Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
IBM Global Briefing
Bangalore, India
June 6, 2006
"Leadership, Trust and the Globally Integrated Enterprise"
Good afternoon, ladies and gentlemen, and may I once again welcome you, officially, to Bangalore, and to this global briefing for IBM investors.
We knew before we left home that this would be no ordinary event. And what we witnessed this morning - an event showcasing the remarkable innovations being generated by this dynamic economy - was extraordinary indeed.
As you heard this morning, IBM India has grown to become the number one IT company in India, in terms of domestic revenue, and the largest multinational employer in the country, with some 43,000 IBM colleagues at work in our systems, software and services businesses. These IBMers serve a rapidly expanding domestic market - the IT industry here is growing 13 percent a year.
But even more importantly, they are also part of a new kind of organization that isn't designed simply country-by-country, but on a truly planet-wide model. As BusinessWeek recently reported, Bangalore has become the epicenter for some of IBM's most important global projects.
And that, in turn, is the real message of this conference - and why we're holding it here. The location is India ... but the focus is the entire world. The subject is IBM ... but the lessons are about the emerging, innovation-based global economy.
Obviously, we didn't need to bring you all to India just to tell you about IBM. Nor did we need the occasion of an IBM business overview to arrange a guided tour of Bangalore. The reason it was important to open up this specific exchange of views in this particular place is that we believe the meeting's location will affect the nature of the discussion. Hearing directly from Asia-based thinkers, CEOs, scholars and officials - and putting them together with those who analyze the industries in which IBM participates - will, we think, produce a different kind of exchange ... on both sides.
As I have reported to you, several years ago we predicted several fundamental shifts in the information technology industry and in the global business environment. We took a series of actions to take advantage of those shifts. Now, you are seeing the benefits of these actions in our results. They position us to deliver on our business model on a sustainable basis, and they also give us greater flexibility to focus on growth and profit opportunities.
Let me highlight three of these fundamental shifts.
The first is the bifurcation of the IT industry, brought about by the relentless cycle of innovation and commoditization. Some companies have chosen to compete on price, speed and efficiency. That's tough - and it gets tougher every day, with ongoing consolidation and commoditzation in some industry segments. IBM has chosen to compete on our capacity for high-value innovation. We believe this is a better long-term bet.
You know that IBM is today the world leader in servers, in middleware, and IT services and consulting. In each of those businesses, we have dramatically shifted from commoditizing segments toward higher-value businesses with better profit opportunities. You've seen the changes in our business portfolio, where we divested of businesses that thrived during the PC Era - hard disk drives, panels, and eventually, PCs themselves - and strengthened our position in higher-growth, higher-value segments. Through organic investment, divestitures and acquisitions, we have fundamentally remade our company.
As a result of these shifts, coupled with innovations in our operations, we have improved our gross profit margins over the past five years. Our GPM improved 3.2 points last year alone. And IBM's margin today is at a nine-year high, and we remain intently focused on our margins going forward.
Our cash story is also compelling. Management view of cash generated from each dollar of revenue has increased nearly 50 percent in the last six years. Today, over 10 percent of every dollar of revenue is available for new investment, in addition to our capital expenditures, or distribution to shareholders.
The second basic shift is globalization. We began a couple of years ago to transform IBM into a globally integrated enterprise - a transformation that entailed a restructuring of our operations to enable us to draw more efficiently on our global resources, and to capitalize on opportunities in emerging growth markets.
We began with our restructuring in Europe, where we implemented the most extensive changes to our management system in nearly 50 years. We eliminated layers of bureaucracy and moved more resources out into local markets, closer to our clients. Our leaner management system, coupled with solid execution and a slowly improving business environment, is enabling us to compete more effectively in the European markets. We're beginning to see the benefits of these initiatives.
At the same time, across IBM we have taken core processes and functions that were once managed regionally, shifted them to an integrated model and manage them globally. We have improved responsiveness to our clients through new ways to bring together sales support. We call these "deal hubs," and in the parts of Europe where we tried them out, our win rates improved dramatically. We are currently rolling them out around the world. As a matter of fact, we launched our first deal hub in India just yesterday.
In aggregate, these changes have flattened hierarchies, eliminated redundancies and improved productivity. They have also given us much greater flexibility to locate business functions where the necessary skills reside, and to redeploy people and teams wherever market opportunities dictate. As one recent example, John Paterson, IBM's chief procurement officer, will be re-locating from Somers, New York, to Shenzhen, China, and will run our global procurement operations from there.
We have tripled the number of people working in or serving markets such as China, India, Brazil and Russia - surging economies where our business, excluding PCs, grew 23 percent last year.
I refer to all of this activity as "lowering the center of gravity of the company." The reason we can do this - the reason we're able to undertake this redistribution of decision-making and operations - is because of the new, fully networked, global computing environment that makes this kind of integration possible.
