called NewCo, and expects the transaction to close by the end of 2021. NewCo, which will have $19 billion in trailing 12-month (TTM) revenue and 90,000 employees, will be a managed infrastructure services provider that will deliver traditional infrastructure outsourcing services; transformational services such as infrastructure modernization, public and private cloud management, security, IoT and edge; and innovation services with data and AI integration. GTS’ technology support services, together with the entire GBS segment that encompasses consulting, global process services and application management services, will remain part of the “new” IBM, which will focus on becoming a leader in hybrid cloud platform and AI. Under the new IBM structure, IBM Services will account for $25 billion in TTM revenues, or 42% of IBM’s total revenue, instead of 59% of IBM’s total revenue prior to the spin-off, and will have approximately 94,000 employees in TBR’s estimates.

Because of the current largeness of IBM, the split into two entities — new IBM and NewCo — is a positive change as it enables more versatility and the ability to adjust strategies according to the needs of specific markets in which each entity will operate. Peeling out GTS’ managed infrastructure services activities, such as traditional information technology outsourcing, which has been negatively affected on the revenue and profitability sides by increased competition and commoditization, will help the new IBM Services return to revenue growth and improve its profitability profile as both metrics have been dragged by the underperforming GTS segment. GTS has been experiencing declining revenues over the past eight quarters and its pre-tax margin was 5.8% in 2019 compared to 9.6% for GBS. While in 1Q20 IBM implemented structural actions to improve cost competitiveness in the GTS portfolio and GTS’ pre-tax margin dropped to a loss of 2.6%, the activities were not sufficient to convince IBM’s new CEO, Arvind Krishna, to keep GTS and IBM Services in their current structure.

After pursuing multiple strategic initiatives over the past several years to better integrate the IBM Global Business Services (GBS) and Global Technology Services (GTS) segments within IBM Services and provide holistic design-build-run solutions to clients, on Oct. 8 IBM (NYSE: IBM) announced it is making a major — and reportedly final — change to the IBM Services organization. IBM is splitting into two entities: IBM, which will be a hybrid cloud platform and AI company with $59 billion in annual revenues, and NewCo, which will deliver managed infrastructure services and generate $19 billion in annual revenues.

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