Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
IBM Business Leadership Forum
Rome, Italy
April 5, 2006
"Keynote Address
Good afternoon, and welcome to Rome! I have to begin by saying thank you, to each of you, for joining us for what promises to be a provocative and productive couple of days.
As you saw from the video, this is not the first Business Leadership Forum that IBM has hosted. We began these sessions three years ago, when many industries, and many countries, were confronting a confluence of daunting issues and historic developments. We wanted to bring together leaders from business, government, academia and policy to discuss these issues and, most of all, to share what we can do about them - how to use them to our best advantage, to change the game, to grow our businesses and nations.
We've held Business Leadership Forums in various parts of the world -San Francisco, Paris and Shanghai - each of them focused on a particular region of the world. These sessions have been so valuable that we decided this year to hold our first truly global Forum. "Global" in how we have framed the agenda - our speakers and panelists, and the issues they will address. And "global" in the composition of the participants - in other words, all of you.
As we come together here - in a city that once, with some justice, conceived of itself as a global capital - there's something different in the air from our previous Forums ... the scent of new possibilities ... the growing awareness that, despite the many serious issues we all face, the world is shifting from a focus on fear to a focus on opportunity.
From my discussions with many of you, and with the leaders of our clients - and, as you'll see, from some intriguing new research among CEOs around the world - the perspective is shifting from 'glass-half-empty' to 'glass-half-full.'
Before we get into that, let's consider some of the new realities our generation of leaders has faced since the beginning of the new century, realities that provide a useful backdrop to our discussions here in Rome.
Globalization has arrived. Or, as some put it: It's a flat world out there. Two millennia ago, that wouldn't have been news to the leaders who stood in a different forum in this city. At its peak, the Roman Empire was about the size of the United States, and Roman commerce extended across a horizontal terrain as far as India and China.
In 1492, another Italian convinced us all that the world was round! Now, an American writer named Tom Friedman is telling us the Romans had it right all along - the world really is flat. And by the way, we'd better start paying more attention to India and China again, as well.
In his best-selling book, Friedman cites 10 different events that have flattened our world. One of the biggest is the evolution of the Internet as an integrated, global trading platform. The Internet has reduced transaction costs, created broader access to global markets and advanced technologies, and leveled the playing field among small businesses and large corporations, and among emerging economies and industrialized nations.
At the same time, the world is experiencing massive economic and demographic shifts. Last year, the GDP of the world's emerging economies increased by $1.6 trillion - that's $200 billion more than the rest of the world combined. India and China represent about a fifth of that growth. The rest is coming from places like Eastern Europe and Latin America. Most of these countries are teeming with young professionals in business, engineering and the sciences. Meanwhile, working-age populations in Western Europe, Japan and Australia are shrinking and aging. In 15 years, Italy will have just one worker supporting every retiree. In Japan, 30% of the population will be over 65 years old by 2020.
Talent is migrating around the world by the millions, and work is migrating as well. Thanks to global networks and standards-based processes, an enterprise can conduct its operations almost anywhere - application development in India, order processing in Brazil, procurement in Scotland, customer care in the U.S.
We've seen some of these changes coming. Others have been much harder to predict - political uncertainties in many parts of the world, a stream of natural disasters the last couple of years, consumer expectations and behaviors shifting more rapidly than ever, an accelerating cycle of technology invention and commoditization.
In this interconnected world, unpredictable change becomes much more difficult to manage. Disruptions on one side of the planet - whether from markets or politics or nature - have an almost immediate impact on the other. Keeping up with these changes - much less capitalizing on them - requires extraordinary levels of speed and flexibility.
When you consider all of these new realities, it's clear that all of us who are decision makers today are facing an unprecedented number of challenges. How will we respond; what will we do? Do we hunker down, and ride it out? Wait and see how others respond? Can we possibly get by doing things the way we've always done them - maybe just better and faster?