That's the third major shift in the world's business environment that I referred to earlier - the shift to a post-PC, networked computing environment, one that has evolved beyond communications and trading into a true business platform.
The Internet today is a network of more than a billion people and hundreds of billions of things - embedded objects and intelligent devices, all interconnected and integrated thanks to open standards and technologies such as Linux and web services. This platform is what enables the globally integrated enterprise to emerge, and it is giving rise to all manner of new business services and applications, developed for and delivered via the Net. IBM is a leader in the technologies, systems, integration software and collaborative solutions that drive and sustain this vital platform for global business.
Finally, all of these macro-trends - the onrush of commoditization; the emergence of the globally integrated enterprise; and the move to a networked computing and business platform - told us that our clients would place a premium on two related priorities: integration and innovation. And from this recognition, we have crafted what is perhaps IBM's strongest competitive advantage - and one that is unique to IBM
The integration of technology with business design has become a competitive necessity in the 21st century. As new technologies get infused into every aspect of business and society, organizations have no choice but to engage. The integration of business and technology is also the source of innovation - which business and government leaders recognize as the surest path to survival and growth in an intensely competitive global market. Innovation today goes beyond novel products and services. It involves every aspect of the enterprise - from business processes and business models, to management systems, culture and policies.
In a global survey conducted by IBM's business consulting unit earlier this year, 83 percent of CEOs said they were focused on business model innovation. Driving their interest was the fear that business model innovation by their competitors could radically change their industry's landscape.
That's the 'stick' driving businesses to undertake comprehensive, enterprise-wide innovation. The 'carrot,' the glass-half-full part of this historical moment, is that an incredible array of new capabilities has come of age - embedded technology, pervasive connectivity, supercomputing, the ability to extract insight from oceans of information, global skill and scale - all of this is available to every business and institution.
When we say "It's a great time to be an innovator," this is why.
As a result of all the actions we have taken, IBM has emerged as a more productive, more profitable company than we were just a few years ago, with continuing strong cash flow and a sharper focus on the high-value opportunities of our industry.
As you know, IBM today is built on three major business units - services, software and systems - and our ability to integrate the capabilities of these businesses for our clients. During the course of the day tomorrow, you will hear from the leaders of each of these lines of business about their strategies and business models. In addition, they will highlight how they work together to integrate IBM for clients, and they will describe the new opportunities we are pursuing to grow our company.
In services, as you know, we've been adjusting our strategy to address the shift to smaller-sized opportunities. At the same time, we're continuing our aggressive advance into the high-growth marketplace for business performance services, or BPS. This is the business of applying technology expertise and global economies of scale to transform and run business processes for our clients - everything from supply chain, to human resources, to logistics and more. Last year, our BPS revenue increased 28 percent, to $4 billion.
We recently created a new unit, led by Erich Clementi, to consolidate and accelerate our efforts in BPS, including a promising new opportunity to deliver more standardized business processing services, mainly to smaller enterprises. Erich and Mike Daniels will tell you about their business model and the strategic shifts they are pursuing.
In software, we have been focusing our internal R&D and acquisitions to strengthen our capability in the high-growth middleware segment. Last year, we improved our competitive position in all five of our key middleware brands. Significantly, for the first time, more than half of our software revenue came from these strategic middleware products. This mix enables our software group to deliver its business model with more consistency.
As our success in middleware proves, companies are looking for open, standards-based software solutions to help integrate their IT systems and dissolve the barriers that impede the flow of information within the enterprise. There is a simultaneous shift underway toward service-oriented architecture - or "SOA" - which enables companies to be much more flexible and responsive. As the global leader in middleware, IBM is in a strong position to capitalize on the SOA software and services opportunity, which over the next two years is expected to more than double, to $143 billion.
Our strategy in our systems business is to continue to gain share, as we have done the last five years. In addition, our systems business is pursuing a growth strategy around core technologies and R&D collaboration with clients. As you know, we made a strategic play in consumer electronics to be a provider of high-value components and design services, as opposed to end-user products. Our focus on core components is generating double-digit growth in microelectronics. Revenue from our 300-millimeter wafer products grew more than 250 percent in the fourth quarter of 2005, and another 200 percent in the first quarter of this year. Our Cell technology has made a clean sweep of the industry's three major game platforms. And the broad potential of IBM's Cell and POWER microprocessors - in healthcare, defense systems, consumer electronics and many other fields - is very promising.
This is not simply an OEM business. This is about collaborating with the R&D operations of our clients. You will recall that we created our Engineering & Technology Services business in 2003 to pursue these opportunities. More recently, we combined this business with our microelectronics business, technology development and manufacturing, intellectual property operations and our OEM sales to create a new unit called Technology Collaboration Solutions. This unit, led by Adalio Sanchez, is designed to capitalize on the growing demand for collaborative innovation. You'll hear more about this from Adalio and Bill Zeitler tomorrow.
