Sam Palmisano
President and Chief Operating Officer
IBM Corporation
PartnerWorld 2002 Breifing
February 20, 2002
On February 20, 2002, IBM President and Chief Operating Officer Sam Palmisano briefed Business Partners on IBM's strategy. The following is a transcript of his prepared remarks. The text has been edited for context and continuity
Thank you. I'm delighted to be here, primarily because I wanted to see so many of my old friends. As you know, many of us have worked together for years. We can reminisce about the launch of the AS/400 — now the iSeries — and the first BPEC we ever did. It's been fun for me to do that.
It was interesting for me last night as I talked with many of you to hear what was on your mind. We've had lots of issues to work together as a team on. Some are real and some are just detail things that perhaps were the result of misunderstanding. Last night, the theme was "let's go get business." Everyone I've talk with here is focused on what we can do in this environment — as tough as it is — to go take share from the other guys. They tell me, "we have a great opportunity. IBM has terrific products. You've got the solutions thing right. The industry is moving your way. So let's go get some business."
Together, we got a lot of business last year. In 2001, you generated or influenced about a third of IBM's revenue. So that's roughly $28-29 billion. That's the amount of revenue generated by Sun and EMC combined. Equivalent to the revenue generated by Microsoft.
Yes, we have issues. Yes, we have things we have to work through. But I think you'd agree, that's one heck of a story.
You participate in more than half of our server business, more than half of our storage business, about a third of our software business, more than half of our SMB business. I want to thank you for that. You do a great job for us.
That being said, I think we have an opportunity of a lifetime ahead of us. Today, I'm going to explain why I think that is.
I'm going to go through a perspective on the industry because I think it's important to point out shifts that have occurred in the computing model. Those shifts cause opportunities to be created for those that are fleet of foot. I'll also go through why I think we were able to gain as much share as we did last year.
I can assure you I won't take you through 40 years of history of the computing industry. I'll sort of give you the Reader's Digest version.
If you look at IT share as a percentage of capital assets in the US, you can see the percentage of expenditure was driven off of the economic benefit over time. If you go back to the mainframe era, it was primarily a back office administrative function, as you all well know. Accounts receivable, billing, payables, payroll, et cetera. IT evolved into more personal productivity, followed by the digitization of the enterprise. And as that has occurred, more and more capital assets deployed within the US economy are IT related.
In addition to that economic trend, over this period of time there were shifts in the prevailing computing model. The computing model that was implemented matched with how this technology was being deployed.
If you think back to the mainframe era, computing was primarily a back-office function and the computing model was primarily a centralized approach in a glass house — a secure bunker, so to speak. Then came along the next era called client/server. The focus here was all about personal productivity, so the computing model that was adopted was based on departmental usage. At the time, there was a lot of speculation that the mainframe was dead and would never return. We know all that it certainly didn't die. Admittedly, mainframe probably is not the most efficient way to address personal productivity. And client/server was a better economic alternative. But the rise of the client/server model did not eliminate the computing functions that were best handled by mainframes. The functions that were being transacted in that mainframe model still needed to be transacted.
Moving through time, we enter into the phase known as the e-business era. The e-business era is all about end-to-end integration. It's all about the ability to digitize the transaction flow throughout the enterprise to drive phenomenal productivity gains, phenomenal cost and strategic advantage.
And that approach requires a different computing model. It's much more about integration. It's not about point products. It's not about a pure play or a desktop experience. It's a completely different approach.
I would add that just as the client/server model never replaced the mainframe model, the e-business model will not replace client/server. I'm not going to stand up here and say client/server is over and the PC industry is of the past, because that's not the case. Client/server certainly has an appropriate usage in many of our companies and many of our customer environments. However, the architecture that was deployed for personal productivity will not take us to this next generation. We need a completely different approach.
I know Abby Kohnstamm took you through a lot of the e-business adoption cycle. I'm going to make some other points that kind of complement what Abby said.
This is a study that we conducted of 33,000 customers — IBM and non-IBM — in the G7 countries. I make that point because I know the analyst data that you read sometimes talks about surveys of 15 at cocktail parties. This is actually a little more thorough as to where enterprises are in the e-business adoption cycle.
About 82 percent of the enterprises around the world are at some point along this cycle. About 51 percent of those companies are doing front Web transactions: publishing, or maybe a simple order entry sort of a thing. But they haven't moved along the adoption cycle to integration.
