Editor’s note:IBM’s latest quarterly earnings report shows that Big Blue’s transformation depends on accelerated software and services offerings, writes Technology Business Research Analyst Krista Macomber.

HAMPTON, N.H. – IBM’s (NYSE: IBM) 2016 growth depends on accelerated software and services transformation

IBM’s 2015 financial performance underscores the magnitude of IT industry transformation as well as the magnitude of IBM’s own resultant makeover. During the year, revenue from IBM’s strategic imperatives (cloud, analytics, mobile, social and security, or CAMSS), rose 17% year-to-year, contributing 35% of the company’s total revenue. Meanwhile, IBM’s total revenue in 2015 declined 12% as the company endured declines in traditional businesses such as on-premises middleware and application implementation and outsourcing.

(IBM earnings report: Read the details.)

Notably during the fourth quarter, IBM’s hardware business, Systems and Technology Group (STG), was relatively stable. STG revenues slipped just 1% year-to-year after 11 consecutive quarters of double-digit declines. Posting the steepest year-to-year percentage revenue declines of IBM’s segments throughout those 11 quarters, STG has successfully repositioned itself to map its strengths in high-end, mission-critical workload processing to clients’ evolving business requirements, centering on IBM’s CAMSS initiatives.

Meanwhile, IBM’s services and software organizations, which contribute critical intellectual property (IP) to the company’s CAMSS initiatives, closed out 2015 with revenues slipping 8% and 11% year-to-year in the fourth quarter, respectively. During 2016 TBR expects IBM to focus on building specific use cases for IBM technologies such as its Watson cognitive computing platform — linking recent portfolio investments to customers’ digitization and productivity initiatives — to accelerate its transformation and slow total revenue declines.

IBM will capitalize on storage industry disruption during 2016

As customers seek new avenues to IT efficiency and cost savings, TBR expects a focus in the storage industry during 2016 on refined backup and archive optimization and reduced data management complexity. Today, this information optimization increasingly relies on a web of on- and off-premises resources connected through intuitive, single-pane-of-glass data management and integration tools. IBM has critical bets in place to stem long-term storage revenue declines by riding the wave of hybrid cloud storage maturity.

IBM is positioning to address customers’ evolving data requirements through in-house capabilities focused on optimizing cost efficiency, performance and management simplicity. IBM is currently the only Tier 1 storage OEM that provides its own public cloud storage resources, and IBM invested during 2015 to augment its capabilities in areas such as object and software-defined storage. Timing is on IBM’s side in the storage market, as Dell and EMC chart their course as a combined entity and Hewlett Packard Enterprise (HPE) moves forward in its first year as an individual company and amid the discontinuation of its Helion public cloud services.

To maximize the market opportunity, IBM is offering partners’ infrastructure as a Service alongside SoftLayer to mitigate customer perceptions of lock in. Additionally, integrating its December 2015 acquisition of object storage provider Cleversafe into its broader hybrid cloud strategy, and building from its planned $1 billion investment in its Spectrum software-defined storage (SDS) portfolio through 2020 to address increasingly centralized and abstracted management requirement, will enhance IBM’s TCO value proposition through further optimization of data and management processes.

Armed with its OpenPOWER Foundation, IBM continues its battle against x86-driven server attrition

During 2015 IBM executed on the next phase of its server strategy, which centers on increasing openness and targeting markets requiring IP-based leading-edge solutions. Divesting its System x server business to Lenovo in October 2014 freed IBM from the conflict of balancing industry-standard and proprietary technologies during the past year. In particular, IBM continued refining its Power server strategy to address the industry shift to x86-based servers — in large part through its OpenPOWER Foundation, which has grown from 80 partners in late 2014 to 175 today. This strategy helped IBM slow Power Systems revenue declines to approximately 2% year-to-year in 2015, from approximately 18% in 2014.

The first systems developed through IBM’s OpenPOWER Foundation, including IBM’s Power Systems LC servers, were launched during 2015. During 2016 TBR expects IBM to focus on further monetizing OpenPOWER, including reducing time to market for new products. In addition to positioning IBM to reduce the perception of the Power platform as closed, OpenPOWER helps IBM reduce capital investment risk and speed time to market for systems tailored to evolving workload requirements.

IBM is messaging the value of collaborative systems innovation and heightened performance-per-dollar to protect Power’s traction in data-intensive transactional workloads, such as high-performance computing, and establish a niche for the platform in newer and faster-growing workloads, such as data analytics. However, competition from systems and chip vendor peers such as Dell, HPE, Lenovo and Intel creates headwinds to IBM’s ability to evolve Power’s reputation. TBR expects IBM to lean on its comparatively more established presence with the C-Suite and expertise in optimizing solutions for particular industries and use cases to mitigate top-line Power Systems declines.