IBM cloud chief: The next phase of cloud is a race to add value

By Brandon Butler and John Gallant

At 105 years old, IBM has been through more than a few major technology transformations. Arguably, none is bigger than the current retooling of the company around cloud computing – an effort overseen by Robert LeBlanc, senior vice president, IBM Cloud. LeBlanc says IT leaders and business executives aren’t caught up in Wall Street’s worries over IBM’s revenue declines or the pace of the cloud transformation.

Instead, they’re focusing on the higher-value capabilities – like Watson cognitive computing or internet of things functions – IBM is layering atop what LeBlanc calls the ‘phase one’ cloud that will help them transform their own businesses.

In an interview with Network World Senior Editor Brandon Butler and IDG Chief Content Officer John Gallant, LeBlanc talked about how IBM is tailoring its cloud services to specific vertical industries and what Big Blue is doing to enhance its Platform- and Infrastructure-as-a-Service capabilities. He also discussed why partnerships with companies ranging from VMware, Box, SAP and Workday are strengthening IBM’s cloud play.

John Gallant: We want to make sure our readers understand the overall cloud strategy IBM has embraced and the major transition IBM is going through. What is the overall cloud strategy?

It’s a three-pronged strategy. One is that we’re very much focused on cognitive solutions and that’s really bringing analytics and AI to all of the solutions, which are very much industry oriented. We started with our focus on healthcare and we’re extending that to other industries. The second is that everything we do is on the cloud. We are focused on building all of these solutions on the idea of cloud. We’re also focused on bringing some of our traditional offerings onto the idea of cloud. As an example, all our relevant middleware offerings are now available on the cloud so the client can run it on-prem and they can run it inside the cloud. The third is we’re doing everything in an industry context and that really feeds into what we’re seeing from clients here and the next generation of the cloud.

Let me expand on that a little bit. In the first wave, everybody looked at the cloud as a way to save money. I could get cheaper compute, cheaper storage, cheaper networking and the cloud was a good way for people to get better economics. In some cases, they looked at that as: ‘Hey, I’m going to move my application to the cloud or I’m going to burst to the cloud. Instead of buying that extra server I’ll just run it on the cloud when I need to’. I think we’re moving to the next phase of cloud and that’s where the cloud is becoming a platform for innovation.

What I mean by that is the cloud is enabling clients to do things today that they otherwise wouldn’t have been able to do – certainly not at the speed and scale that they have in the past. This is starting to spawn new business models. It’s spawning new business processes. It’s allowing clients to move into mobile at a rate and speed that they’ve never seen before. The reason is they now have access to capability and technology that before would have required a level of investment. They would have to procure servers, configure them, get them all ready, buy software and that literally can take months when in most cases now, with little or no investment they can get access to newer technologies. That’s what I call the value and where the cloud is now becoming a platform for innovation.

A couple of examples on the IBM side and what we’ve done with Watson: We’ve got over 30 cognitive services now that are available on the cloud. In fact, the only way we’re delivering our cognitive services is on the cloud. Whether I’m a small startup company or I’m a large enterprise, I have access to that set of technology capabilities without having to make a large, upfront investment. That enables me to do a lot more sandboxing, a lot more testing, trying things and seeing where I can come up with new innovation.

We’re the first to put blockchain services up on the IBM cloud and we offer different levels of security with that blockchain capability. Look at Internet of Things and the connection of all these physical devices, as well as all the services you need to ingest data at rates that most companies or enterprises couldn’t ingest at. You’re talking billions of pieces of information being ingested at a pretty dramatic rate.

Hence, why we bought the Weather Company. When we bought the Weather Company, everyone said: ‘Wow, IBM is getting into the weather data business’. Yes, weather data is important and we think that weather data actually impacts a lot of business processes, whether it be supply chain or airline scheduling. We have data that we can now help clients with but more importantly, what the Weather Channel gave us is the ability to ingest data and deal with data at scale. We got a lot of technology that we’re applying into the internet of things space. Again, it’s value added on top of the cloud.

JG: In her presentations, CEO Ginny Rometty talks about this transition in terms of IBM focusing on higher value opportunities. What does that mean from a cloud perspective?

