Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
2004 IBM Annual Meeting of Stockholders
Providence, Rhode Island
April 27, 2004
As you know, 2003 was a very good year for IBM.
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As you saw in the results we announced two weeks ago, we built on last year's momentum in the first quarter of 2004. We grew revenue and earnings in double digits, continued to gain market share, and we ended the quarter with $8.5 billion of cash on hand.
So, we are enthusiastic about our prospects for 2004 and beyond. Part of the reason for this is that economic conditions are steadily improving in many nations, including the U.S. We intend to capitalize fully on the rebound.
But it is important for you to understand that our enthusiasm isn't because of a cyclical recovery alone. It's much more fundamental and long-lasting. I'd like to explain some of the context — about what's happening in the IT industry and business in general, and about the changes that have been taking place in IBM itself.
First, a brief history lesson.
We all know what the driver of the information technology industry has been for decades. Simply put, you create something that nobody else knows how to make... something that provides some unique value to customers. Because they can't get it from anyone else, they come to you.
This gives you a very strong marketplace position. You are, for a period of time, the agenda setter. IBM has benefited from this many times in our history — most prominently with the mainframe, whose 40th anniversary we're celebrating this year.
This industry cycle has been great for innovators. But other people inevitably enter the market. They produce alternatives to your technology, product or service. The once-unique innovation becomes a commodity, and those opportunity spaces become less and less attractive.
This cycle — of innovation and commoditization — has never been more pronounced or more rapid than it is today.
Today, our industry has bifurcated. There are really only two models now for building a leadership position:
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Now, at times in IBM's past, we weren't sure where we wanted to play — and we made some pretty big mistakes. Sometimes we were slow to capitalize on our own innovations. At other times, we hesitated to re-invent or exit businesses that were no longer differentiating for us or for our clients.
A few years ago, we made a fundamental decision — to lead in the high-value, innovation spaces of our industry, and to focus on businesses and institutions of all sizes, in every industry.
By "innovation," we mean much more than invention. Don't get me wrong — your company takes a backseat to no one in the value we place on technological invention. Our scientists and engineers earned 3,415 U.S. patents last year — a new record, and 1,400 more than our closest competitor. It was our 11th year in a row of patent leadership.
You can rely on IBM to continue to invent more cutting-edge technology than any other institution in the world.
But "innovation" is a bigger thought than "invention." It's what happens when invention intersects with insight... when some new technology or capability is applied to an industry or to the particular circumstances of a client. That's when unique value is created. That's the business we have decided to be in... and to lead.
We want to solve our client's toughest problems — by bringing to bear great technology, deep insight and know-how. We want to give our clients something they can't get off-the-shelf: unique, differentiating advantage that helps them succeed.
Frankly, this is what has set apart IBM for many years. It's why clients want to work with us, and why great people want to work here.
This decision commits the company itself to continuous reinvention. It means redoubling our commitment to innovation in everything we do... reallocating resources... growing new capabilities and new opportunity spaces.
Sometimes you have to go out and acquire new strengths. Sometimes you have to leave behind parts of your business that no longer represent high value to clients and no longer differentiate the company... and you have to do this without having an emotional attachment to things that don't represent your future.
Every bit as important, you need to take a very hard look at your culture — the way all your people actually behave, the way they relate to others.
For us, the need for these kinds of decisions coincided with an enormous downdraft in the economy — both the recession and the collapse of the dot-com bubble.
Now, it might have been the safe thing to do to hunker down, to focus on gaining market share, to concentrate on getting ourselves into fighting trim while waiting for the recovery.
But that's not what we did. We decided it was time to look beyond the past and the present. We decided to "recreate" IBM again.
So, over the past three years, we've taken concrete steps to seize leadership in the high-value, innovation space:
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These decisions and moves are beginning to pay off for our shareholders and clients.
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So, we are growing the revenue and profit potential within our existing markets. That's one of the important reasons we believe we can, on a long-term sustainable basis, continue to out-perform and produce return on invested capital superior to the S&P as well as generate strong cash flows.
Another reason, and perhaps the more important one, is that as you innovate, you significantly expand the opportunity space for the industry. You make the whole pie bigger.
As we set and lead the agenda for the technology industry, we know that we are not alone. Today, nearly all our competitors—many of whom derided our on demand announcement 18 months ago — have frameworks and marketing campaigns that look suspiciously like our on demand platform and offerings.
But the real question — the real differentiator — is not sloganeering. It's: What actually matters to clients?
The answer is, clients want measurable business improvements. They want to know what the concrete advantages are of becoming an on demand enterprise.
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After scores of engagements with major clients over the past 18 months — and based on our own efforts to become an on demand company — we are seeing the tangible business value of an on demand business.