What we've learned in each of our previous Forums is that the most successful leaders are choosing a new path forward - the path of innovation.
From Europe to Asia to the Americas, heads of state are promoting innovation as a way to stimulate growth, create jobs and find new solutions to the persistent challenges of public health, public safety, poverty and education. In Japan, Prime Minister Koizumi has made innovation the centerpiece of his government's plan for economic revitalization. In the U.K., Prime Minister Blair has set a goal to increase investment in research to 5 billion pounds by 2008 to help promote innovation and economic growth.
Last month in China, the National People's Congress endorsed a five-year economic development plan that centers on innovation and government-funded research.
At the same time, the call to innovate is echoing in executive board rooms around the world. Initially, businesses of every size reacted to globalization the same way - by cutting costs. Now, there is equal pressure to grow the top line as well.
CEOs recognize they have two options here - either create the differentiating value that brings greater profitability and growth, or be a commodity player, focusing on high-volume, mass-market products and services at the lowest possible cost. There's just one way to the high road; that's why, in industry after industry, you hear CEOs such as Jeff Immelt at GE, Howard Stringer at Sony and Juan Arena at Bankinter in Spain talking about market strategies built around innovation.
At IBM, it won't surprise you that we have our own view of innovation. We are proud to hold more patents than any company in the world - more than 29,000 over the last 12 years. And we are proud of the contributions that we have made to the IT industry over the past 90. But despite all of that, we understand that innovation means more than invention. It means new forms of collaboration. It means combining invention with insight to tackle the most pressing problems in business and society.
But we didn't invite you all the way to Rome to hear IBM's views on the subject. With leaders around the world all promoting the promise of innovation, we wanted to learn from them. So in the months leading up to this meeting, we interviewed more than 750 CEOs and government leaders.
A team of IBM consultants sat down, individually, with a cross-section of business and institutional leaders from 20 separate industries, in 11 regions of the world. We spoke to leaders in all the major markets, as well as in the emerging markets of Asia, Latin America and Eastern Europe. We spoke to leaders of major corporations as well as small businesses - an important consideration here in Europe, where 90% of all businesses have 10 employees or less.
We called it a CEO Survey, but we didn't talk with business leaders only; 14% of our respondents were leaders from the public sector. And from these conversations, we got provocative views about the changing nature of innovation, and some valuable ideas about what it takes to be an innovator in today's economic environment.
Let me share their three most important insights with you.
First: CEOs and government leaders told us that we need to approach innovation from a broader perspective than we might be accustomed to. Most of what you traditionally hear in terms of innovation focuses on cool new inventions - the next iPod, hybrid automobile or search engine. That view of innovation isn't entirely wrong, but it's incomplete.
The biggest opportunities in innovation do not reside exclusively in our product and service lines. They are locked inside our business processes, our management systems, our policies and governance, our operations, even our corporate cultures. Product and service innovation will always be fundamental. But I believe each of us has the potential to unleash innovation in virtually every part of our enterprise.
Consider the opportunities to apply innovation in your business processes, for example. From the supply chain, to human-capital management, to manufacturing, to R&D, every system that makes up your enterprise's operations can be transformed through the application of technology, and through partnerships that can give you access to global talent, global scale and greater expertise than you have internally.
Another opportunity for innovation is a cultural one. One of the more difficult aspects of innovation isn't coming up with new ideas, it's making that capability sustainable, a part of your operations. In other words, it's creating a culture of innovation that generates a pipeline of high-value, marketable ideas. Part of this task is simply providing the tools for collaboration. The tougher part is creating an environment that rewards risk-taking and knowledge sharing.
Perhaps the biggest opportunity lies in applying innovation to the fundamental business model that defines your enterprise. CEOs told us they are pursing business model innovation for two reasons - one, because their competitors are doing it, and two, because it pays off. When you compare business performance, those companies that have grown their operating margins faster than their competitors are putting twice as much emphasis on business model innovation.
