IBM Puts the Rules Down

In the aftermath of IBM’s announcement of intent to buy Ilog, it would be all too easy for us to reflect back on a conversation with Ilog’s CEO Pierre Haren last winter at its annual user conference covering survival in the software industry. Haren’s description of the typical life of a software vendor is that first you get a handful of successful references, then replicate to at least 20 – 30 successful accounts, then you start thinking about what your company wants to do when it grows up. Start specializing your solution for vertical sectors or other specialized sectors of the market, or you must change your role and move on. Haren’s implicit message: eat or be eaten.

We won’t take the cheap shot about IBM swallowing up Ilog because this deal makes too much sense.

Both companies know each other quite well, having been partners in one way or another for about a dozen odd years, that Ilog’s business rules engine fills a key gap in the WebSphere Process server BPM line, and most notably, that we saw IBM’s SOA strategy VP Sandy Carter keynote Ilog’s conference. IBM’s not going to haul out the big guns for any sub-$200 million software company.

Ilog has had a case of multiple attention disorder for a number of years. Otherwise, how could you explain that company of Ilog’s size would have not one or two, but three separate product families that targeted almost completely different markets? Or that a $180 million company could support 500 partners? Ilog was best known to us and the enterprise software world as one of a handful of providers of industrial-strength business rules management systems. That is, when your rules for conducting business are so conditional and intertwined, you need a separate system to keep them from gumming up into a hairball. That condition tends to typify the world’s largest financial institutions. That’s enough for one business.

But Ilog had two other product lines, one of them being an optimization engine that was OEM’ed to virtually every major supply chain management vendor, from SAP and Oracle to i2, Manugistics, Manhattan Associates and others. And by the way, it also had a cottage industry business selling visualization tools to ISVs.

So how do all these pieces fit together? Just about the only common thread we could think of was the case of a supply chain customer that not only uses the optimization engine, but has such a complex supply chain that it needs to manage all the rules and policy permutations separately. And not to leave loose ends untied, it needed a vivid graphics engine so it could visualize supply chain analyses so it could conduct better exception management.

Suffice it to say, that is not why Ilog had three separate business units. The company happened to grow satisfactorily, showing profits for seven straight years, so that it never had to face the uncomfortable question of refocusing. Had it stayed independent, it might have had to do so; while revenues grew roughly $20 million this year to $180 million, profits sank from $4.9 million last year to a paltry $500k this year. Blame it on currency fluctuations (based in France, Ilog would have had to discount in the US to keep customers happy), not to mention the mortgage crisis that has cratered the financial sector.

The good news is that Ilog is a great fit for IBM. Its rules engine adds a piece missing from WebSphere Process Server, and in fact has excellent synergy with a raft of IBM products that start with Business Events (apply sophisticated rules to piecing together subtle patterns emerging from torrents of data), FileNet content server, WebSphere Business Fabric (the old Webify acquisition, providing frameworks for building vertical industry SOA templates), and the list goes on. And that’s only the BRMS part. IBM Global Business Services and its Fishkill fab are customers of Ilog’s optimization engine, while Tivoli’s Netcool node manager uses Ilog’s visualization.

The sad part of the deal is that the acquisition will likely abort Ilog’s interesting foray into Microsoft’s Oslo vision, where it provides the business rules underpinning. Even if IBM wants to maintain the business, we’d be surprised if Microsoft followed suit. Ilog went to the effort, not simply to port Java-based JRules, but write a fully .NET native product. That’s analogous to what happened with Rational, whose Microsoft Visual Studio partnership originally dwarfed its ties with IBM.

Colleague James Taylor says that the acquisition portends the end of the rules management market as it will likely set off a wave of consolidation by major application/middle tier vendors. CIO UK’s Martin Veitch adds that “IBM is continuing to dance around the margins of enterprise applications” with the Ilog deal. We’d agree, just as with the previous acquisition of Webify and the bulking up of WebSphere Process Server, that it’s getting harder to see where tools leave off and applications pick up. In an era where all these pieces become service-oriented and theoretically composable, maybe that’s irrelevant.

Veitch takes issue with the broader implications for IBM and Oracle – that “These companies have become planets to be explored rather than recognisable fiefdoms of even 10 years ago,” and that “a lot of people are unimpressed by the levels of integration and R&D that follow the incessant deal-making.” Well, part of that may be to satisfy Wall Street, but the march toward agglomeration has become something of a self-fulfilling prophesy. That is, a $500 million software company is no longer considered large enough to be viable, and so if customers are afraid for vendor survival, that reinforces the trend for IBM, Oracle, SAP, and Microsoft to gobble up what’s left. That’s a larger issue that gets beyond the pay grade of this post, but ironically provides subtle reinforcement of what Haren told us roughly six months ago: that once a market gets to the billion dollar or so level, that it becomes prey for “bottom fishers” that push niche providers back into their niche.

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