Some of the cloud vendors will tell you to bring your applications, bring all your data and you can run it on my cloud. That’s what I call phase one of the cloud. Phase two of the cloud is the additional value. I can bring IoT services, I can bring cognitive services, I can bring a PaaS platform, our Bluemix. We’ve got over 150 services on our Bluemix platform which runs on the cloud, really allowing the higher value. Those are the things that clients can do more with. Instead of just giving them compute and storage and elasticity and allowing them to scale up and down and pay for what they use, it’s also the functions that will run on the cloud that I now have access to that I can [use to] build my next new application or my next solutions. Instead of having to build everything from scratch, I now have a real set of building blocks on which to build those next-generation applications.

Brandon Butler: We saw that cloud revenue was up 30 percent in the last quarter to about $3.4 billion. Can you outline what falls into that cloud revenue bucket?

We split our cloud revenue externally into two pieces. We talk about the total cloud and we always talk about the trailing 12 months because the world of cloud is moving very quickly. Our last 12-month trailing is $11.6 billion, of which $6.7 billion of that is as-a-service. That’s where we provide the capability to the client as a service and that’s what a lot of people think about when they think about the cloud.

As an example, our SoftLayer platform where we provide the compute and storage as a service, that’s all included in that number. The difference between as-a-service and the total cloud is what clients are doing in the private cloud. That’s where clients are building out their own clouds and in a lot of cases they’re actually building hybrid clouds in which they have a private cloud connecting to a public cloud. In fact, most enterprises are building some kind of hybrid solution. There are some applications and solutions that will run just on the public cloud but in most cases the clients are trying to connect back to traditional transactional systems, to their databases, to their data and so they’re building up these private clouds. In fact, if you look at data from IDC and others, there still is more spend in private cloud than there is in the public cloud. You were at VMworld recently, correct?

BB: Yes.

You saw some of the data that [VMware CEO] Pat Gelsinger showed about private clouds versus public clouds. We’re seeing it as a combination, so when we say $11.6 [billion] that includes what we’re doing for clients on private cloud. Remember that also includes some of the things that we do in terms of our strategic outsourcing and our consulting business where we’re helping clients build their cloud strategy. We’re helping them build their private clouds as well as what they do in the public cloud.

BB: Is your sales force fully onboard with selling those cloud services versus the traditional on-premise offerings? What have you done to incent the sales force to make that shift?

There are always two things you do with a sales force. One is you have to train the sales force. They have to be aware of the offerings and how to put the offerings in context with what the client is trying to do. We are training our sales force in the cloud and honestly, when you talk about the cloud you have to talk about it in the context of industry. We are educating our sales force in how you put the cloud in the context of the industry I’m in.

I talked about business models and business processes being affected by the cloud but you have to understand the industry you’re in to understand the business process and models that are being affected. That’s where most of the disruption, in fact, is happening. One is certainly getting our sales force to understand how we can bring value and what we have in our portfolio to help them make the transition. We’re undergoing a transformation. Every client, every industry I’ve talked to in the last year is going through some form of transformation. Some people call it digital transformation. There are different names for it but everyone is going through that transformation. That’s number one. Number two is how we compensate. We have changed the compensation model so a big part of a salesperson’s compensation is their ability to sell our cloud offerings.

JG: Investors and financial analysts have lots of questions about what’s happening with IBM’s revenue and the length of this transition and whether it is taking too long. Do you get those same kinds of questions from IT buyers? Are they concerned about that transition or do they see this as an absolutely necessary move for IBM? What kinds of questions are they asking you about it?

I don’t get a lot of questions about the financials from clients. They’re more [concerned] about where we see the cloud going. What are the things I need to do to prepare for that transformation? Almost every client I talk to is committed to the cloud. There’s no maybe anymore. Everyone is going to the cloud. Now they’re trying to decide what to move to the cloud. There are certain business processes, certain applications that are natural to move to the cloud. Some of them will stay on-premise. Sometimes that on-premise is driven by regulatory, security, the amount of data they have. There are a lot of factors that go into it but in most cases they end up with hybrids.

A lot of the dialogue I have with the client is: ‘What do I move, how do I move it, when do I move it?’ They’re looking for help and guidance. They’re looking for capability. I don’t have a lot of discussions about IBM financial results with clients. What they want is to make sure we’re in it for the long haul. They know as they make the transition this is a decade-long commitment that they’re making. The other piece that I hear a lot from clients is [about] culture. How do they make the shift in culture? They’re always asking for my experience and insights into how you make that transformation because inside of IBM we’ve had to make that transformation.

JG: From the CIO perspective, when you talk to them about the IBM transition, what would you say is the single biggest worry they have? What’s the one thing they don’t want IBM to screw up?