Let me mention a few examples.
We all know the importance of cash and free cash flow. But today there is also "time to cash." This is taking the traditional metric of DSO — or "days sales outstanding" — and adding a Compound Annual Growth Rate flavor to it. How much are you driving down DSO and how fast are you doing it?
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Another business value of on demand is "time to scale" — how quickly you scale up or down with market demands or opportunities. On demand thinking gives companies more options for achieving better variable costs:
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A study of 125 electronics firms found that 90-95% of their costs were fixed. They couldn't manage costs within a quarter, and they said it usually took them 2-3 quarters to catch up to fluctuations in revenue. But of those companies, the ones we've worked with to become more quot;on demand" businesses saw an average increase in productivity of 5% — vs. an industry average of negative 4%. For example:
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Bottom line: On demand business is here today... it's delivering measurable results that our clients value… and IBM is capturing the lion's share of this new industry opportunity.
Another example of that is what I mentioned earlier, IBM and Morgan Stanley this morning announced a $575 million services contract under which IBM will help Morgan Stanley become an on demand financial services institution. This work will involve business transformation efforts, coupled with a standards-based technology infrastructure that automatically draws computing power as needed from a shared pool of resources. This is a significant opportunity for IBM and another example of how we are helping more and more clients become on demand businesses.
At the same time, we continue to be at the forefront of the shift to an open, industry standards-based model of computing — which provides the technical underpinnings for on demand business.
As you know, we have become convinced of the crucial importance of standards, and we're pushing for them in every way we can — whether through Linux at the operating system level, or with grids, or with Web Services.
We firmly believe that standards will accelerate the growth of the entire industry. It will free up significant client resources from doing difficult, gorpy integration work — work that, frankly, our industry should do for the client — and allow that spending to be used for new business opportunities and applications, new workloads, new capabilities.
I can assure you that we do not minimize the effort that will be required to ensure that open standards prevail... but we are confident they will.
Now, there are some important implications of our business model for the way our company operates — namely, for our culture.
If you are going to build a business based on continual innovation and on the creation of new intellectual capital, you are signing up for total dependence on the creativity and adaptive skills of your workforce.
You have to unleash people's creative energy, trust them, empower them — and yet get everyone working together in a way that is consistent with IBM's brand promise. That's a towering challenge for a company like ours, with 320,000 super-smart, very independent-minded people in more than 160 countries. And yet it is absolutely critical to our success.
So last year we did something that hasn't been done at IBM in nearly 100 years — we examined our core values…not because of the crisis of confidence that exists in many corporations today, but because our clients want integrated solutions from us.
We needed to find a way to integrate all of our tremendous capability, in different circumstances to solve different needs, one client at a time. How do you accomplish that? We could have created a lot of processes and added management oversight, but that would only slow our people down. Instead, we decided to ground the workforce — all of us — in a common set of shared values.
A typical way to promulgate a company's values is for the CEO or a special committee to create them, and then propagate them throughout the organization. However, I didn't believe something as vital and personal as values could be, in today's environment, dictated from the top.
We had to find a way to actually engage everyone in the company and get them to speak up on these important issues. So we did something that is, to my knowledge, unprecedented in any company. For 72 hours last summer, we invited all 320,000 IBMers around the world to engage in an open "values jam" on our global intranet.
It was risky — we didn't know what our colleagues would say or what we'd get. But it paid off.
IBMers by the tens of thousands weighed in. The content received one-and-a-quarter-million views — a new record.
IBMers were thoughtful and passionate about the company they want to be a part of. They were also brutally honest. Some of what they wrote was hard to read — even painful. As you probably know, IBMers aren't shy!
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But, frankly, that's to be expected. These are important issues. Responsible, thoughtful dialogue is appropriate.
Anyway, we stuck to our guns in keeping the dialogue free-flowing and candid. And we learned a lot about the gaps that exist between our stated aspirations and the realities of our company.
I am convinced that what resulted — not only the values themselves, but the broad, enthusiastic, grass-roots consensus behind them — could not have been reached any other way.
In the end, IBMers themselves shaped our values. They determined that our actions will be driven by these three principles:
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These values are significant for our leadership goals.
IBM defines leadership in multiple dimensions. One of those is to create superior value for our shareholders. We believe the way to do that is to be the best client partner in the world... to set and lead the agenda for our industry... to be the most innovative technology company... to make the most meaningful contributions to our local communities and to society at large... to be the place all the best people in the world want to work.
In this last dimension — to continue to be the employer of choice — I think you know our track record over the years. And still today, on most measures, we over-invest in our workforce.
We know this because, as you would guess, we do a lot of benchmarking, within our industry, and across all business.