If you go to the next phase, about 31 percent are now in this integrating point in time. What do I mean by the integration phase? Not only taking the order from the Web but actually exploding it to the bill of materials, sending the order to manufacturing, building the product, shipping it and then replenishing the component parts through your supply chain.
The end-to-end integration model is different than enabling people to post an order, then faxing it to manufacturing so that manufacturing can reenter it to the bill of materials system.
Clearly the most advanced phase of e-business is when people are creating alternative business models. A very small percentage of companies are in this stage. Online auctions are an example. The New York Stock Exchange, the NASDAQ and the like have been around for a long time, but they certainly are an alternative business model to perhaps how stocks and bonds were traded in the past.
Now given that data, where do we find the IBM customers? Of the 33,000 enterprises we interviewed, about 8,300 were IBM customers. And of the IBM customers there were about 400 that were large enterprises, and then the others were more midsized.
The data shows that as more of our customers enter the integration phase they tend to work with IBM. And more still of the large enterprises in the integration phase turn to IBM.
Now, a couple of points I'd like to make. I would say that the focus we've had strategically is this was about the enterprise, not about dot-coms. They were fireflies before the storm. The point we were on is that e-business was fundamentally a tool to be applied for productivity gain and strategic advantage. It wasn't about a Web experience long term. This data supports that view.
The other point that I would add is that there is just a tremendous amount of opportunity. And I think that by working with us you'll see a buyer consideration rate that's higher than our competitors because when people think about integration and think about solutions they quite honestly think about IBM's and IBM partners' ability to do this.
We've always said that our strategy was about integration and about solutions. It is not about voodoo economics and business models that make no sense. A lot of our pure play competitors were successful in doing what I would argue was a somewhat simplistic implementation of the computing model. Those competitors aren't doing so well now that this has moved to a more mature phase of the adoption cycle.
What it means from the customer perspective is that it really is about the challenge of cross-enterprise integration. This is tough stuff.
At IBM, for example, we've all done a great job of taking a "silo'ed" process — for example, supply chain and customer relationship management — and become excellent at that portion of the enterprise. But as we try to take those processes and make them horizontal and link them across the enterprise to get this digital transaction flow where the true productivity is gained, it's a lot tougher. That's our experience, and I'm sure you've seen it at many of your customers as well.
It's as lot harder to link horizontally throughout your companies, to take the order to release it electronically to manufacturing, to ship and bill without it being touched by a human being. That's a lot harder than having a great manufacturing resource planning system. It's more complicated, but it creates a lot more opportunity for productivity gains.
And this is why we think it's absolutely appropriate for all the things that we do, we do together with our Partners. It requires a lot more service and skill to pull this off. There's a lot more expertise involved in this than bringing up a Web page.
The good news in that is there's a lot more profit margin associated with integration because it is harder to do. And as you all know, we are all struggling in a tough environment for profitability. Moving into the value chain at a more advanced stage of e-business adoption generates more margin for you than playing in the commoditized business earlier in the value chain.
Integration demands open industry standards — because now as you have billions of devices interacting with your enterprises. You cannot solve the integration problem with a proprietary approach. That doesn't mean that my colleagues in our industry will not try to persuade everyone that one size fits all. But, just like the mainframe will not address the technical needs of personal productivity, a locked-in, single-focus proprietary architecture will not create the infrastructure required to support the e-business environment of the future.
When I say it needs to be open, I don't mean it doesn't have to be technically world class. You still need world-class servers, storage, networks, software and the like to get this done. But we believe that the way you really solve this computing problem is an industry-based open standards approach.
Now I want to frame the industry for you all. You know, it's a trillion dollar industry, and you can get lost in a lot of the details.
So we think about the industry in three large buckets:
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The business insight and transformation perspective is about 13 percent of the overall industry. Good margins. Double digit or low teens. Good operating margins, and good growth. Yes, it's cyclical. In a tough economic environment, consulting tends to be down while the integration services around it tend to be up. Fundamentally over a sustained period of time, it has good operating margins and good steady growth.
Infrastructure is a different story in the sense that it's much bigger: 72 percent of the industry opportunity. Servers, storage, software, networking and the like are all in this segment. The margins have been pretty good over a period of time, but of late in a tough economic environment they've declined. But they'll come back. But not everything here is the high profit zone. In the infrastructure there are profitless spaces. You can't make it up on volume. Or, you could put yourself in a role where you only generate income for the OEM suppliers. When 90 percent of that segment's profit go to two large "duopolists," long term you might find it a little uncomfortable.
