Q&A: IBM's Moffat Says Company Not Leaving Hardware Business

IBM Senior Vice President Bob Moffat, who as group executive for systems and technology group, oversees the computer giant's nearly $20 billion hardware business, spoke with Channelweb.com Editor/News Steven Burke after his world premiere address kicking off Everything Channel's XChange 2009 conference at the Gaylord National Resort in Prince George's County, Md.

Moffat answered questions on a range of issues, from whether IBM's profit focus is causing channel conflict, to the 2010 compensation plan for IBM's partners and the direct sales force and, ultimately, whether IBM would ever consider bowing out of the hardware business.

You took the issue head-on whether IBM will exit the hardware business. There seems to be a lot of talk about that.

I don't know how much talk there is. There is a competitor out there that likes to say that, and they like to use the Lenovo licensing deal.

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First of all, that is a little bit of what comes out of the 4,186 (IBM) patents. You tend to get money for those patents somewhere in your business model. So licensing technology to someone so they can distribute it in places that I can't distribute it is smart business. I understand if you don't invest in technology you don't have to do that.

Look, I am not in this business to get out of this business. The numbers are starting to talk for themselves. We gained substantial share in the United States. The partners asked us to address a set of business problems we had around our System X business. I think if you ask partners, they would say we absolutely did. We continue to invest in R&D at the same rate I did in prior years. That is tough to do in a market that is down 20-plus percent in the industry. Look, if you can't compete on technology, you compete on rhetoric.

Some people have pointed to the fact that you got called in to get the (IBM) PC Company in order and sell it and get the (IBM) Printer Company in order and sell it.

First of all, I'd ask any channel partner to take a look at that decision to get out of the PC business and ask if they would make a different recommendation if they were in my shoes. I am very glad we are not in the PC business in today's economic times and what I expect to be the future. What do I mean by that? Look, when you start getting netbooks starting to take away your business in notebooks, you could ask: Is there a true economic dynamic in that business that could be truly fulfilling to a shareholder?

I think if you go look at the shareholder value IBM has created and the shareholder value that the rest of the market has created, the market right now speaks for itself.

Did IBM make a change in the direct sales compensation focused on profit, which is resulting in direct-sales channel conflict?

I think you are missing the point. Some people have talked about the fact that we have got some IBMers going into some accounts that the channel used to deal with. That is not driven by incentives or anything else. Honestly, I think it is driven by tough economic times. What customers are doing is looking at us saying: 'Okay, what do I do? Can I get a cheaper price with you?' And the answer is no. So I think that has caused some conflict.

We are trying to radically unstack things so that we don't have multiple people calling on an account, all trying to sit there and take credit for business happening. So we will continue to do that type of work.

One of the things I drove is the republishing of our business partner charter. The words are updated. But the theme hasn't changed. The theme is the same that [IBM Chairman and CEO] Sam [Palmisano] put out when he took over the Systems and Technology Group. I just wanted to reinforce that our belief in the channel is stronger than ever.

You are getting ready to look at those 2010 comp plans for the direct sales team and for your partners out there. What is your message to partners?

First of all, we are listening. We think the changes that we made to the channel in 2009 have resonated with them. When you step back and look, we recession-proofed the (partner) incentives. And that is their word and not mine. What did we do? We said on the first sale you could start earning with us as opposed to you need to make the clip level. Why did we do that? We wanted them to continue to invest in us and our solutions as we move forward. We also know they have to run a business. So how do you give them that in very uncertain times?

Honestly, I said this when I was on stage. I think you can learn a lot about a company with how they deal with tough economic times. I'll use one that goes away from the channel here a little bit: Look at how IBM has treated its employees during tough economic times. We are one of the few technology companies that has a salary increase program. We have not had a furlough in the IBM Corporation.

Then I ask you to go look at some of our competition that has cut pay and has furloughed people. That tells me they are not exactly focused on the longer term and they have other systematic business model issues that aren't being dealt with because, honestly, cutting pay is an easy thing to do.

Next: Moffat On IBM's Plans For Paying Partners

You mentioned that you are paying partners more money on a percentage basis in a down year. Talk about that.

You can go look at the external results of the IBM Corp. for hardware. Think about the channel as being about the same [total percentage of annual sales] because there has been no share shift. Think about that. In the first quarter, I actually paid more absolute dollars on down revenue. In the first half, it is up on a percentage basis but not quite on an absolute dollar standpoint given the sales decrease.

Has there been a shift in the total percentage of sales that go through partners of the total hardware business in the first six months of the year?

You can go look at external data. I won't even use my own internal data. There are people that put out this data. You look at the growth rates inside the channel and inside IBM and they are essentially the same. A little up or a little down depending on how you look at sales out vs. sales inetc. By the way, that is one of the things that I look at in order to make sure that those programs that we are putting out there are having the intended consequences that we want.

Some partners would like to see a profit uplift in the 2010 comp plan to help partners.

Our sales program actually is more weighted to profit in 2009 than pure revenue. So we did switch that mix a little bit as you would expect people to. I don't really expect us to change that in 2010. As I said, we have to go through the design programs of our own internal compensation and the channel and really listen to feedback both internally and also the channel to understand whether or not we will tweak those things. I don't expect any big changes.

So the comp plan for direct and the channel will probably be the same in 2010?

I would not expect any significant changes. I am careful not to say there will be no change because honestly that would say that I don't listen both to my own internal employees and the channel.

You talked about the profitability of IBM partners. That is something that has always been paramount with IBM. Are your IBM partners the most profitable segment of the channel?

I can tell you the ones that I have been talking to: yes. Some of this is very difficult decisions we had to make. Certainly in the distribution world, we were overdistributed in the United States. So we had to take some tough actions on that. We have seen margins go up across the board associated with that. I think what partners should know is we are willing to make the tough decisions. I think if you had to say: why was I brought into Systems and Technology Group? Because I have a history of making tough decisions. I have a history of doing the things that are right for customers and the economics of the channel and the economics of IBM. One of those is not sell off the hardware business. People need to understand how core the hardware business is to the IBM Corporation and what it means as far as driving the IBM Corporation.

What is your mood as we come toward the end of the year into 2010?

My mood is upbeat because I think we are doing the things to go compete and win share, and I think the results are showing that.

What is your message to HP partners who might be looking at the market and thinking about branching out and bringing on other vendors?

I think they should come and join in with the innovation that we bring to the market. We have gained 15 points of share in the Unix market, 14 points in the $250,000-and-above server market, which is where stuff is going to consolidate. I think they can come work with us to make some money and grow their revenue.