Tomorrow you will hear from a company in India that has done just that. Bharti Tele-Ventures is the largest private sector telecommunications provider in India Unlike just about every other company in its industry, Bharti doesn't manage its own networks, base stations, customer care, billing systems or core technologies. It has engaged business partners such as IBM to do that for them. Since 2003, Bharti's revenues have grown nearly 400%. And in its last fiscal year, net income tripled. Sunil Mittal, the chairman of Bharti, will tell you how innovation has contributed to his company's spectacular growth.
Second: The best innovators don't do it all themselves. They collaborate. When we asked CEOs about the best sources of innovative ideas, their top answer - not surprisingly - was their own employees. What's fascinating were the next five: business partners, customers, consultants, competitors and industry associations. All of them external sources. Internal R&D came in a distant seventh place.
The fact is, in a flat world, no enterprise, no university, and no national economy stands alone. Every one of our organizations is part of an ecosystem of business partners, government agencies, universities and research labs, customers and competitors. Global connectivity gives us the unprecedented ability to collaborate and learn from one another. That's why vertically integrated, internally focused R&D is giving way to joint ventures, licensing, outsourcing and other forms of collaborative partnerships.
Procter and Gamble is one of the leaders in collaborative innovation. The global consumer products company expects that outside partnerships will be contributing half of its new products and services within a few years.
Collaboration is more than "teamwork." It means ongoing, systemic and very new forms of sharing. This is collaboration that spans disciplines, industries, the public and private sectors, that works on a shared infrastructure, and that loosens the traditional restrictions on intellectual capital, so that ideas can build on one another. As one of the CEOs in our survey put it, "Having a few beers together is not collaboration. Collaboration is a discipline."
Finally: Innovation is not something you can delegate. It must come from the top. I can testify to this from our experience at IBM.
About four or five years ago, we recognized that the dot-com crash wasn't just a cyclical change, but a sign of bigger changes to come. We recognized that, to keep ahead of it, we needed to reinvent IBM for the 21st century. We reengineered our portfolio to focus on the high-value opportunities - strategic consulting instead of hard disk drives, middleware over applications, Power technologies over PCs.
Beginning with our supply chain, we migrated to a globally integrated operating model. We lowered our center of gravity - flattening hierarchies, deploying more resources to the field, and taking steps to deploy our global resources more fluidly where they are needed most, anywhere in the world.
At the same time, we have made strides in fostering a culture of innovation at IBM. "Innovation that matters" is one of the three values that we manage our business by. IBMers themselves defined these values, and we continue to introduce new collaboration tools and new incentives for innovation in our workforce.
And we've barely scratched the surface.
Speaking as a CEO who has been down this path, I can tell you, this is not easy! In many ways, we are moving into uncharted territory. Because understanding the opportunity is one thing; seizing it is another. And our CEO survey revealed a big gap between the two.
83% of CEOs recognize that their business model has to change - but only 20% say they have a good record of managing change. 76% see the value of collaboration to achieve innovation - but only 51% are actively collaborating now. 80% recognize the need to create a culture of innovation - but only half say they have implemented the business and technology integration necessary for innovation to thrive.
So, after all this talk about innovation, what do we know?
We know that, for companies and economies that want to achieve sustainable growth, innovation is the only alternative. We also know that the kind of innovation we're talking about - innovation that asks you to rethink every aspect of your business, to share your intellectual property, and to build collaborative relationships inside and outside your enterprise - that kind of innovation is incredibly hard.
Finally, we know that the benefits are real - but they won't come overnight. Meanwhile, all of us face growing pressure for results from our shareholders, citizens and other stakeholders.
Make no mistake: This is a test of our leadership. Some might say there has never been a more difficult time to be a leader in our position. But I would answer, on the contrary - there has never been a better time.
This is the glass-half-full aspect I mentioned earlier. Everything I have talked about so far - macroeconomic changes, new realities, even innovation itself - they are all part of a much bigger - and very exciting - story.
