PHOTO: Michael Coté

Earlier this month, IBM and HCL announced a deal worth $1.8 billion, in which HCL will buy a bunch of IBM software products. The transaction, expected to close by mid-2019, addresses a potential market of more than $50 billion. The products include:

  •  Appscan for secure application development.
  •  BigFix for secure device management.
  •  Unica (on-premise) for marketing automation.
  •  Commerce (on-premise) for omnichannel eCommerce.
  •  Portal (on-premise) for digital experience.
  •  Notes & Domino for email and low-code rapid application development.
  •  Connections for workstream collaboration.

HCL and IBM have existing partnerships for five of these products, two of which are core to the a number of enterprise digital workplaces that have invested in Notes, Domino and Connections. The ecommerce offering is also a key application for many. “The products we are acquiring are in large growing market areas like security, marketing and commerce, which are strategic segments for HCL. Many of these products are well regarded by clients and positioned in the top quadrant by industry analysts,” HCL president and CEO C Vijayakumar said in a statement. “The large-scale deployments of these products provide us with a great opportunity to reach and serve thousands of global enterprises across a wide range of industries and markets."

However, the question everyone is asking is why did IBM sell, given that over the past five years it has never missed an opportunity to flaunt its software credentials? The sale was announced not long after Big Blue bought Red Hat for an extraordinary $34 billion, leaving many to wonder if the HCL deal might be a way to cover a tiny part of the cost. Perhaps, but that doesn’t address the major problems and upheaval that IBM has been facing over the last three years.

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Selling Legacy Software

Tony Byrne, analyst and founder of Real Story Group, has been watching and writing about many of these tools for the past 15 years. In his company blog, he outlined four take-aways from the deal:

  1. Declining toolsets: RSG evaluates several of these offerings and they all had this in common, they are mostly legacy offerings, in long-term decline, according to Byrne.
  2. Money in legacy: There is a business model around acquiring aging platforms and housing them more or less to their demise. This can be very profitable.
  3. Licenses: It is not clear that HCL actually knows how to execute effectively on the license model that IBM has used. Among other things, will they now freeze out competing integration partners? 
  4. Lines continue to blur: The line between large outsourcing/integration firms and traditional software vendors has been getting blurry, and this just continues that trend. Services firms are envious of the recurring revenue streams that vendors see, especially with new cloud models. 

MarketsandMarkets, a revenue impact research and advisory firm focused on high-growth niche markets, pointed out that HCL’s aim is to move away from a labor-intensive software services business to an intellectual property (IP)-driven business using the IBM products. The result is that IBM’s old revenue mix has become HCL’s new revenue mix.

However, HCL management has a big task ahead proving it can turn the acquired products of IBM into a lucrative investment for its stakeholders.

Related Article:  How Will the $34B IBM Acquisition Affect Red Hat Users? 

Declining Revenues

Francois Koutchouk is one of the original members of the Lotus Notes engineering team formed in 1989. As a groupware evangelist, product manager and technology partner recruiter, he had direct visibility into most large organizations adopting Notes. Koutchouk stayed with IBM as a consultant after the acquisition, he then moved on to help companies get off Lotus Notes.

Koutchouk said one unique advantage of Lotus Notes is its resiliency: servers and clients run unattended for years. As a result, many customers simply opted to stop paying IBM for upgrades and support fees. Most also froze development of Notes apps, drying out associated revenues for outside consultants like IBM Global Services and IBM Partners.

For well over 10 years most large organizations have feverishly tried to move away from Notes. From an estimated 10 million apps at its peak, the first seven years saw a reduction to 2 million or so apps — mostly through attrition and easy migrations to Microsoft SharePoint. The remaining apps are the most valuable, more complex and harder to migrate due to the unique and proprietary technology powering Notes. “What IBM did not tell HCL is that the last few years have seen the apparition of new platforms better suited to migrate Lotus Notes apps and its users, such as Salesforce and Microsoft PowerApps,” he said. “This, combined with new technologies to automate migrations, is dropping the count (and cost) of remaining apps at an unprecedented rate. IBM is offloading Lotus Notes because $1.8 billion is a lot of money for an installed base racing to zero revenues in a few years."