The biggest and likely most significant news in information technology in 2018 arrived this week with the announcement by IBM that the company intends to acquire open source Cloud-based technology provider Red Hat. In this Supply Chain Matters blog, we explore what may be the implications for supply chain management focused technology.

The all-cash deal is valued at $34 billion is noted as being the third-largest in the history of information technology, representing IBM’s largest ever acquisition. Big Blue was willing to pay a 60 percent premium for the open source provider and add a considerable boost to its overall debt load in order to accelerate its recurring Cloud based subscription revenues. The acquisition itself would add in the vicinity of $3 billion in added Cloud related revenues for IBM, at current run rate.

Red Hat is recognized as being largest provider of open-source enterprise software, specifically in the offering of Linux based software for connecting private, public or hybrid focused Cloud systems supporting high-performance computing and applications. In addition to Linux software, subscription license revenues come from other open source software tools focused on supporting middleware needs in connecting services, app containers, data storage platforms or data center tasks.

The likely analogy for describing Red Hat is that of being a significant behind the scenes Cloud utilities provider with technology supporting many businesses. Their primary customer base is internal and external IT engineering and operations teams that are supporting Cloud and applications software systems. More pertinent, Red Hat was an option to avoid perceived “lock-in” to proprietary software offerings. Thus, Red Hat’s success remains dependent on fostering a global community of open source developers and advocates.

According to the announcement, Red Hat will remain an independent brand as part of IBM’s Hybrid Cloud division.

As in many these mega-deals, time will be the ultimate judge.

Risks

Thus far, initial views from Wall Street analysts and pundits seem to focus on sticker shock, tending to characterize IBM’s move as either a swing for the fences, or a desperate move. There is little secret that IBM’s has struggled for many subsequent quarters with its ability to accelerate its highly strategic Cloud-based revenue base. The company’s Cognitive Solutions segment which includes IBM Watson offerings had a revenue decline of 6 percent in the latest reported quarter. A highly touted effort to drive IBM Blockchain adoption across certain supply chain management focused processes remains untested and a work-in-process.

The top-five Cloud technology players, Microsoft, Amazon Web Services, IBM, Google and Oracle are riding the exploding Cloud based adoption wave and there is speculation that some of these players may have been bidding for Red Hat, driving-up the acquisition price. Once the acquisition closes, competitors will likely want to steer the open source community toward non-Red Hat alternatives. The size and scope of this acquisition could further trigger additional industry open source acquisition moves which business IT communities will pay special attention to.

There are inherent risks for IBM itself. The company has not in the past demonstrated a stellar record in being able to successfully integrate prior acquisitions. That includes  supply chain management focused providers. Procurement platform provider Emptoris, acquired in 2011, was folded into the SAP Ariba platform last year. The prior acquisition of supply chain optimization and business rules provider ILOG in 2009, included supply chain network design software provider LogicTools.  The latter was subsequently sold to supply chain technology provider LLamasoft in 2015, which has since integrated network design technology into the Supply Chain Guru suite. Similarly. the prior acquisition of Sterling Commerce has languished as a B2B Business Network provider.

Observes are already focusing on the different corporate cultures inherent in IBM and Red Hat. By its nature, Red Hat’s culture has been one of openness and transparency because of its roots in the open source development community. Analysis that we have reviewed indicate hierarchies and organization charts are not a fabric of Red Hat. That implies a potential risk of post-acquisition talent drain if cultural differences are not managed appropriately. Future pricing strategy will be another risk determinant.

Implications for Supply Chain Management Focused Technology

Supply chain management processes are often complex and increasingly network focused, linking supply and demand networks across companies and global regions. Thus, with the continued adoption of broad ERP, B2B Business Network or Omni-channel B2C customer fulfillment platforms, integrating information, collaboration and analytics anchored decision-making across multiple Clouds will be a key dependency.

Similarly, specialty business and supply chain planning as well as customer fulfillment providers have their particular software hosted on one or either of the top-five Cloud utility providers. Thus, whether known or otherwise, Red Hat, and soon to be IBM software technology may be a dependency of your current computing stack, whether you know it or not.

The dynamics of the Cloud platform market can therefore potentially begin to shift for the better or worse as a consequence of this acquisition play out, and as business focused IT teams respond or buffer any market dynamic shifts.

The question for multi-industry lines-of-business and supply chain functional teams is probably- Why should I care?  I’ll let the CIO and his or hers IT teams manage such implications.

In one respect, that may be partially true, in another, network maintenance and subsequent shared services costs related to overall IT expenses could rise as a consequence of this week’s development.  As the potential for physical platforms and digital processes being linked by Internet of Things or electronic documents linked directly to processes come to fruition, integration of various Cloud platforms will become ever more important. Another critical consideration is cyberthreats and the protection of business-critical information residing in multiple Clouds.

Keep in perspective that the value-proposition for Cloud adoption has been increased adoption of advanced technology with less business disruption at reduced overall IT maintenance costs. Cloud is a tradeoff of the 80 percent of annual IT budgets solely dedicated to keeping internal systems and application maintained and running, shifted towards added business innovation. Cloud can be the path toward digital business transformation and to more robust and less costly information security needs.

Business and technology vendor IT support teams favored the adoption of open source technologies for leveraging Cloud applications and network-wide integration to avoid vendor lock-in and to mitigate potential added cost triggers. Yet, open-source implies that all systems operate with the same logic and that data security must be focused at the data level itself.

Takeaway

Our takeaway for line-of-business, supply chain management and IT teams is too keep a close eye on what changes incur across Cloud platform technology providers as a result of this week’s significant acquisition announcement. The game strategy for the five top platform providers is Cloud platform dominance, and with that, increased annual recurring revenues. The hidden question of the Red Hat acquisition is whether open source will remain an avoidance of vendor lock-in in that the technology tilts too far, and whether remaining enterprise Cloud platforms now attempt to scoop-up remaining open source options as a counter.

From our lens, continuing to focus on Cloud based providers that have the ability to consistently demonstrate a deep understanding  of your business and supply chain business outcome needs, a technology savviness to be able to integrate and manage process, information and decision-making among multiple Cloud networks leveraging open source methods without vendor lock-in is the smart move. Focus on a long-term business partner relationship that has your cost, compute service, applications and information security needs as the prime objective as opposed to billing more seats onto the platform.

 

Bob Ferrari

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