We have come to a historic turning point, the kind that comes around once every 50 years or so. That's the thesis of a Latin American economist now at Cambridge University in the U.K. - Carlota Perez. In her research, Ms. Perez has identified five times in modern history when some revolutionary advance in technology has ignited a new economic era - the industrial revolution, the age of steam and railways, the age of the automobile and mass production, and now, the age of information technology and communications.
We also know from history that, as each new era unfolds, it follows the same pattern. First comes an "installation period," when businesses figure out how to capitalize on a new technology or invention. This is a time of exploration and speculation. This inevitably leads to a bubble, an economic meltdown and a correction. However, once the market adjusts, there is an extended period of "deployment" - which can last anywhere between 25 and 50 years.
This is the period of innovation, after the moment of invention. It's in this period when new ways of doing business are explored, and broad-based wealth and value are created. This is the period we are entering now. And, given all that we now know about innovation - both its opportunities and its challenges - we are in a great position.
Because the fact is, when it comes to innovation, our generation of leaders has more tools and capabilities than any generation in history. The same forces that have turned our world upside down - globalization, universal connectivity, advanced technologies, emerging economies - all of these challengers to the status quo also contain the seeds of a more promising future.
Indeed, it's not an accident, I believe, that the new imperative of global integration is arising at the same time as the new possibilities of innovation. The two phenomena are intimately related. In an world where everything is connected, where massive computing power is available to everyone, where you can reach out to any marketplace on earth and get skills and ideas in return ... in that kind of world, you have the makings of an unprecedented explosion in creativity.
If I sound overly optimistic for a CEO, it's because, when I look around, I see a very different landscape for business than we were looking at just a few years ago. It's filled not with theories, but with tools; not with blue-sky projections, but with new generations of people with reservoirs of skills and imagination; not with visions, but with available and affordable capabilities.
Indeed, when we look around today, we see that we are surrounded by possibilities and inspiration.
We talk about how technology has become pervasive. Did you realize that last year, the world produced more transistors than grains of rice - and at a lower cost? In actual numbers, we are on track to producing 1 billion transistors for every human being on Earth by the year 2010. About half of those are built into consumer electronics. But a growing number are RFID tags, which are helping to monitor everything from auto parts moving around on the production floor to cartons of tomatoes en route to market.
Imagine what you can do with all that intelligence built in to your products and your processes. In crowded cities like London and Stockholm, city planners can now monitor traffic patterns so closely that they can adjust the cost of tolls and control access to major streets during peak periods of congestion. In London's financial district, congestion is down 30 percent. That's a promising innovation for a nation like China, where the number of automobiles on the road is expected to triple in the next 15 years, to more than 140 million.
And that's just one example of how embedded technologies are going to transform the way businesses and societies operate.
But, amazing as they are, smart objects will never replace smart people. Imagine what you could do with a workforce of 800 million. That's the size of the labor pool in China. Or could you get by with 500 million? That's the size of the labor pool in India - double the size of the workforce in the entire European Community. Those two countries alone are graduating nearly 1 million new engineers every year. The talent in emerging economies around the world is enriching the world's marketplace of expertise.
But exceptional talent is everywhere. And the good news is, you can tap into it whenever you need to. Thanks to integrated software architectures and new business models, enterprises today are knitting together teams of highly specialized experts and integrating their capabilities into their overall operations. American radiologists send x-rays to Australia for interpretation; procurement centers in Manila process corporate purchasing decisions on behalf of companies around the world; back offices in Dublin process derivatives transactions for global investment banks; chipmakers, such as Samsung and Infineon Technologies, and chip manufacturing equipment companies, such as Tokyo Electron, are tapping American engineers and know-how to advance their manufacturing technologies.