I guess they’re always worried about two things. Are you bringing the A-team skills to help me make the transformation that I’m undergoing and are you going to stay in the public cloud longer term? I point them to our strategy. We’re as dependent on the cloud, if not more, than our clients are. If I’m not in the cloud, then I don’t have a Watson business because everything I do is on Watson. If I’m not on the cloud I’m not in the internet of things business, I’m not in Blockchain. All of those value-added services and solutions that we’re building for ourselves and for our clients are all on top of the cloud. The cloud is a foundational element for the IBM business and also for our clients. I talk to them about the level of investment we’re making, which is in the billions of dollars and about the progress we’ve made in the last 18 to 24 months, really starting when we acquired SoftLayer in 2014.

BB: Robert, I want to get back to hybrid cloud. In her annual letter to IBM shareholders, Ginny said that hybrid cloud is the fastest-growing segment of the cloud market and that IBM is the global leader in hybrid cloud for the enterprise. How is IBM better than, say, Dell/EMC or Hewlett Packard Enterprise for hybrid cloud?

Think about hybrid cloud: It is the combination of private and public. For some players, it’s hard to be a hybrid cloud provider if you don’t have part of the equation. Being a world-class public cloud provider is a perquisite to being a world-class hybrid cloud provider. You’ve got to enable the client to build these solutions and put the solution or the application and the data where it makes sense for their business. As an example, if you’re building a new mobile application, most mobile applications today are being built out on the cloud. You’ve got to have a world-class cloud platform to enable mobile. You’ve got to be global. Some of these players are more local. Most enterprises are global. Even smaller companies have aspirations to be global so you’ve got to have data centers that are around the world. We’ve got almost 50 data centers now as part of our cloud around the world. In fact, just last week I was in Korea opening up our Korea cloud data center.

Clients are looking for the ability to deploy their solution anywhere around the world and to have data local. There are a lot of companies that have data regulation, data security, privacy regulations that force some of the data to be in-country. We give that flexibility to the client so they can decide where the application runs. They can decide where the data resides. If I’m running an application, I may have an instance of that application running in Country A and the same instance running in Country B. That really is the client’s decision.

When you think about some of the other players, they may have one piece or the other. We’ve got the on-prem; that’s our history, that’s where we come from. We understand how to securely connect applications to data, securely connect back into transactional systems. That is where we have a unique set of capabilities, a unique understanding, since we were a major player in that generation of on-prem IT. Our ability to map and to connect them to the public cloud and a world-class public cloud solution is unique.

I’ll give you an example.If I’ve got a large application and it’s handling a lot of data, for me to move the application to cloud is one thing. For me to move the data is another thing. If I have transactional systems that are producing new data every day, if I’m having to replicate the data back and forth, that becomes a very expensive proposition. What I hear from clients is: ‘Yes, compute and storage is a big part of the public cloud but I’ll tell you, I’m spending more money on networking and moving data than I am on compute and storage.’ Having to move data and replicate data, if you have to do that in a hybrid world, is not a cost-effective way to manage my environment.

BB: Partnerships seem to be another important part of your strategy. You have an expanded partnership with VMware that you spoke about at VMworld. You have a partnership with Workday. Can you explain the overall partner strategy for advancing the cloud position and what should customers expect in the way of future partnerships?

One type of partnership enables clients to do things they couldn’t do before. VMware would be a great example of that. I would put Apple in the cloud in that bucket where we enable clients to move workloads from on-premise onto the cloud. They can consistently manage and have a consistent platform and a stack where they can build the application once and run it where it makes sense, whether it be on-prem or in the cloud. Then you want to automate that such that it’s easy for them to move from one to the other. Sometimes they’re going to start in the cloud and build the application and move it on-prem. Sometimes they’ll take an on-prem current application and move it to the cloud. We want to make it easy for them to go back and forth to map to whatever business model or whatever business objectives they have.

We had Marriott onstage with us (at VMWorld). That was an important thing for Marriott because they want to have that flexibility. It’s technology that clients use on-prem to enable them to use that in the cloud and that drove a lot of the VMware partnership. It’s the same thing with Apple because one of the pieces of the Apple relationship is Swift. As you know, Swift is heavily used in building the mobile application but clients need to be able to connect the mobile application to backend systems. We enable Swift to be run in the enterprise and in the cloud. That’s enabling new capability in the connection of this hybrid notion. That’s one class of partnership.

