Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
PartnerWorld 2007
St. Louis, Missouri
May 1, 2007
I am delighted to be part of this year's conference in St. Louis and to spend time with a very important group of people, our business partners.
Needless to say, IBM could not and would not be the company we are today without you. And I really do mean that.
Exactly one week ago today I was in Knoxville, Tennessee, hosting our annual shareholders meeting. I was able to report on an excellent 2006. Last year IBM achieved record profit, record earnings per share and record cash performance. Our margins are the highest they've been in the past ten years. Cash generated from every dollar of revenue has increased 18 percent since 2003. And we're off to a good start this year.
I could not have stood before our owners and delivered that report—and as a company we could not have produced these results—without you.
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So before I do anything else, I want to thank you. This is your accomplishment, as much as ours.
Of course, these results were not only the result of hard work—by all of you and 350,000 IBMers. All the hard work in the world won't guarantee success—if you don't get yourself to the right place at the right time. To get to the position we are in today, we started several years ago and, together with you, made some important strategic choices. We placed some big bets—bets that are now paying off.
As we entered the decade, we saw major shifts playing out in our industry and in business. Together we committed to lead—and to profit—from those shifts. I want to talk about each of those and provide a perspective on what they mean for our opportunities this year and in the decade ahead.
What trends and developments did we anticipate? There were three of overarching importance:
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These forces were causing value, opportunity and profit to shift across industry after industry—and none more than information technology. Let me spend a moment on each.
First, how was computing changing?
We saw the emergence of a new computing model, built on a new global infrastructure. This infrastructure would be based on open standards and technologies. Of course, the Internet was interconnecting everything - people, businesses and institutions. At the same time, there was a proliferation of connected technology in devices, in transportation systems, retail… in the infrastructure that underpins how we all live and work. Together, they were displacing the PC-based client/server model of the 1980s.
We anticipated the mass adoption of open standards, new approaches to software and advanced technologies such as virtualization and modular hardware systems. The combination of these would create a very different computing capability for businesses. They would radically change the data center, and the work loads and work flows that it would support.
Importantly, this new, open infrastructure would enable enterprises to break down vertical silos and redeploy processes and functions horizontally and globally, across not just their individual companies but their entire value chain, from business partners to supplier to customers. That would enable new kinds of partnerships to develop, new forms of collaboration to emerge.
We committed to lead these changes.
About five years ago, when we first started talking about this new computing model, we had to find new words to describe it. You may remember that we talked about On Demand Business and an On Demand Operating Environment.
If we look back today at what we said at the time, we can see that things have played out very much as we all said they would. They took the form of things like:
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Second, we saw that this new computing model would change the way businesses applied IT. We knew that businesses were going to need to respond rapidly and effectively to a volatile marketplace—and so they would need to take all this advanced technology far deeper into their organizations.
Their aim? Not merely to reduce costs, but to use technology to be more innovative—in their products and services, of course, but also in their business processes and even their business models.
Last year, we commissioned a worldwide survey of more than 750 CEOs and government leaders to get their thinking. It strongly confirmed our gut instinct of a few years before.
What did CEOs say about innovation?
They said the biggest opportunities in innovation aren't limited to novel products and services. They said they wanted to build innovative companies—innovative operations and processes. They said they are focusing at least a third of their innovation initiatives on their business models.
We asked them how innovation takes place today. In the lab? They said that the best innovators don't do it all themselves. They collaborate.
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Now, why does all of this represent such an important opportunity for all of us? Because the CEOs also asked for help.
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And since this study was done, we have only seen the appetite for innovation increase.
I think this represents an obvious opportunity for all of us. Together we can be our clients' innovation partner—"the innovators' innovator."
My colleague Nick Donofrio will join you tomorrow to talk about how we are building a culture of innovation at IBM—and how that work translates into opportunity for our partners and clients.
At the same time that the new computing model, optimized for innovation, was taking shape, we all realized that the world was becoming ‘flat.' Globalization arrived.
What would the reality of globalization mean for our clients, IBM and our industry?
A lot of people think this is all about lower cost and labor arbitrage. But to us, what was happening went far deeper than that.
We saw the emergence of an entirely new business environment, one that would allow businesses, including our own, to tap into skills, expertise and economics now accessible all over the world. We saw the sunsetting of the "multinational" corporation—with its replication of mini-versions of the parent company in country after country.
When I started at IBM in 1973, we were a classic multinational. We had "mini-IBMs" in dozens of countries around the world. Each country operation had its own sales force, its own supply chain, procurement, finance, HR and other so-called ‘back-office' functions. In many cases, the countries had their own manufacturing, development, even research capabilities.
For a time, this was the most efficient way to grow in local markets. But for IBM today—with more than 350,000 employees and more than 100,000 business partners working in 170 countries—the multinational model simply isn't the best fit. What once looked like efficiency has now become redundancy. The multinational model is expensive, and increasingly it gets in the way of speed, responsiveness and innovation.
