See, when there’s only one mainframe company in the world, and they’ve locked most of their customers into long-term outsourcing contracts, and in some cases they don’t just run the data center, they actually own the data center, well, the customers are kind of at IBM’s mercy. And sometimes that really, really sucks. Just ask Air New Zealand.
Today’s case study: Air New Zealand, a big IBM outsourcing customer, lost its data center and was massively disrupted. Its CEO complained in an email, and said:
In my 30-year working career, I am struggling to recall a time where I have seen a supplier so slow to react to a catastrophic system failure such as this and so unwilling to accept responsibility and apologise to its client and its client’s customers. We were left high and dry and this is simply unacceptable. My expectations of IBM were far higher than the amateur results that were delivered yesterday, and I have been left with no option but to ask the IT team to review the full range of options available to us to ensure we have an IT supplier whom we have confidence in and one who understands and is fully committed to our business and the needs of our customers.
Let’s overlook the fact that the guy can’t spell “apologize,” and point out the obvious, which is that his airline maybe should have thought about this before they signed over their data center to IBM.
See, those outsourcing deals always sounded so good: Why do you want to run a messy old data center anyway? We can do it for less than it costs you to do it yourself, and you can focus on your real core competence, which is running an airline.
Except, um, no. An airline’s core competence is running computers. I mean, think about it. Duh.
Thing is, these guys did think about it. They knew the deal, but they did it anyway. You know why? Because they got to take a bunch of assets off their balance sheet and send a few hundred IT employees to IBM. It was an accounting maneuver, a way to dress up their financial reports, and it was especially appealing to weak companies. IBM takes your data center off your hands — and in some cases even pays you some money — and then sells it back to you as a service over the next decade.
This isn’t about IBM being a technology company. It’s about IBM being a bank.
But once IBM takes over your data center, they can start using it to goose its own hardware sales. Like in 2002, at Air New Zealand, when IBM swept out all the Windows NT Compaq servers and replaced them with Linux on mainframes. Ah, Linux. That’s the stuff that sets you free, remember?
They might even start renting out cycles in your data center to their other customers, and calling it “utility computing.” Because, see, IBM can’t make money on the deal if they just take your old crap and run it for you (aka “your mess for less.”) They need to put you into a big pool with loads of other people.
They also need to set up the deal such that you get a discount in the early years, but prices start sliding up toward the end of the 10-year contract, and you’re locked in with a huge penalty for early termination. And if you do survive the 10 years, well, by then they’ll have you so hooked that you can’t ever leave.
Yeah. You’re at the mercy of your outsourcer. Which is why a lot of these deals are made by CEOs who know they’re not going to be around long enough to take the heat for them. They get a quick shot of chemo for their sickly financials, and then they’re out the door and their successor can mop up the mess.
This is also why the first thing Jamie Dimon did when he took over J.P. Morgan Chase in 2004 was to cancel the bank’s long-term outsourcing deal with IBM. No flies on Jamie.
In response to the Air New Zealand fiasco and its CEO’s threats to “review the full range of options available to us” IBM CEO Sam Palmisano issued this statement:
Options? What options? At IBM we’re strongly blah blah blah mwah mwah mwah to address this important blah blah committed to innovation mwah mwah in partnership with our customers blah blah get stuffed.
Oh, and one more thing: You don’t suppose that in the era of “cloud computing” companies might face any of the same dangers, do you? Except that instead of being controlled by IBM you’ll be controlled by Google? Could that be why Google is so excited about the cloud and is giving away all that free stuff?
Nah. No way. Couldn’t happen.