The other class of partnership is like what we’ve done with SAP, Box and Workday, in which they’re looking for a world-class public cloud so that they don’t have to spend all their time and energy investing in their own private cloud. They want to go public cloud and for them, the other thing that’s attractive is my global presence. Because they’re all trying to expand their businesses into global markets and the fact that I’m sitting already in data centers all through Europe, I’ve got nine data centers in Asia, enables them to take their offerings and get into new markets quickly without having to invest all of their money on building out the infrastructure. It opens up the opportunity for them to expand their business into new markets.

JG: You had talked earlier about the industry-specific focus of your efforts. Some analysts we had talked to in advance of this spoke about a recent internal structural change, the creation of an industry platforms group. Can you tell us about that?

We made an announcement internally here at IBM. Look at what we did with Watson Healthcare. That really became a model that we believe will permeate through multiple industries. We will go after the other industries and replicate what we’ve been able to do in healthcare in those industries. Financial services would be a natural for IBM – given our position in financial services and what we’re doing in technologies like blockchain – and helping financial services companies move into the cloud.

JG: Just so I understand, Robert, how is that group structured? That’s one group that oversees all of the industry-specific capabilities you’re bringing to market?

Yes. There are certainly a lot of things we do that are common to industries. The cloud is an example. The cloud is the cloud. The cloud doesn’t know an industry. There are separate capabilities that we will build on top of the cloud that are unique to a certain class of applications or certain industries. Blockchain is a great example for financial services. You saw new acquisitions in healthcare of Truven, Merge, and Phytel. There is a set of applications and data that is applicable to healthcare. You would anticipate that we would continue to do that now in other industries and being able to take our Watson technology and apply our Watson cognitive technology into multiple industries. Most industries are data driven and process driven and any time you can take data and apply things like cognitive and analytics, you get insight. When you get insight you improve the process, you come up with new business models and you can drive that digital transformation. Every industry that we look at is going through some form of digital transformation. What we want to do is we put that unit together to focus in on specific industries as we go forward.

JG: I would assume this also has a big impact on who you sell to. Is it bringing in more line of business executives that you have to talk to about these industry-specific capabilities?

I think that’s a good observation. The people who are making decisions are not just the technical team or the CIOs anymore. The lines of business are heavily involved. When cloud was all about compute and storage that was a CIO decision. Now that the cloud is becoming a discussion around business process, business models, data specific to an industry, the line of business is now being involved so it is a different sell. It is much more of a consultative sell, hence why Bridget van Kralingen, who ran our Global Business Services unit, was a natural to run this. We believe it’s much more of a business transformation than it is just technology. Technology is a means to an end. I’m partnering closely with Bridget to make sure that I provide the best platform, the cloud that enables that level of transformation that happens in an industry context.

BB: Robert, I wanted to ask you about the public cloud. In Gartner’s latest Magic Quadrant report, Amazon Web Services continues to be the market leader. Microsoft is seen as a second place vendor and it seems like there’s a whole host of other vendors fighting for market share, including Google, IBM and others. What do you think of that characterization of the public IaaS cloud market and where do you see IBM fitting in?

Gartner has a very narrow definition of what the cloud is. They actually talk about Infrastructure-as-a-Service and that’s what their report is based on. We think it is too narrow. We don’t think it’s a client view. Forrester just put out a new report and they positioned IBM as a leader, especially when clients are trying to do hybrid. Gartner tends to have a very narrow view, probably the most narrow view of the market that I’ve ever seen, but even in Gartner, if you look at some of their other Magic Quadrants, they position us extremely well. They excluded a lot of capability we have. They excluded our Platform-as-a-Service capability. They excluded our bare metal capability, which is a big differentiation for our cloud over other clouds. It’s something that enables us to do things that others cannot. If you look at our VMware partnership, a lot of that was enabled because we had the bare metal capability. We can do things for clients that some of the other public cloud providers cannot do. We think that Gartner took a very naïve view, a very small, narrow view of the market.
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BB: What steps are you taking to ensure that SoftLayer and the IBM Cloud are even more competitive versus an Amazon?

Again, we look at the investments at three levels. One is Infrastructure-as-a-Service and we’ll continue there. We’ve made public that we’re spending billions of dollars just like all the other providers. We continue to expand geographically – we expanded into Korea last week. We’ll make an announcement here, another announcement in Europe in the northern hemisphere likely in September. We keep expanding the capability that is in our data centers. We have the latest and greatest technology.