The technology segment is a tough, tough environment. A lot of invention, lot of innovation. We supply our own products in addition to playing in the semiconductor industry's markets for advanced logic, ASICs, memory, DRAMs. But you can see it's cyclical with a lot of peaks and valleys in here. Intel is included in these numbers, and it has a smoothing effect on the cycle. It's highly capital intensive, high-risk, with a lot of technical expertise required to play in this space. It's about 15 percent of the industry opportunity.
What's going on from a competitive perspective?
I'd like to take you back a little bit in time. A year and a quarter ago you heard from many of our colleagues in the industry link their troubles to the economy. It was all about the economy. It was the perfect storm, the 100-year flood. Perhaps it was. I'm not saying that it wasn't a tough economic environment. But what's happened to our competitors' strategies in this tough economic environment?
The most obvious strategic shift is the Compaq/H-P merger. Very straightforward. You get to read about it every day. There's really no reason for me to comment on it, except that you can see the strategic intent. The strategic intent was to become much more of a service-based solutions company. You could argue whether that's real or not. By combining, they claim that they will divest their interest in the UNIX marketplace and make a much bigger play in the Wintel opportunity area. I'm summarizing probably two tons of paper that have been written on the merger — the embattled family, and the family versus the embattled CEO and the like. But fundamentally the intent I think is very clear: it's much more about a solutions play.
Another example is Microsoft's .Net. Going way back in time, Microsoft was an operating system OEM technology player. Clearly they've moved way up into the infrastructure. I mean, no doubt about it in the client/server model. With .Net, Microsoft is moving into the solutions space. They wouldn't use that term because they say you only need middleware if you don't have an operating system. You know, one view of the world. My point is that they now see the need for this connection, they see the need for a different play within the infrastructure. And you see that in their .Net. What .Net becomes, we're going to all have to observe and learn. We only know what their vision of it is today.
Sun. I recently read that Scott McNealy came out in a penguin suit to talk about Linux and open industry standards. That is a strategic shift.
Two years ago, Sun was saying that IBM needs to have a large services organization to rationalize all their offerings in the open system environment, and Linux isn't really real — it's a desktop alternative. But nonetheless, Sun is undertaking a huge strategic shift. Not so much the penguin suit — I'm not commenting on attire or dress. But the fact that Sun sees the need to adopt Linux as an open system platform is quite a dramatic move.
Dell. Here the significant strategic issue is not so much Dell as a PC distributor trying to move into routers and storage. It's really about Dell's business model, which, whether we like it or not, has a lot of power and a lot of customer appeal. We all have to adjust our businesses to this new model. Our PC business, our server business, our storage business, our software business. And if I ran Cisco, I would say our router business. Because the direct model has a lot of attractive economics features to it. We'll see if it can be adapted elsewhere, which is Dell's strategic intent — to move this beyond just strictly PC distribution into the infrastructure. They want to distribute and sell all infrastructure products and wrap services around it. Just look at their ads.
So the industry is in a transition.
At IBM, there's no reason to change the strategy. We know it, we've got it right. We understand what e-business is all about. And now, others are trying to copy what we've done and capture the momentum. They are coming after the business that we together have been able to garner.
Here's a look at IBM's portfolio. I think if you've been partnering with us over the past decade, you'd agree that we have made a phenomenal transition in our portfolio. If you go back to my earlier charts where I talked about the computing models, IBM was predominately an infrastructure player a decade ago. Our portfolio was predominately based around servers and storage and software that supported those kinds of technologies. That's what we were.
But if you look at IBM today, you see 11 percent of our business is in the consulting, systems integration or the insight segment of the industry. Much like the industry, 81 percent of our business is the infrastructure: outsourcing, storage, services, software, middleware, PCs, client devices. And then technology, our OEM business — the commercial side of it, not the internal supplier to our system businesses — is about 8 percent of IBM.
I know this week we've been trying to segment the services opportunity as to what we think is yours and where you can go get that opportunity.
Here's a macro economic view. IBM at $37 billion in services revenue is a minor player in the services industry. We're only about nine and a half, 10 percent share. So we are a small player. We have 155,000 people, and to take this up to 20 percent share, we would probably need in the range of 225,000 to 250,000 people to do that. That is a difficult task. How do I know that math so quickly? Since I was one of the founders of the services business at IBM I understand what it takes to get to that level of share participation.