And, as more and more people get connected to the Net, the global talent pool will only get stronger. The Internet now connects one billion people around the world. And we've reached only 16% of the global population - so far. The numbers are growing exponentially. In Africa, Latin America and the Caribbean, Internet penetration has tripled in the last few years. Each new wave of connectivity brings with it the potential for reaching new markets and extending all manner of services to communities and individuals who so far have been left out of the Internet revolution.
But the Internet is not just people - the Web is fast on its way toward encompassing one trillion objects with embedded intelligence. Object-to-object communications is a $270 billion industry, growing at a rate of 49% every year. What we are witnessing is the emergence of the Internet as a global platform. In this new world, an incredible array of business services, public services and consumer applications are being developed for and delivered by the Net.
Here's one that we are IBM have a particular interest in. By 2010, supercomputers will be capable of 10 quadrillion calculations per second. The exciting thing is that you don't need to be a Fortune 500 company or a member of the G8 to access the power of supercomputing. It's now available to governments and companies of every size, in every industry. Supercomputing can now be accessed on demand by just about anyone - the average cost of CPU time is about 50 cents per hour.
And these are just a handful of what's available to each of us as decision-makers. A whole new generation of tools, techniques and models has come of age - innovation enablers that are more powerful, affordable and accessible than ever before.
Consider the tools that you can deploy to:
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Now, none of these tools and technologies solves anything by itself. Not one of them, on its own, creates innovation. That only comes from human will and human ingenuity. Innovation isn't born of technology; it's born of the insight to recognize how to integrate these tools and technologies into your public services, business processes and business models.
A golden age of innovation is not one of homogenization or sameness. That may be what's most exciting about this moment. Think about similar moments in history - Greece in the 5th century BCE; 1st century Rome; Renaissance Florence; the Industrial Revolution in England; the post-War boom in America. In all these eras, we saw not only new forms of commerce, but an explosion of individuality, of opportunity for a radically diverse array of people and ideas. We saw deep and rich explorations of art and culture. We saw pioneering approaches to how we learn and how we govern ourselves.
The great eras of innovation were periods when people integrated the breakthroughs of technology into the fabric of life and business. These eras - including those of recent times, as identified by Professor Perez - have always expanded our imagination of the possibilities for individuals and for societies. And they have dramatically grown the world's total wealth.
At IBM, we approach innovation from the standpoint of a unique capability or expertise. What makes any enterprise special? What sets you apart? And is this capability potent enough to sustain growth; to deliver economic prosperity; to give you a competitive edge?
That's what this next era of innovation is all about. We created this forum to bring you face to face with some of the individuals who are leading us into this new era. Over these next two days, we will hear first-hand from global leaders who have made innovation a priority for their businesses, and who know how to create and execute an innovation agenda. You also will hear from experts in academia, government and technology who have met the challenges of innovation and embraced its opportunities. Some of the great minds that have analyzed the revolutionary changes going on around us - socially, economically, as well as in technology - will share their thinking with us.
But remember, this is not a forum where we talk and you listen. This is a dialogue. Every individual you meet here represents a new opportunity to learn. Seated among you are CEOs of some of the world's largest, most respected corporations. We have government officials from the major industrial economies of the West - and from the emerging economic powers of the East. We have educators and investors, technologists and economists. You come from every region of the world, and you represent virtually every sector of the world's economy.
We have taken this broad, ecumenical approach for one reason: because innovation is not limited to any country or to any industry. Good ideas can come from anywhere. It doesn't matter how large your enterprise, how established, or how new. What matters is the courage to lead. If there is anything all of us in this room have in common, it is that.
I know there are a lot of reasons for hesitation. Change is difficult. It's risky. It's tempting to let others be the pioneers and just follow along behind. But I don't believe anyone in this room has chosen that path.
At IBM, we see innovation as our path to the future. And we created this Forum for leaders like you who have a similar vision. I believe we can all look forward to an engaging and productive exchange over these next two days. And I thank you for joining us.