For instance, the next-generation Intel servers have security updates in the hardware. We’re already deploying those servers into our infrastructure. Then there’s all the value added. There’s internet of things, Blockchain and Watson Cognitive, all the Bluemix services. We’re continuing to invest there. What I would say to clients is that this is a race for value, not a race for size. Some of the analysts have gotten enamored with size but when you think about it from a client’s perspective, if they have a provider who has half a million servers or has a million servers it really doesn’t mean much to the client.

What they need to know is that you have the capacity they need when they need it so it provides an elastic service and, by the way, do I have the additional value-added services that enable me to do something or build something that I couldn’t otherwise do if I wasn’t on a cloud like the IBM Cloud? We’re continuing to invest but we’re investing for value and not for size. As long as I’m at a cost competitive point, I’d rather provide additional value than just more of the basics.

BB: Is that Infrastructure-as-a-Service component still important? How big of an operation is that for IBM compared to the other public cloud components that you’re talking about like hosting?

It’s as important to me as it is to every other single provider. It’s no less important. It’s a basis of our strategy going forward just like it’s a basis of all their strategies going forward. But when you think about it, some of them can add it because they’re supporting a big business, a retail business or they’re coming at it because they have a large Software-as-a-Service business or they’re supporting all of their advertising and search business. We’re all in it not only for being a public cloud provider but for all the capability that we support in the businesses.

If you look at IDC data and where they position us in terms of volume and revenue and everything else, we are a major player. I don’t get enamored with being bigger than somebody else. I really look at whether I’m providing more value. I have very little discussion about infrastructure with clients. Most of the discussions I have with clients tend to be around hybrid, tend to be about the architecture that enables them to build new capabilities, to get access to new functions that they can build into their business models, into their business processes.

JG: I want to shift over to the Platform-as-a-Service market and make sure people understand the strategy there. Can you help them by comparing your Bluemix approach with something like Microsoft Azure?

There are a couple things that we focus in on Platform-as-a-Service. One is the DevOps environment. When you’re building for the cloud, the next-generation of applications you’re building differently, the processes are different, the tooling is different. In our platform we support a lot of open tools. Unlike some of the others that say no, you have to use my tools to run on my cloud, we allow the client to bring the tools that they’re familiar with. That’s why we’ve done partnerships with players like GitHub and others. We allow them to bring in whatever tools their developers are used to and we help them build out the tool chain.

We help them integrate these open tools and allow them to build a true DevOps environment inside our PaaS. Some of the providers support the open tools but they haven’t integrated any of the tools. Some of them have all the tools and no integration. We’re trying to bring the best of both of those worlds.

The other one is we support applications to be built locally. Think of that as private clouds, dedicated clouds and open clouds. Our Bluemix platform supports clients building applications that may be targeted at any one of those cloud environments whether it be private, dedicated or open clouds. That’s another differentiation. The other one is in the access to all of the services. For instance, our analytics services, I have access links to those analytics services on the public cloud, on the dedicated cloud, on the local cloud so the client can make the decision and the decision is based on where their data is, not where the function is running, as an example.

JG: What are you doing to get more developers to build on the Bluemix platform, especially emerging companies?

We’ve got a very good mix between startup companies and enterprise companies. We’ve got now well over a million users on Bluemix and adding quite a few every single week. We continue to add capabilities. Developers will go where they see function, where they see value and that’s what we’re really focused in on. Some developers are in enterprises; some of them are in small companies. When you look at it, the technology in the whole cloud is actually leveling the playing field. We look at providing capability for all and also building an ecosystem of third-party services.

That’s why things like VMware, Box and Apple, SAP and GitHub and all the partnerships we do are important because we’re also enabling them to expose their capability on top of our platform, therefore providing more capability to our clients.

JG: What’s the single most important thing you want the CIO or senior IT executive to understand about IBM’s cloud strategy?

You want choice with consistency. Therefore, you want to be able to build out your next-generation system to deal with digital disruption and choose what makes sense to your company: public, private or a dedicated cloud on the public cloud. You want to make sure you have the ability to utilize the next generation of skills, the next generation of tools, the next generation of technology to build all that innovation into your business, whether it be into your business model or your business process. If all you’re going to do is take an application and move it to the public cloud, you’re probably not bringing business value because the business doesn’t care if it runs in the cloud or runs in the closet. What they’re looking for is new capability, new function and when you think about the cloud and the cloud bringing new data sources, combining those data sources with data sources I have today, you provide new insight. New insight provides new opportunity for business model transformation, for business process transformation. Those are the kinds of discussions that I tend to have with clients.

This story, “IBM cloud chief: The next phase of cloud is a race to add value ” was originally published by Network World.