Replacing it is something we call the globally integrated enterprise. It takes advantage of global networks to locate operations and functions anywhere in the world. And it integrates those operations horizontally and globally.
Clients are tremendously interested in learning about and becoming globally integrated. Certainly the established multinationals see the potential. But I would say that smaller and mid-sized companies are even more advantaged in this flat world.
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Of course, IBM has been a classic multinational for many decades. We are well on our way to becoming a globally integrated company. We have been flattening hierarchies all over the company. We've restructured regional headquarters and directed more resources out into the field. We've created new operations, such as deal hubs, to better integrate our capabilities. We are capitalizing on skill and expertise everywhere in the world, increasing capability in emerging markets in India, China, Brazil and Central Europe, even as we continue to hire in advanced skill groups in the U.S., Western Europe and Japan.
Today about 60 percent of our revenues come from outside the U.S. Over the next four years, we expect the IT markets in China, Brazil, India and Russia alone to grow revenue more than twice as fast as the worldwide economy as a whole, which should produce a market opportunity of more than $150 billion by 2010. IBM is extremely well positioned in these markets.
Now, I'm sure that you welcome IBM becoming more efficient, faster and more responsive. I'm also sure you're glad that we are tapping into talent pools and economic opportunities all around the world. IBM's unmatched global reach and our partners' deep understanding of local markets—including the hottest growth markets—is a significant differentiator for us. It's one of the reasons we are able to command a premium in the market.
But I'd like to point out one other important aspect of this new model.
If you look at it architecturally, it's very different from the centralized hub-and-spoke model of the 19th century, or the linked nodes of the 20th century multinational. The globally integrated enterprise is inherently distributed… componentized… and pervasively interlinked.
In other words, a globally integrated enterprise is inherently an architecture of partnership.
And this is not partnership in the old-fashioned model—where the role of the partner was to be extra arms and legs. In this globally integrated ecosystem model, partnership is a function of complementary expertise and multi-directional collaboration.
Think about this in terms of how we are all working together today. You increasingly partner with each other, as well as in one-on-one relationships with IBM—whether it's through ValueNets… or PartnerWorld Industry Networks… or the Business Partner Innovation Centers.
So… we saw all these forces reshaping our industry and creating new opportunities. We decided to lead these shifts. We got to work.
You know what followed. We exited commoditizing businesses like PCs, hard disk drives and displays—the elements of the past computing model—and strengthened our capability in the emerging model. This is why we are growing robustly in software and in particular in Service Oriented Architecture, or SOA… information on demand… and open, modular systems for businesses of all sizes. We deepened our business consulting capability.
We have acquired 56 companies since I became chairman. These have strengthened our hand in the key growth and profit areas, mostly in software, but also in new spaces that combine software and services.
All of this work has positioned us to capture the most profitable growth opportunities.
Now, let's talk in more detail about those growth opportunities, and how we will go after them together.
Of course, when it comes to the biggest IT growth opportunity in the world today—small and mid-sized business—our partners play a central role. The global SMB market is valued at $487B, growing at 6.5 percent—and 47 percent of IBM's SMB revenue is driven by our business partners.
But simply framing this as a market in terms of enterprise size fails to capture the real nature of the opportunity. We know why small and medium businesses can grow today… why they can become players in the global economy… how they can access capabilities that were previously reserved for large enterprises. The question is how have our strategic moves over the past several years positioned IBM and our partners to help them, and to capture the highest-value areas of this opportunity? Because it turns out that those high-value areas are also the ones our traditional large clients need.
Hardware: The importance of our partners to IBM's position as the leading computer hardware company in the world is, of course, very well known. I could talk about so many areas of opportunity, across all our server lines. One of those you know very well, System I, which is all about the channel. We've just introduced two new System i servers to our Express Portfolio, which gives you a great platform to add value through solutions.
But let me focus on two areas of hardware in particular:
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Software: Now, you know that IBM is aggressively growing in software. I commented earlier on the dozens of software companies we have acquired in recent years. We haven't just acquired great new technology and smart people… we've also expanded and enriched our partner ecosystem with thousands of new partners.
If you've been focused on one or two of our software brands, the breadth and depth of IBM's growing software portfolio is a great opportunity for you. We can help you expand beyond your current business through integrated, multi-brand solutions.
Now, let me call out a couple of major growth plays—SOA and Web 2.0, via Lotus Connections.
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Today the world is fixated on the consumerish applications of Web 2.0—MySpace, YouTube, FaceBook, Linked-In and, of course, SecondLife. It's cool stuff. As you know, IBM has islands in SecondLife, where we train people and hold conferences. And like Ravi, I even have an avatar that kind of looks like me.
But Web 2.0 is coming to the enterprise. And IBM will be a leader, just as we were with Web 1.0, which we called e-business.
