of Mercury Interactive fast-tracked HP to being the sixth largest software vendor in the world, IBM sits at No. 2 on the list, just behind Microsoft. Also challenging HP’s software goals is IBM’s equal pursuit of the market. Executives at IBM say Big Blue is looking to increase its software market share by acquisition and OEM agreements. IBM bought 13 companies in 2006 and expects more in 2007. In the OEM arena, IBM recently expanded its deal with Cisco whereby Cisco will use IBM software to help customers manage their networks. IBM has signed more than 4,500 deals with companies to use its software in their products

In the long term, IBM wants software to represent about 50% of total its profit — an increase from 40% last year, IBM executives said recently. Software accounts for about 20% of IBM revenue, but generates 40% of pre-tax earnings, according to industry reports. At HP, software last year represented less than 2%, or about $2 billion, of the company’s total revenue of about $90 billion.

To catch up with IBM, HP will have to continue to grow its business. HP has completed or announced some 20 software buys since Hurd came on board in April 2005 and says it will also continue to buy technology. The company has also shifted its R&D focus away from hardware to software.

“Ultimately looking at the business as a percentage of revenue, it will take a long time until HP Software becomes an equal [to IBM] from this metrics comparison,” says Stephen Elliot,

director of enterprise systems management at IDC.“There are other ways to win at the software business: disruption, savvy deals and the improved utilization of HP channels [services, hardware notably]. IBM is clearly good at this, specifically via their services utilization.”

“We will invest heavily in organic research and development and continue to make acquisitions that make sense,” Hurd said. HP has spent $20 billion on R&D over the past five years, and of the $3.6 billion the company spent last year, HP dedicated 70% of that to software.“Four years ago we spent 70% of our R&D dollars on hardware, but last year that 70% was dedicated to software,” he said.

HP also spent in the past year $500 million to deliver on 50 integration packages across HP, Mercury and other technologies it acquired. With somewhere between 200 and 300 products — HP’s now renamed OpenView portfolio had more than 100 applications alone — it is important HP simplify its offerings for customers. But that won’t be enough, experts say.

“Since selling less hardware is not a real option, HP will have to increase the average deal size and acquire more software to sell,” says Jasmine Noel, a co-founder and principal analyst at Ptak, Noel & Associates.“Given Hurd’s focus on infrastructure and supporting the CIO, it seems unlikely that HP will go after platforms such as BEA.”

IBM also represents a moving target. Like HP that has relied on acquisitions to add technology, customer base and market share,

most recently with its plans to purchase SPI Dynamics, IBM in the past month announced it would acquire Watchfire and Telelogic. With 45 software acquisitions under its belt since 2000, IBM will continue to grow its business via acquisition — making it even more difficult for HP to get ahead of Big Blue.

HP, which analysts estimate will bring in $100 billion in revenue this year, may lead over IBM in that financial metric, but the company still has work to do. “We don’t have 15% or 20% share of the enterprise market; we have single-digit share, but there is a $1.1 trillion IT market we can approach and we cover about 60% of it today,” Hurd said.

IBM also simply offers more software than HP. IBM’s middleware, security and messaging businesses pump up its portfolio in areas HP has not invested as heavily. HP focuses on distributed systems and IBM brings in cash from its mainframe software products as well, a flat market, but despite predictions of the mainframe going away, an ongoing revenue stream just the same.

And while some argue HP has an advantage of being a newer player in this realm, IBM has been a strategic partner to customers longer, has more software to sell than HP and is about 18 months ahead of HP with its software strategy.

“HP is following the exact same strategy [as IBM] of selling to their existing installed base of both their customers and those of acquired companies. Both [HP and IBM] have big plans to cross-sell and up-sell customers in their installed base and are

training their sales teams to do that. They are also creating packaged solutions that make this easier to do,” says Rich Ptak, founder and principal at Ptak, Noel & Associates.“The only difference is that IBM started doing this some two years before HP — they are also making changes in how they incent, organize and pay their sales forces to encourage the cross-selling. Again, IBM is about 12 to 18 months ahead of HP.”

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