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IBM didn’t buy enough software from itself in 2007.

Posted on January 23, 2008

As I read it, for IBM (IBM) 2007 represented the first year this decade that the growth rate in internal software revenue (e.g., the Software Group from Global Technology Services) dipped down into single digits. In 2004 and 2006, the internal growth rate was twice the external rate at 12% and 14% respectively. In 2003 the internal growth was three the times the external growth rate at 32%. In 2002, software revenue from down the hall grew 25%, representing a large percentage of the growth of the IBM Software Group that year.

I’m not sure how to interpret that. Maybe somehow when IBM sells itself software it adjusts for exchange rates in a way you can’t do with real money. Therefore the internal growth rates are closer to the constant currency rates that IBM reports. I also suspect it has something to do with the transitional period vis a vis IBM mainframes (a large percentage of IBM software sold deploys on mainframes).

I know part of the reason is because the numbers I’m using for comparison (from the IBM Investor Relations page) are not backcast for IBM’s software acquisitions. That tends to inflate the external growth-rate number vs. market reality. Using a pure apples-to-apples comparison to take into account the 2006 acquisitions of Filenet, Internet Security Systems, MRO, Vallent and so forth might reduce the GAAP-compliant external growth rate of 10% down a point or two. But it would still be higher than the 7% growth in internal software sales.

Maybe the booming services groups are buying someone else’s software, when they win an outsourcing or management consulting contract. I recall a story—surely just a story—about former CEO Lou Gerstner writing one too many seven-figure checks to that company out in Islandia and immediately sending someone out to acquire Tivoli. Who’s looking at the outgoing checks these days?

Or maybe open source software (OSS) is being used in a lot of the contracts won by the IBM services divisions. As I have researched and reported in depth, OSS does not mean “free” unless you have a bunch of highly trained and highly motivated computer scientists on staff. Without expert staff, it is very hard to maintain and upgrade OSS without a service contract from someone. There are very few organizations that have that kind of expertise hanging around but Big Blue’s services organization is definitely one that does. Wouldn’t that be interesting?

Tags: open source software, OSS, IBM, Global Technology Services, Filenet, Vallent, MRO

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