My point is there is a huge amount of opportunity for us to work together. So from an aggregate view, I think we've made an attempt to segment the opportunity. The feedback I've gotten so far is that it's a start. More to be done, but it's a start.
In infrastructure, we had a terrific year last year in terms of market share. We gained three points of share in servers. We're now clearly number one. Some competitors find a niche and segment by price and define it by operating system, all so they can say their number one in this space. But in aggregate server opportunity, we've now passed Sun by a few points now and we are moving right along. So our server business continues to do very well.
Our storage business has had a phenomenal comeback versus EMC. We have open network storage that we're now participating in. Our middleware is very robust.
Our database software offers twice the performance of Oracle at half the price — a compelling value proposition. Oracle is trying to move in the applications space so that perhaps they don't see the need to invest as much in their database business.
It's in the infrastructure space that the computing model is going to have the most impact. In the insight space, we want to connect it to the infrastructure. We want to work with our clients on those processes as they digitize them and they flow horizontally. In the infrastructure space, we see a world in which billions of devices, wireless devices, network devices are coming into this infrastructure, which has to run 24-7. The requirement is quite different.
Our eLiza initiative is developing autonomic, self healing high-end systems. We have self-healing high-end storage. Autonomic computing is a phase on the way to grid computing. We've been doing a lot of work with the scientific community on grid. The grid establishes an open industry standard seamless environment that is robust and scalable and bulletproof, and that can deal with the requirements that this world are going to dictate long term.
The computing model will not be an evolution off of a client/server base. I'm not suggesting that it will go back to mainframes, although quite honestly, we're pleased that Linux on the IBM zSeries resulted in five quarters of revenue growth for the first time since 1989. I must admit that delights the IBM company. But it doesn't mean that the computing model is going back to that era.
This infrastructure model is going to comprise dedicated classes of servers. There will be big back-end transaction servers. There will be edge-of-network servers. There will be caching servers. There will be storage in the network. There will be blades and those sorts of things that are going to be stacked and racked if we can ever figure out how to manage the power requirements without dimming the lights of the metropolitan areas of the world. And this will all be brought together by robust middleware.
It won't be done in the operating system. It cannot be done in the operating system. It just technically can't be done. Our competitors can wish for a large dominant share position based on an operating system, but it's not credible. It won't solve the computing problem.
This kind of computing is at the core of IBM. It's something we do extremely well.
From your perspective, our technology business feeds all this great invention and the world-class products. Our 3000 patents annually. Our technology businesses allows us to offer Regatta, our large UNIX server which is clobbering everybody in the industry on benchmarks. Just blow the doors off the competition. And our technology business allows us in WebSphere to outgrow BEA by two or three times their growth. It's these sorts of things that for you represent product competitiveness and hopefully will make your businesses more successful.
We're going to play across the spectrum of the IT industry. We need to do that because it's fundamental to our customer view of the world. To solve this problem requires the connection of great technologies with business insight that allows you to digitize these processes in a robust infrastructure environment that's open and industry standard based.
That is what's going to drive the future world and the future computing model. We think that strategy is the reason we were able to gain so much share last year in a very difficult environment. We stayed focused on this play.
So we don't see any need for any major strategic shift, unlike our competitors. And working together we just need to continue to stay focused to gain share.
Now, some examples of working together.
Multitask in Australia at Pizza Hut: this is an example where Multitask and IBM Global Services collaborated in the Web design, the front end systems, and in linking back office delivery systems. The important thing was the teaming environment.
E.Dexter was able to help IMAX-Tree — which is a digital imaging application — by combining our products together to solve the customer problem.
Sirius exploited IBM's relationship with Siebel to capture the opportunity for both ourselves and the partners.
These are examples the things we can do together, combining our products together, complementing ourselves from a services perspective, regionally where one team might have a better set of skills than the other, and then exploiting some of the global relationships.
What about 2001? How did IBM perform?
I scored ourselves on share. This is all based on industry data, IDC, DataQuest, etc.
Our database business grew, high 20s, Oracle only was flat or up two percent.
Transaction management: MQSeries, growing 70-some percent, clearly the share leader. WebSphere up 44 percent. BEA had a good year, up 18 in a tough environment. But we out performed them.
