Why IBM’s purchase of Red Hat matters to banks

IBM’s announcement Monday that it’s buying Red Hat, the large Linux enterprise open-source software company that also offers infrastructure services for companies that manage private or public cloud services, is likely good news for the many banks moving to the cloud.

That includes Capital One, which has said it will migrate all its computing to the cloud by 2019. Other institutions aren’t far behind.

For any bank tempted by the promise of lower costs, quick deployments and ease of management they can get from adopting cloud computing, using an IBM firm may ease any qualms their compliance, risk departments and board of directors have.

“IBM is one of those vendors we trust to help deliver mission critical systems,” said Bruce Ross, group head, technology and operations at Royal Bank of Canada. “This will put them in a much better position to compete with these other three players in the market,” he said, referring to the cloud computing providers Amazon, Microsoft and Google.

That could help explain why IBM was willing to pay $34 billion, making Red Hat its largest acquisition ever. In addition to offering services for the cloud, Red Hat’s technology, which includes a “wrapper” for open source software and a development platform, runs on all cloud platforms.


“This is to create the company that will be the No. 1 cloud provider,” IBM CEO Ginni Rometty said on Monday.

Bloomberg News

A boon for RBC

Like many banks, RBC has been building newer applications such as mobile banking and advanced analytics that need to coexist with legacy systems and applications. The newer work is done in the cloud, using agile development methods and Red Hat’s Ansible software development platform.

Use of the cloud gives these projects the ability to consume large data sets and to be set up and deployed faster and with less cost, Ross said.

“We end up in the cloud, either local on RBC’s premise or in the public, and we’re 30% faster than we were under traditional methods,” he said. “We’re also getting capability to market much faster. An example is our mobile app, where we’re getting up to 10 releases a year out to our customers, we can release new capability whenever we want to, whatever makes sense for the customer.”

The merger of Red Hat and IBM will improve this dynamic, he said, as legacy and newer applications will work more seamlessly together.

“With the two organizations working as one, I don’t have to referee between the two of them,” Ross said. “I don’t have to think about the transition from one company’s software to the other; I can think of that part of our assembly line being through one. That helps me manage it.”

Over time, he expects to be able to move applications easily between IBM, Azure and other cloud platforms because Red Hat works with all of them.

This is important to RBC because its cloud computing environment is hybrid. Most work takes place on an internal, private cloud. But at times, the bank needs to run fast-moving projects in a public cloud. For instance, a regulator might ask the bank to assess its exposure to a type of market risk, prompting it to rapidly analyze a huge amount of data.

“In some of those cases, it’s good to be able to do that on a public cloud because you don’t have to spend all the capital to build all that infrastructure. You can dial it up when you need it and shut it down immediately,” Ross said. “The key is to be able to move from one environment to the other as you need to.”

A potential drawback?

Developers who contribute to open source projects tend to be free thinkers, happy to share ideas with people in other organizations and to not be under the thumb of any one corporation. In fact, for banks like Capital One, one of the reasons to use open source software is to attract the best, most creative coders.

But IBM is seen as more conservative. The same observation could be made of Microsoft, which bought the open source community space GitHub in June.

Though IBM has been a supporter of the Linux open source operating system, at one point donating $1 billion to it, and some companies do run hybrid clouds on IBM computers such as the Z enterprise mainframe, heavy users of cloud computing and open source tend to think of the development ecosystems around IBM’s mainframe and other computers as closed. They often argue that they have to go to purely cloud and open source environments to innovate.

“For those in the open source community, I would be a bit concerned as IBM doesn’t have the best track record of innovation in the operating system space,” said Al Pascual, senior vice president of research at Javelin Strategy & Research.

In their announcement, the companies asserted that Red Hat will remain independent and keep doing what it’s been doing.

“Importantly, Red Hat is still Red Hat,” said James Whitehurst, Red Hat’s chief executive, who will stay on at IBM in Red Hat’s existing headquarters. “When the transaction closes, we will be a distinct unit within IBM, and I will report directly to IBM CEO Ginni Rometty. Our unwavering commitment to open source innovation remains unchanged.”

Whitehurst said Red Hat’s technology will continue to work across all cloud platforms.

In Ross’s view, the open source communities need the big tech companies to merchandise the code they create.

“If I’m an open source developer, what do I want more than anything else? I want people to use the stuff I build,” he said. “If I build open source capability and Microsoft, IBM and Google use it, I will become famous as one of those developers.”

IBM’s big bet on the cloud

There’s little question the purchase is beneficial to IBM. With cloud computing space dominated by Amazon, Google and Microsoft, this gives IBM an entry into the market, which it estimates to be worth $1 trillion.

In an interview Monday on CNBC, Rometty said that the move is about “resetting the cloud landscape.”

“This is to create the company that will be the No. 1 cloud provider,” she said.

Most IBM clients have moved about 20% of their workloads to the cloud, she said.

“Chapter two is moving the next 80%, and that is what this is about,” Rometty said. “To move that 80%, you have to be hybrid, you have to be able to handle multiple clouds, you have to have open technologies, you have to do multicloud management.”

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.


Penny Crosman

Penny Crosman

Penny Crosman is Editor at Large at American Banker.