How an IBM LiferBuilt Software UnitInto a Rising Star
By WILLIAM M. BULKELEY WSJ, April 2, 2007; Page B1

This article on the spectacular growth of IBM’s software business via acquisition illustrates two important points: a discipline process in the selection and integration of target companies is critical; and, M&A can be a major component of organic growth by filling the gaps in the Capability Platform (product, market access, technology, etc.). As I always preach, a discipline process truly empowers the organization to innovate and grow.

Increasingly, the public face of International Business Machines Corp. is that of Steve Mills.

Mr. Mills heads IBM's rich and acquisition-hungry software unit, which has buoyed results in recent quarters. He frequently represents the company at investor conferences and software-customer gatherings, and his rising profile reflects a new reality at the technology giant.
IBM still gets most of its reputation from its computers and most of its revenue from services, but most of its profit growth comes from software. After 44 software acquisitions since 2000 for about $9.5 billion, the company is trolling for more (major M&A activity)

Mr. Mills says his group is likely to become increasingly visible because more than half of its revenue is finally coming from fast-growing software areas, offsetting declines in old mainframe-related software.

"I've been doing off-Broadway for years," says Mr. Mills. "Now, it's like I have a hit series."

On a stand-alone basis, IBM would have had the second-highest revenue of any software company after Microsoft Corp. Software revenue grew 14.4% in the fourth quarter and reached $18.2 billion last year. Software accounts for only 20% of total revenue -- but 40% of earnings. Fast-growing IBM brands include WebSphere, a variety of Internet tools for business, which gained 23% last year; Tivoli, which manages computer systems, up 26%; and Lotus, which makes email software, up 12%.

Mr. Mills is credited with helping to persuade the company to emphasize software, and with taking a disciplined approach to making and integrating acquisitions. IBM buys smaller, often closely held, companies with arcane products and little reputation outside the tech community (these are part of the selection criteria). The most it has paid for a company in the past six years is the $2.1 billion it laid out in 2002 for Rational Software, a maker of tools used by software developers.

The idea, Mr. Mills explains, is to buy companies with unique products that can grow faster when sold by IBM's giant sales force (organic growth). Mr. Mills says he won't buy a company just to get more salespeople or new customers, (inorganic growth) since IBM already sells some products to virtually all large enterprises. Instead, he tries to make sure they "can accelerate their revenue two or even three times" as fast as part of IBM.( these are part of the selection criteria)

Once acquired, companies are put through an integration process that was initiated in 2000 at Mr. Mills's instigation. (process)

John Patrick, a former software group executive, says that one of the keys to IBM's success in software was Mr. Mills's recognition in 1995 that the Internet would be used by big business for more than advertising. That led Mr. Mills to order programmers to develop its WebSphere software using open standards that other companies could easily link up with (open innovation example)-- a risky decision because it could have made it easy to replace it, Mr. Patrick says………

After acquiring a company, Mr. Mills's 5,000-person sales force has to move fast to get trained in the acquired software, and to pitch it to their customers. IBM says companies acquired from 2002 to 2004 averaged 25% revenue growth the year after they were acquired -- including closely held Candle Corp., which IBM bought for $430 million in June 2004 and saw its revenue surge to $300 million the subsequent year.

Six years ago, while acquiring database maker Informix, Mr. Mills ordered executives to keep a record of what worked and what didn't in order to standardize the way acquisitions are integrated (building the process) He also started IBM's sophisticated "signature selling system" that categorizes and tracks sales opportunities on a weekly basis. Some salesmen groused about the paperwork (typical reaction to building the process), but IBM later adopted the system for its entire sales force.

As soon as an acquisition is completed, IBM sends in a transition team. "Every employee gets an IBM employee as a buddy," Mr. Mills says (process). On the very day IBM completed its acquisition of Las Vegas-based SRD Inc. in 2005, founder Steve Jonas says the new owner renamed all SRD products. "There's a process called blue-washing," he says.
SRD specialized in software that helps casinos comb public and private databases to check whether a job applicant might be living at the same address as someone Nevada regulators had banned, or if a contractor had an arrest record. The U.S. Department of Homeland Security adopted the software after 2001 to check on suspected terrorists. Last year, Mr. Mills asked Mr. Jonas to speak about the products' uses at a presentation he made to IBM's top customers on Wall Street, opening up another potential market.

The road to such a successful transition started before the acquisition, Mr. Jonas says, when Mr. Mills spent time with him discussing the technology and how it fit with IBM products. He was, Mr. Jonas says, "paying attention."