When you step back and look at our major businesses and how we have reshaped them over the past decade, I think a couple of points stand out.
First, our services, software and hardware/financing businesses are evenly balanced in terms of profit contribution to IBM. Each of these three units represents a mix of emerging, high-growth businesses and more mature, slower-growing, but highly profitable businesses - which generate substantial cash and fuel our investments in new market opportunities. These businesses are also vital to our clients. In many cases they are the foundation of our strongest relationships. From these relationships we are expanding our business into emerging spaces.
Second, we have strengthened our capacity to lead through innovation. For example, in software, we are the leader in web services and SOA, the new architectural model that is reshaping the software industry. In systems and component technology, we are the leaders in this wholly new, deeply collaborative approach to how technology is created. In services, we are reinventing the business services industry by leading a shift from labor-based to asset-based approaches, through the intimate integration of advanced science, technology and algorithms into business processes and operations. At the same time, we have exercised great discipline in pursuing contracts and have walked away from opportunities that may have yielded short-term revenue but had what we considered unacceptable financial risk.
Third, we are winning in the marketplace. IBM is the world leader in middleware, in services, and in servers. In services, we have twice the share of our nearest competitor. Two weeks ago, Gartner reported that IBM gained ground on Dell and Hewlett-Packard in the server market during the first quarter, with a 19 percent gain in shipments - faster than the overall pace of the market. And according to a new IDC report, IBM took the number one position in total storage hardware in the fourth quarter of 2005.
We're out-performing competitors like CA and BEA in enterprise middleware. We are seeing strong demand for our WebSphere products, including application servers, portals and our business integration products. We're the market leader in Information Management Services, as well as SOA and web services. IBM Global Services was recently named by Gartner as a leader in Supply Chain, CRM, Business Intelligence and Offshore Applications Services.
As in past decades, when the IT industry moved from one computing model to another, IBM is again leading the shift to a very different era for our industry. We are putting distance between us and our competitors. We like our competitive position going forward
Today's meeting will begin with a broad-ranging discussion of global integration and its implications by a panel of business leaders and government officials, as well as an expert from the Harvard Business School. I believe our panel will provide a good backdrop for tomorrow's discussion - and also provoke some stimulating conversations over dinner.
Following our panel, Doug Elix will discuss how we are capturing growth opportunities in the emerging markets of India, China, Russia and Brazil. Joining him are our general managers of each of those country operations. Then Bob Moffat will describe to you how we are capitalizing on and integrating the skills, economics and scale now available in these markets and throughout the world, and how we are bringing this integrated capability to bear for our clients and for our own productivity and operational effectiveness.
Let me close with just a few words about the subject of this afternoon's panel - global integration
One of our hopes for this session - beyond giving you a deep dive into IBM's own globally integrated model and operations - is to spark dialogue about the broader role of global companies in emerging markets. I believe that companies like IBM can and must be a positive force for bridging the gaps between the promise of the developing world and some of today's thorny realities.
Are there gaps? We all know there are. For one, there remain serious roadblocks to the full integration of the emerging world.
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One reason I think it's especially important for leaders in the developed world - including those who participate in and follow the IT industry - to spend time in India, China and other emerging markets is to recognize that there's a lot more to these rising economic powers than low-cost labor. This really and truly isn't about labor arbitrage.
Indian universities are turning out more than 2 million new graduates every year, and it's still not enough to keep up with the demand for talent. By the end of this decade, India will have more than 21 million college graduates and the second largest pool of scientists and technology professionals of any country in the world. In an integrated global marketplace, India's skilled professionals will have an impact well beyond the borders of this country.
On the other hand, developing markets are under enormous pressure to mature as industrial and post-industrial economies. This is visible in issues like intellectual property, security, infrastructure and, in some areas, the rule of law.
We think IBM can play an important role. IBM was cited in a recent INSEAD study as one of only nine truly global corporations. We believe that we can help emerging regions, not just as a supplier of advanced technology, but as a deeply experienced global institution ... one that has learned over nearly a century what it means to be a progressive world citizen.
These are exciting times, and especially for our company. I believe IBM's competitive position is strong - along all the dimensions on which a business can compete and lead. This position was hard-won - requiring tough, honest self-examination, an understanding of the fundamental shifts driving our industry, and top-to-bottom actions to remake our company. And that has led not just to more efficient operations, but to a more strategic business model.
Clearly our work is never done, but the headwinds we faced a few years ago are largely behind us. And you are now seeing the benefits of those decisions and actions in our results. The IBM company is positioned to deliver on our model on a sustainable basis, and we have greater capacity and flexibility to focus on growth and profit opportunities in the decades ahead - here in India, and across an ever-more-integrated world.
Ladies and gentlemen, thank you again for joining us in Bangalore. I hope that these presentations, and your first-hand view of IBM's operations in India, will enliven your understanding of our company and the exciting times in which we are living.
