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IBM CFO Schroeter on the company's innovation strategy

IBM's CFO discusses the company's purchases of The Weather Co. and healthcare companies, changes to its acquisition process and the divestiture of its chip manufacturing business.

If any single word defined the C-suite conference circuit in 2015, it was innovation. And at the MIT Sloan CFO Symposium last month in Newton, Mass., IBM CFO Martin Schroeter had plenty to say on the topic.  

The company is placing big bets in a number of areas, most notably around healthcare and the big data "ingestion engine" that was acquired in the company's October purchase of The Weather Co.

And in another nod toward innovation, the company has added predictive analytics to speed the due diligence process when it acquires new companies -- which in some cases will make the difference between IBM getting the deal and not getting the deal, Schroeter said.

In addition, Schroeter said that from a business model perspective, IBM has revamped how it makes money on its Power platform.

Healthcare strategy

The IBM CFO described the company's healthcare play within the context of its Watson supercomputer, which combines artificial intelligence and analytics software to answer users' questions. This year IBM bought Explorsys, Phytel and Merge Healthcare.

Martin SchroeterMartin Schroeter

"With that we get [data on] about a hundred million lives ... and we get a few billion images that describe all sorts of medical conditions. When you put that into Watson, you now have a system that can help doctors understand what they're dealing with, so you get to outcome faster," he said. "You can help payers understand what courses of treatment have worked the best and find insights in that data. And you get a system and an ability to change an industry from a pay-for-service to a pay-for-value."

The Weather Co. acquisition

IBM's purchase of The Weather Co.'s data processing and analytics operations brought the company a "massive ingestion machine," which plays straight into its IoT strategy, Schroeter said. The ingestion system pulls in 4 GB of data per second, he said, and runs a lot of analytics as users generate weather forecasts for their geographies.

"All of that activity generates about 30 billion interactions a day, so this is a platform that has incredible scale. Good for weather. Good for a lot of things. Think of endpoints. Right now the endpoints are on weather data, but the endpoint could be a smartwatch. The endpoint could be your car. The endpoint could be your refrigerator," Schroeter said.

The Weather Co. system will be the basis for the company's Internet of Things platform, he said. And by combining that platform with Watson and its ability to find insight within huge stores of data -- and by adding in IBM's insight into the industries it serves -- the company has a very powerful platform, Schroeter said.

Fine-tuning the acquisition process

IBM has bought about 100 companies since the beginning of 2006, making it one of the most acquisitive companies in the tech industry. But there have been times when the company has lost out on an acquisition because of a lengthy due diligence process -- a process that involved about 80 checkpoint items.

"Another company would [be considering making a bid]. We would be [engaged in the due diligence process] for a few weeks. The other company would come in and say, 'We know IBM was just here. They're great at this. Add 10% to what they offered and we'll buy you right now,'" he said. IBM lost out on those deals.

We built a predictive system that allows us now to take the profile of any acquisition, and in a pretty short period of time -- like an hour -- we can figure out what are the two or three really important things we have to get in when we do the diligence.
Martin SchroeterCFO, IBM

Schroeter said IBM saw that it needed to save time to avoid losing out on future deals. It evaluated the process it had applied in its past acquisitions. From that, "we built a predictive system that allows us now to take the profile of any acquisition, and in a pretty short period of time -- like an hour -- we can figure out what are the two or three really important things we have to get in when we do the diligence. And all the rest [of the checkpoint items] -- we know that they'll be OK. They are less important." The predictive analytics system has cut the company's due diligence process from weeks to a day.  

"We don't lose deals now. We're able to act very quickly. We're able to be very agile, and we're able to kind of win the day if you will, but we needed that system to help us navigate through that data and figure out how we were going to do it," he said.

The Power platform

IBM historically has owned the semiconductor manufacturing operation that supports the company's Power server platform. With the ever-shrinking size of chips and an increasingly competitive chip market, however, IBM would need to invest significant capital to stay relevant as a chip manufacturer, Schroeter said. To avoid that capital burden, the company announced in late 2014 that it would pay Global Foundries $1.5 billion to take over the chip manufacturing business, thereby signing Global Foundries to provide it with chips for the next 10 years. Prior to that deal, in 2013, IBM formed the OpenPower Foundation along with Google, Nvidia, Mellanox Technologies and Tyan Computer, opening up the Power platform to development by other companies -- and gaining a wider set of customers for the platform -- for a licensing fee.

"You have to be willing to disrupt your revenue streams in order to get to these bigger 'elasticity plays,' if you will," the IBM CFO said. "If you don't disrupt yourself and if you're not willing to get rid of the revenue streams that don't make sense ... then you're not going to be there over the long term."

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