IBM Merges Hardware, Software Units

IBM has merged its two non-services divisions — hardware and software — into a single business unit under one manager, a move that points to IBM’s intention to offer fully integrated systems.

That could have important implications for IT executives weighing whether to adopt an IBM-dominated infrastructure over competitors like Oracle, the database and enterprise software colossus that, thanks to its recent
purchase of Sun Microsystems
, is now also able to offer tightly integrated servers, software and middleware.

IBM (NYSE: IBM) CEO Sam Palmisano announced his company’s reorganization internally this week following IBM’s second-quarter earnings. Steven Mills, previously the head of IBM’s Software Group, is now senior vice president and group executive of the new group, called Systems and Software. Rod Adkins, previously senior vice president of the Systems and Technology Group, now reports to Mills instead of Palmisano.

The combination means IBM can now focus on tighter integration of hardware and software, a model that has also worked wonders for vendors like Apple (NASDAQ: AAPL).

“We’re delivering much more integrated technology,” David Gelardi, vice president of IBM’s systems and technology group, told “You will see more integrated services of hardware and software, with our services unit wrapped around it in the future.”

“I think it will help a lot. It will give us more integration potential than what we’ve already been doing,” he added. “This will enable more collaboration up and down the line.”

That’s pretty much how IBM did it in the days before government scrutiny brought about a consent decree, which finally ended in 2001. The 1956 consent decree between IBM and the U.S. Justice Department came about as regulators sought to break IBM’s monopoly over both the hardware business and what then passed for a software business. It forced IBM to keep its business units separate so other companies could compete in the punch card business. Chafing under the decree in the 1990s, IBM had to get permission from the Justice Department just to integrate its services unit into the company in 1995. Prior to that, IBM’s services arm had to function as a separate business known as Integrated Systems Solutions Corp.

But it’s not 1956 anymore, noted Merv Adrian, principal analyst with IT Market Strategy, and IBM can now step up its game by integrating its offerings.

“It’s a different situation because the industry has completely transformed since those days,” he told “There was no independent software industry back then. Software has been the profit engine on IBM, although there’s more revenue on services. That’s why [Mills] got the job.”

The tight integration and working together of hardware and software teams has been the magic formula for Apple, which has built its success on mostly commodity hardware run by a seamless integration of easy-to-use software interfaces. You don’t get two more different companies than Apple and IBM, but the demand for integration is the same, Adrian said .

One of the points IBM highlighted in its new zEnterprise mainframe announcement is the integration of management, virtualization and load balancing software between the mainframe and other IBM parts. IBM has promised there would be further integration of software and hardware to simplify management and do it all from a single console, with the mainframe at the heart of it all.

“People want to consume this stuff as easily as possible. Yes, they want choice, but the other side of the growth of an independent software industry is complexity has grown,” Adrian said. “People are buying environments composed of literally dozens of moving parts. They don’t want to have to deal with multiple releases and APIs just to get an end-to-end process up and running. So there is a powerful value proposition” in what IBM is doing.

In that regard, Adrian thinks Mills is perfect for the job. “Steve knows this stuff. Smarter Planet comes to life when Steve Mills tells the story. And he understands both sides of the shop. He’s always had a deep understanding of the whole stack and people who have worked for him on both sides of the aisle, so he’s really well suited for this model,”
Adrian said.

The men (and woman) who would be CEO

The hardware and software mergers weren’t the only shuffling going on at Armonk. Global Services, which accounts for more than two-thirds of IBM’s business, also had a little change. Mike Daniels, senior vice president of IBM Global Technology Services, is now responsible for IBM Global Business Services, the company’s consulting operation, as well.
This effectively puts Daniels in charge of all of the company’s services business, it’s largest source of revenue.

The company also gave new responsibility to Virginia “Ginni” Rometty, senior vice president of sales. She will now take over IBM’s marketing and strategic planning with the new title group executive for sales, marketing and strategy.

The final promotion saw CFO Mark Loughridge promoted to senior vice president of finance and transformation, which means he takes over the company’s financing arm, IBM Global Financing.

The promotions may suggest that IBM is preparing for the inevitable retirement of Palmisano. IBM has an unwritten law that its CEOs step aside at age 60, and Palmisano turns 59 this year. It’s not a hard and fast rule, and Palmisano might stay a little longer. Age may be one of the determining factors: Mills, the most visible of the four IBM executives, is also 59. Loughridge is 56 and Daniels is 55. Rometty is 52, which would give her the longest reign.

Additionally, Adrian noted there is “an awful lot of buzz internally at IBM for Ginny.” That was echoed in a recent Wall Street Journal article on the promotions, where an executive recruiter said “While Ginny may not be ready for the job tomorrow, it is her job to lose.”

“One of those four will be Sam’s successor. The assignments are designed as grooming exercises. Several of them have been advised to sit on boards of other companies. That’s really good experience for being a CEO,” said Adrian.

Andy Patrizio is a senior editor at, the news service of, the network for technology professionals.