Top 5 Reasons Why The Mainframe Empire will Strike Back in 2022

Intro

The IBM Empire has suffered from a decade or more of decay. In 2012, IBM stock was trading at over $200 per share, and in 2022, it is trading at somewhere around $120, which is a value loss of 40%.

IBM Revenue at the end of 2011 was $106.916 Billion vs. the $57.351 Billion it is at the end of 2021. This is a loss of $49.565 Billion of revenue over the last 10 years, which represents a reduction of more than 46% of its customer receipts.

With a current market value of $110.7 Billion, IBM is just a shadow of its former self, as its market value was worth $216.72 Billion 10 years ago. That's a $106.02 Billion loss of value, hemorrhaging 48.9%.

The notion that IBM is getting smaller, to become leaner with a higher focus on high-margin business opportunities to become more valuable is a lie. IBM is losing market value faster than it's losing revenue, and it's losing revenue faster than its share price is declining.

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And even after Ms. Rometty was replaced as CEO by Mr. Arvind Krishna:

Breaking Dawn for IBM: Meet the New CEO, Mr. Arvind Krishna

IBM's focus became AI and Cloud (Red Hat acquisition), but the results so far have been:

With a long slide of decay and the lack of market leadership (still no market-leading products in any category), a broken marketing message (how are you the leader in hybrid cloud and AI if you scrapped your AI [Watson]), unhappy customers who are intent on reducing your cost and minimizing your influence, continued underperformance on revenue goals, and no real unique (customer accepted) role in the modern enterprise, it is no wonder why the problems at IBM have metastasized into a life-threatening disease.

Since Mr. Krishna took over, IBM revenues are down from $77.147 Billion at the end of 2019 to $57.35 Billion by the end of 2021. That's a $19.797 Billion reduction (and a loss of 25.66%). A year ago, Mr. Krishna laid out an extremely ambitious plan to double company revenues within 3-5 years. So far, things are going in the wrong direction.

So IBM is walking dead, right? Well, not so fast my friend. This is 2022, and it may just be the year that the IBM Empire Strikes back. IBM currently pays the highest dividend in the dow with a yield of 5.3%, and that draws in a lot of investment. And, there is still one place where IBM completely dominates: Mainframes. Many people are surprised to learn that Mainframes are still used at:

All 10 of the world’s largest insurers
92 of the world’s top 100 banks
90% of all credit card transactions are processed on mainframes
18 of the top 25 retailers
70% of the Fortune 500
68% of the world’s production IT workloads

2022 could be a pivotal year for IBM in the mainframe arena, leading to a big boost in sales.

Top 5 Reasons Why The Mainframe Empire will Strike Back in 2022

March. CA, BMC, and Compuware Fiscal Year-ends are all happening in March. This creates an influx of deals for not only these suppliers, but also those who can offer competitive alternatives. As a result, March has become a very big month in the mainframe world. See our related blog on the Top 20 Mainframe Software Suppliers for 2022.
Kyndryl. The IBM Services Spin-out Kyndryl has a significant number of customers in IT Outsourcing (ITO) agreements, inclusive of IBM mainframes. As a so-called independent services company, Kyndryl now says they don't have to rely on IBM for solution components. This could potentially open up some additional opportunities. To this point, Kyndryl just signed a deal with AWS for cloud enablement, and clients have been successfully migrating mainframe workloads to the cloud using AWS cloud migration programs, so this is an area that should be evaluated. On a related note, please see our recent blog about Kyndryl. Time to Defuse Your Kyndryl Deal BEFORE it Detonates.
IT Services Companies. There is a swell of mainframe application development and maintenance services contract activity in March due to FYEs for DXC, TCS, Wipro, and Infosys. We are seeing margin compression in this space with these and other suppliers who remain aggressive in their pursuit of competitive opportunities. As a result, mainframe-enabled services are becoming less expensive for the first time in a long time, which may give some clients increased hope of getting another 3 to 4 years of runway on their digital transformation initiatives. See our related blog on this topic, Top 10 India-Based IT Services Companies for 2022.
Digital Transformation, Cloud Migration, and Enterprise Modernization efforts continue to rage on at a frenzied pace, so this puts the mainframe 'front and center' when it comes to a system that is targeted for workload migrations and re-platforming. However, Boston Consulting Group reports that a staggering 70% of digital transformation projects fall short of their goals, which often results in a backlash to legacy platforms, resulting in increased demands on the mainframe to power additional workloads that fall back to the customer data center for further data collection, processing, staging, resource utilization, testing, and/or remediation works. IBM is adamant that the new z16 mainframes can be a useful tool to help customers leverage hybrid cloud capabilities, but it will remain to be seen how big of a role IBM wants mainframes to play in helping customers migrate workloads to the cloud.
Upgrades. The new z16 IBM Mainframe is expected to become Generally Available (GA) in late 1H 2022 or early 2H 2022. The new model will have massive processing advantages (many customers will upgrade). This is where the IBM Empire may Strike Back at customers. The last time there was a major platform upgrade, IBM got a 70% revenue boost in its mainframe business. Most clients have no idea about how to cost-optimize these proposals and end up making massive over-investments based on perceived technical limitations and/or requirements. Pro Tip: Be sure to future-proof all your related agreements so that you don't get boxed out of savings opportunities once you do upgrade.

Two Customer Case Studies (to further prove the points in #5 above):

A large financial services client of ours was facing a $928 million upgrade charge to their mainframe operating environment. We were able to help them secure the upgrade and dramatically shorten the time to value, for a revised cost of $350 million. They saved $578 million (62.3%) by leveraging our Federated Market Intelligence (FMI), utilizing our industry best practices for the modern enterprise, and by relying on the skilled negotiations expertise of our subject matter experts. Our Savings Cloud ME Program (ME stands for the Modern Enterprise) is dedicated to helping clients make their digital transformation journey in a cost-optimized way. Find out more about how we can help you drive and fund your very own digital transformation on your path to becoming a modern enterprise.

In another case, we were able to help our client lower MLC costs from $1.44B to $1.25B S&S from $426.8M to $300M resulting in a new 3-year IBM Software deal with $950.4M in Savings, but even though these hard dollar savings amounts are extremely impressive, they actually dramatically understate the value achieved in the negotiation because, in addition to these cost savings, our client also received a 45.5% INCREASE in its MIPS Capacity.

Summary

Above are the Top 5 Reasons Why the Mainframe Empire of IBM will Strike Back in 2022. With a successful rollout of the z16 in late 1H or early 2H, there will be considerable interest from customers looking to upgrade their mainframes. With a monopoly on big iron, IBM will undoubtedly stuff the market with bloated proposals that are wildly sub-optimized and hugely over-priced. IBM is clearly driving very hard to increase sales and margins in 2022, and with recent disappointments in AI, and an inability to establish itself as the clear market leader in hybrid cloud and multi-cloud management, IBM is going to have to rely heavily on its mainframe business to drive the kinds of financial performance it needs to regain relevance. That spells big problems for any customer considering a mainframe upgrade, which is why we strongly recommend professional assistance in all your commercial interactions with IBM.

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