Services, we gained share overall, although EDS had a very good year. EDS is doing well, quite honestly, and they've done some good things in acquisitions. They acquired SABRE, which is deep insight to airline reservations and the like. EDS historically was more of an infrastructure provider than business insight, but you can see EDS's migration and this movement up the value chain.
UNIX servers. This is a wonderful story, and you helped us a lot here in the fact that Sun's down 25, 30 or 50 percent, depending on the quarter. We were down slightly in our UNIX business, but we have a very strong product lineup. We've gained a bunch of share. I've covered zSeries already. iSeries held in there last year. We need to do better on iSeries, quite honestly. We're off to a reasonable start . It's a wonderful platform, and we've now Linux-enabled it. We need to do a little better there.
In our xSeries, our Intel based servers, we also gained share. I think we gained 1.3 points of share in the Intel space. The data has just come out.
Storage. EMC had a model that was phenomenal — a lot of service engineers for free, big branch infrastructure, high-growth margins — until an alternative arrived called Shark that was half the price, new architecture with gross margins that are better. And the rest is history. We gained four and a half points of share in the storage space. Good year for our storage teams around the world.
I talked about Intel servers. In PC client devices, we didn't fare as well. Dell was the winner in that space last year. We did as well as Compaq and H-P, but Dell clearly was the winner. There was no doubt about the data when you add it all up. We've made a lot of changes in our PC business. It's much more solution based now as far as cost of ownership, the ability to deploy the images in an automated way and the like, having common engines across the enterprise. We've done a lot from a cost competitive perspective. We're going to stay in this business. It's important to our infrastructure play.
Let me wrap up.
The computing model is shifting. You can see it in the IBM results. And as in the past, these shifts are great opportunities and also threats. It quite honestly depends on your business model if you're a player in the industry.
Now, from our perspective, we've already made the transition to open industry standards. We believe it's an open world. And we're not hung up in the world of a proprietary past. We've adjusted our business model to be able to thrive in this environment. The proof point is clearly Linux, but that's just one. I can give others, but our encouragement of the Linux initiative clearly demonstrates that we are very comfortable in this open industry standard way.
From your perspective, this change is opportunity. Someone has to work together to build these infrastructures. Someone has to work with our clients to show them how to take their functionally expert processes that are silo driven and make them cross enterprise and digitized.
It's a tremendous opportunity for us. And we're looking for partners to get this done. We can't do this without you. What do we want? We want to work with people that are committed to this strategy, see the vision the way we see the vision, that are aggressive and want to take share. That's really all we'd like from you.
Now, I understand and I respect that not everyone in this room is totally dedicated to the IBM platform. I understand that for very, very valid reasons you've made investments in alternative platforms. I would like to give you an alternative. I commented on the strategic shift that many IT companies are going through. Not all companies are going to execute their strategic transformation well.
You can decide how many will do it as well as IBM made the transition — that's judgmental. But regardless of your personal opinions, a strategic shift is a risk to your businesses, because these strategic transitions, these product consolidations, these selections of a common brand from merged companies always have the same effect: they cause an industry pause. They cause customers to reevaluate.
And I and my colleagues from IBM would like to work with you to help you reduce your risks and come to us to present an alternative. We are very cognizant of the fact that this takes years. We know it takes time to build up these skills. We know it takes time for you to create an alternative business structure that is not as complementary to what you've had in the past. We understand all that.
But we would like to play with you for the long term. We would like to give you that option. There are a lot of people in this room I know want to stay wedded to some of our competitors for the rest of your careers or your business futures. So be it. That's okay. We respect that.
We would like to present those that are rethinking their strategies with an option, just some flexibility in choice. We'll invest with you, we'll work with you.
I would encourage you, regardless of your opinions of whether our colleagues' strategic transitions will be successful or not, to minimize your risk. You need to invest in an alternative platform. As you rethink it, IBM would love to be there with you.
I can't thank you enough for the business we do together. It's wonderful. It's huge. We need each other. We listened hopefully better this time than we have in the past. We want to adjust. We want to respond.
But at the same time, I hope you understand that we see the industry shifting. And as we see the industry shifting we all need to adjust our business models for success.
2002 in our view is going to be a very tough economic year. We're assuming that's the case. Maybe things get better; maybe they don't. In terms of our partnership, we don't care what the economy is like. We want to work with you regardless of the economic environment and do what we did in 2001, which is go out in the marketplace, focus on our customers and satisfy their e-business needs, take share and beat up on the other guys. Thank you, and I hope you're with us.