Later this year, we'll be launching Lotus Connections, the first Web 2.0 suite for business. But to give you a taste of the possibilities here, we have created Lotus Connections for Partners, which is available to you now. You can use it to create and share profile information, find subject-matter experts, and engage in collaborative business planning—to get your feet wet, and think about ways you could sell it to your customers.
Services: Of course IBM is the leader in IT services. Perhaps the least well-known opportunities to leverage the IBM partner ecosystem in new ways lie in the area of services. These opportunities go right to the heart of the big strategic plays I described earlier.
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As an example of the latter, we're announcing at this PartnerWorld three new asset-based, replicable and managed Security services, to be sold through our partners. They simplify security purchasing, maintenance and management. This is not only an attractive option for SMBs, but also for branch offices of larger companies, resellers and service providers.
Overall, because we recognize the huge upside to this expansion of our services opportunity through the channel, we are expanding our Principles of Engagement, which clearly describe where partners play and where GBS plays, as Val Rahmani told you yesterday. We're creating more teaming models, and getting a lot clearer on how together we can bring those models to life. So even if you're a reseller who is hardware-focused, you can improve your profit by also selling tech support and maintenance, and you can transition to a solution model—with higher profit and customer sat—without having to acquire services capabilities yourself.
Finally, let me say a word about emerging markets.
Take all the opportunities I've just described, and imagine their revenue and profit potential in markets growing at the rate of a China or India or Russia or Brazil. But I don't have to tell that to some of you. 80 percent of those who joined the PartnerWorld program last year are in Europe and Asia.
Business partners are arguably more important to us in emerging markets than anywhere else—because you bring local relationships, local solutions and market access. IBM, in turn, helps you with investments, reach, and through opening these markets to international partners. Most important of all, we bring the power of the IBM brand.
Thanks to you, we have moved aggressively and we are well positioned to capture the lion's share of the growth opportunity—including areas that are just now being opened up to development. For instance, Project Blue Sky in China expands our partner presence in remote cities - including about half of our 3000 business partners in China.
And, of course, the subtext of the emerging markets story is once again SMB. SMBs choose local and regional providers 49% of the time. To drive that even farther, our Express Advantage program has been expanded to 23 countries with 9 new offerings to help reach mid-market clients.
As Ravi said yesterday, our commitment to you has been strong, consistent and mutually beneficial—matching the strength, persistence and value of your own commitment to IBM.
I hope you agree that there are many advantages to associating your business with the IBM business. We have unmatched technology, products, services and global reach. And we are stronger today because of the moves we have made over the past several years to reposition IBM for a very different computing model, a very different set of client needs and a rapidly flattening world.
I hope you also have chosen to work with us because of the power of the IBM brand. By any measure, the IBM brand is one the most respected and well-known brands in the world. And it is not only universally recognized. It is unique.
Most global brands make you think of a particular product - a soft drink or a line of clothing or some other good or service. But the IBM brand has never been defined by particular products and offerings. In our industry, those come and go. So, on what is our brand based? When you, as a partner, choose to associate yourself with our brand, what are you seeking?
In a word, our values.
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These are not empty words for us. They were created by IBMers themselves, and they go deep. In very concrete ways, they are now reshaping everything about our company... including our relationship with you.
And our values are not just a bond between us. When really lived, they can be every bit as powerful a competitive differentiator in the marketplace as our products, services and marketing programs.
In fact, as IBM business partners grow and expand our reach into new markets, how they interact with the communities where they do business—that is, the values they bring to these communities—may well determine whether or not we have permission to do business there at all.
Besides which, many of the biggest business opportunities waiting to be tapped are integrally bound up with solving some of society's biggest challenges—whether we're talking about the environment, or rural poverty, or developing the skills of the future, or policy issues like intellectual property or protection of privacy.
This convergence and integration of business and societal goals is at the heart of my vision of the globally integrated enterprise, and of a values-driven company. And that is why I am so pleased to announce a new award for corporate citizenship exhibited by our partners.
The IBM PartnerWorld Beacon Awards recognize IBM Business Partners for their outstanding innovation and customer satisfaction in providing innovative solutions to clients worldwide. I was pleased to meet some of you last night. This new Beacon Award—the PartnerWorld Beacon Award for Corporate Citizenship - will recognize innovative ways of practicing our value of "Innovation that matters"—in areas like community engagement, human resources, environmental affairs, and responsible supply chain practices. Our vice president of corporate affairs and corporate citizenship, Stan Litow, is here at PartnerWorld, and will be available to answer questions about this exciting new award.
IBM renewed its values in 2004, and they guide everything we do. They lead us to apply our expertise to improving communities worldwide. Yesterday Ravi described some of our efforts. Next PartnerWorld, we want to hear about yours.
Finally, let me conclude by thanking you again for all that you do to make IBM something much greater than just a company. The work we do together is a continuing source of inspiration to me and my colleagues. We are proud to work with you as stewards of this unique enterprise and legacy of innovation.
Thank you.