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The reason we do this is not altruism, nor a mindless allegiance to our past. We certainly have learned, the hard way, the importance of IBM's long-term competitiveness. We make these investments in our people because we believe it's strategically important for IBM.
Our company is totally dependent on forging client relationships and the continual creation of new intellectual capital. And that depends on having the best workforce in the world. We believe it is in the IBM shareholder's interest for us to "over-invest" in our people.
Similarly, we are rolling up our sleeves to bring our values to life in our policies and daily operations along multiple dimensions.
We've revamped our performance management system. We're re-inventing what it means to be an IBM manager.
We're creating innovative ways to assist the communities in which we live. Last November, we launched the IBM On Demand Community to encourage and sustain employee volunteerism. As of today, we've registered 13,500 employees from 55 countries to use the online tool that supports their volunteer efforts, and they've already logged almost 400,000 hours of community service.
And we are pleased to let you know that we are extending the online access to the IBM On Demand Community to retirees in June. This means that all retirees will have access to the same grants and resources that are currently offered to IBMers.
We're combining advances in technology with progressive policies to expand the enablement of a diverse workforce. Of course, you probably know IBM's long and proud history when it comes to the hiring and promotion of minorities and women. But human beings have diverse physical capabilities, as well as diverse backgrounds.
If you visit some of the technology demos in the lobby here today — and I certainly encourage you to do that — you'll see some examples of IBM technology that is opening up the Internet — and the world – to people with disabilities.
Accessibility — which started out as a philanthropic effort — has now evolved to a business transformation effort for IBM and our clients.
We're also working to strengthen investor confidence. A few weeks ago, the board of directors approved sweeping changes in compensation for IBM senior executives.
Among the changes are programs that ensure investors first receive meaningful returns — 10 % — before any of IBM's top 300 executives realize a penny of profit from their stock option grants. We also now require those executives to invest their own money in IBM stock before they are granted traditional stock options.
Driven by our values, we're also thinking hard about some major economic and societal issues that are implicit in the emergence of a global, innovation-driven economy.
For example, I think most people recognize that we can't simply lock into place current jobs, skills, businesses — or, for that matter, nations.
IBM has, throughout its history, contributed to and benefited from economic development around the world. We have always believed that ultimately, open, global trade brings about the most benefits to business and society.
On the other hand, the impact of these economic shifts on individuals is a very real issue. At IBM, we believe we have to prepare our people to do the jobs that will be needed in the future. To that end, we are determined to be second to none.
As I mentioned, we spend more than $750 million a year on training our workforce—and $200 million is specifically aimed at "hot" new areas of expertise, such as high-value services, the skills to execute business integration, open standards and pervasive and wireless technologies.
Last month, at our annual PartnerWorld conference, I announced that we were starting a "Human Capital Alliance" — an innovative commitment of $25 million in seed money to help our people develop and refresh their skills and find work with IBM's 90,000 business partners worldwide.
We hope other companies in our industry will follow suit in helping their employees and their partners develop critical skills. At the same time, our employees understand that they have the responsibility to continually grow, learn and perform.
We're making an enterprise-wide effort to understand what one columnist has called America's "secret sauce" of innovation — how to define it, measure it and spread it, within IBM and in the world at large.
Here in the U.S., I'm co-chairing a National Innovation Initiative for the Council on Competitiveness, made up of leaders representing the broad spectrum of American business, labor and academia — enterprises like 3M, Mayo Clinic, Morgan Stanley and GM... and leading universities such as Georgia Tech, Stanford, Columbia and MIT.
Our aim is to identify actions that will help stimulate innovation in a 21st-century United States.
And, because innovation today occurs within a global ecosystem, this year we're taking this initiative to the major countries in which we do business.
All of this is just the beginning. We are creating a culture that integrates all the capabilities of IBM to solve our clients' toughest problems... because:
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So, let me wrap up.
IBM today has a more focused business model... we're witnessing an industry shift that plays to our strengths... our bets are paying off in the near term... and most importantly, our workforce is united and impatient to lead the industry once again.
I wish I could have my 320,000 colleagues join us here today. But since we can't stop running the company, I'd like to show you a video of some of my colleagues talking about the work they do and how they feel about IBM today.
For me, what comes through again and again when I talk with other IBMers is the deep-seated optimism that infuses this company — IBMers' fundamental belief in progress, science and the improvability of the human condition. That optimism has been characteristic of IBM since its beginning, and it's once more, alive and well.
IBM today is a company ready to focus more on opportunities than on threats.
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On behalf of the colleagues you just saw on video and the 320,000 around the globe, I want to thank you again for your investment and your ideas and your support.
Thank you very much.
