What International Business Machines Corp. (IBM) Needs To Do Now

There’s an argument to be made that mainframes like the z13 still have a place. People in the tech industry have for years predicted the death of the mainframe. But according toMorningstar, they remain popular in the financial services and telecom industries.

The problem is that the mainframe is not a symbol of long-term growth. In fact, the servers IBM sold off had more growth potential in revenue than do mainframes. Low-end server revenue across the market was up 7.4% in Q3 2014, according to researcher Gartner. Mainframes, according to the most recent figures reported by Gartner in Q2 2014, fell by 2.2%

The mainframe is a symbol of something else: IBM’s past. Low-end servers failed to generate profits for IBM. So even if they were a growing business, it didn’t hurt IBM to offload them. But mainframes certainly aren’t the path to the future.

Which is what made the z13’s unveiling so unusual. IBM went on about its future in the cloud and in Big Data. At the same time it rolled out the newest version of a product that is emblematic of its past. What was missing was the bridge between the two in the present.

And while the present would make for a very boring sales conference, IBM needs to focus on what is driving most of its business now. And that is technology and business services.

Global services, IBM’s cash cow – which makes up about 55% of total revenue and 45% of income – has been struggling. Revenue from services has fallen for 11 straight quarters, falling 8% in the most recent quarter.

“IBM needs to fix Global Services, the company’s largest division touching the most customers and a catalyst for IBM sales,” Cringely wrote. “For IBM to succeed they need a strong and effective services organization. IBM’s Cloud strategy, for example, cannot be financially successful without Services. If Services fail, IBM will fail. It is that simple.”

That’s IBM’s most pressing need now. Near the end of last year, Rometty abandoned the pledge of her predecessor, former CEO Sam Palmisano, to deliver $20 EPS in 2015.

This was a good first step, those were the kind of pledges that led IBM down the path of downsizing and divestiture that eroded the quality of its services business. Hopefully, Rometty will take this opportunity to shift focus from overly ambitious, destructive shareholder goals and look toward rebuilding services in this tough interim period.

“If IBM can invest $1.2 billion in the Cloud, why can’t it invest $200 million in Global Services?” Cringely wrote in October.

The Bottom Line: To stay relevant, IBM needs growth out of cloud, analytics, security, and mobile. But right now, all the money it pours into these initiatives isn’t going to help it through its current problems. This is only the first earnings report since Rometty abandoned the $20 EPS pledge, so we have yet to see if this will have a meaningful impact on services. But this quarterly report showed too much of the same, and makes IBM stock no better than a “hold” at this point.

Money MorningWritten By Jim Bach From Money Morning

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