Dive Brief:

• IBM is splicing its managed infrastructure services from its technology services unit to create a new public company, leaving IBM to focus on hybrid cloud and AI, the company said Thursday. In its second quarter earnings, cloud and Red Hat revenue were up, while its global business and technology services units were down, 7% and 8% respectively. 

• More than 60% of IBM's revenue comes from services, but with the spin-off, its portfolio will shift to lean on recurring revenue, stemming from cloud software and solutions, CEO Arvind Krishna said in a blog post. The company plans to complete the separation by the end of 2021, which will cost almost $5 billion, according to an investor update.

• The yet-unnamed services company will manage and modernize client-owned infrastructure and will "partner fully across all cloud vendors," IBM said. Once split, IBM expects the new company to earn $19 billion in annual revenue, with IBM bringing in $59 billion in annual revenue. The new company is expected to have 90,000 employees; In 2019, IBM had more than 350,000 employees worldwide. 

Dive Insight:

One of Krishna's promises was "a return to growth, using hybrid cloud and analytics/AI as the foundations," said Ted Schadler, VP principal analyst at Forrester, in an email to CIO Dive. That requires paring back parts of the business and streamlining operations.

This is particularly important in the managed services space. "Infrastructure services has been a declining-margin business for years," Schadler said.

IBM's portfolio is split between services and full-stack technology, including legacy mainframes and nascent AI capabilities. As cloud has come to the fore, IBM has pivoted focus toward hybrid capabilities, under the leadership of Krishna, who took over as CEO in April. 

Already, IBM has focused its portfolio on hybrid cloud growth, with vertical-specific investments in the financial services space. Its trajectory highlights the trend of where cloud technology is heading, and takes advantage of enterprise portfolio realities — few will be 100% cloud native.

Though the managed services company will work with other cloud providers, it could also serve as an effective implementation arm for IBM.

Outsourcing has fallen out of style, in favor of in-house technology management in concert with "as a service" technology models. As companies rethink tech operations, and make cuts during the pandemic-induced recession, services could take a hit.

But there's potential to use automation and cloud to make infrastructure modernization easier, a possible growth path for the new services company, Schadler said. 

What's left is an IBM better aligned with enterprise needs for digital business transformation, he said. "We like this deal for both sides of the party."