Sam Palmisano Presentation Transcript
IBM Business Leadership Forum
San Francisco
Nov. 12, 2003
On November 12, 2003, IBM Chairman and Chief Executive Officer Sam Palmisano spoke about on demand business at the IBM Business Leadership Forum in San Francisco. The following is a transcript of his prepared remarks. The text has been edited for context and continuity.
Good morning and welcome. I thank you for taking the time to join us today at the San Francisco Museum of Modern Art. We appreciate your time, and we also appreciate your business.
The IT industry is roughly a $1.3 trillion industry. It employs about 23 million people around the world and its market capitalization is about $2.7 trillion. It's an important industry to those who invest in it; to the millions of businesses that take advantage of its core technologies and innovate around them; and to the billions of people around the world whose lives have been improved by technology.
If you look at the IT industry through history, it's best described as an "invent and assert" industry. We in the industry asserted, projected and proclaimed the benefits of our inventions in the market. We created incredible things in our laboratories and we thrust them upon you. And we relied on the genius of you, our clients, and your capabilities to find a way to take advantage of all of the technology we were inventing.
Sometimes, we were incredibly successful in providing technology that you could apply: back office automation, online control systems, desktop publishing, computer-aided design, e-business. Other times, the IT industry failed to deliver on its promises. Do you remember the cashless society, or the paperless office? I know you remember "The New Economy."
The point is this: this incredible industry is no longer going to be driven by gizmos and guessing. It's going to be driven by you and how you take advantage of all these incredible technologies. The client is now setting the IT agenda.
Gone are the days when some of our physicists showed up in your office with clipboards in hand to tell you why the latest material requirements in the field of semiconductors were important to your business.
Equally absurd is this notion that technology doesn't matter and that invention is no longer important. I'd be hard-pressed to agree with such a statement, given that IBM has been issued more patents over the past 10 years than any company in the world. We plow between $5 billion and $6 billion a year into R&D.
But we do say that technology in and of itself is not enough. Yes, we're all going to invent all kinds of wonderful things, but it's the application of these incredible inventions that will drive value. Value for the investors, value for you the users, and clearly value for the companies that provide the technologies.
I'm not dismissing high-volume commodity segments in the IT industry. Consumer PCs, printers and so on — these will clearly remain large segments of the industry. There will also continue to be multiple approaches to technologies that customers can acquire, buy and deploy.
But I don't think you're going to be able to differentiate your business using that kind of technology. Differentiation is going to come from the integration of technology into the core elements of your business. You'll get the competitive edge at the intersection of business process and technology. That's what's going to drive the agenda.
As we sat back and thought about today's agenda, we thought we'd do something I know IBM has never done — and I would say that our industry has probably never done. We're going to let you speak. The client and the customer.
When we thought about the companies we could have chosen to represent you, we came up with a list of 50, 60, 100 companies. Then we stepped back and asked, "If we could only get two enterprises that really represented what we're talking about, who would they be?" GE and eBay.
Consider the differences between these two companies. GE is over 111 years old, with 315,000 employees. It's the most valuable company in the world.
eBay, compared to GE, is about 28 minutes old. Formed eight years ago, with 5,300 employees and one-eighth the market value.
Yet the two leaders of both companies — Jeff Immelt of GE and Meg Whitman of eBay — are driving incredible strategic changes and phenomenal innovation. It will be terrific to hear from them.
Then we'll do a panel on business issues moderated by Charlie Rose. This afternoon we're going to hear from the technology industry. Cisco is one of IBM's key, strategic partners and (CEO) John Chambers is going to be with us.
For a panel discussion on IT issues, Tom Siebel of Siebel will join us, as will Linus Torvalds, the creator of Linux; Shirley Ann Jackson of Rensselaer Polytechnical Institute; and Nick Donofrio, who runs IBM's technology organization. Think of Nick as our chief technology officer.
Last year, we launched what we viewed as an industry initiative called "on demand." At the time, we were quite lonely. It's great to have so many industry colleagues here today to share their thoughts on the progress we've made over the past year.
Let me take just a moment to remind you of the definition of on demand. I know there's a lot of posturing and positioning about its definition. It's really about three very simple ideas.
First, on demand starts with an enterprise's business model and business design. Future innovation in business models will be driven by horizontal integration. For years we've all focused on the vertical process — CRM, ERP, back office processes and so on. We were digitizing them and making them efficient. Future business models will horizontally connect all the processes that make up an enterprise, and extend out to that enterprise's partnerships.
Second, in this new world, the technical characteristics necessary to support horizontal integration are changed. The underpinning infrastructure — the hardware, the software, the storage — needs to be architected differently to support new business models. The infrastructure needs to be more simple, more automatic, more autonomic and more cost effective. Finally, given all these shifts, clients are going to insist on different ways to access, manage and buy technology.
Those three points are how we defined on demand a year ago. At the time, all that was an assertion. We said it was our point of view on industry trends. It wasn't just an IBM marketing program. A year later, we are well beyond assertion. I would argue we are into adoption and reality.
So let me start with the business design elements of on demand. It's a simple thought, but very hard to do. At every point of interaction — at every transaction in an organization — there's an opportunity to increase speed or drive productivity. To respond faster to your clients or customers in ways that they want, or to be more efficient in your supply chain. It doesn't matter if that supply chain is in financial services or manufacturing.
That's what we're talking about when we talk about business design. You're fulfilling the dream of integration when you eliminate the gaps and seams and spaces in the transactions among your customers, your partners and your employees.
So are companies and institutions buying into this? What does the market data say? If you look back through the history of networked computing, you see three stages. All of us are moving through these three stages.
It started with network access: using the Web to exchange information.
In the second stage, people began to transact. We call it a lot of different things: e-enabling, e-business, digitizing transactions. You could literally take an order, ship it and bill it — all on the Internet. That second phase was about enterprise integration.
Now we're seeing the most logical extension of enterprise integration to the third stage: on demand. Companies in this stage are extending their enterprise through partnerships, electronically. Some companies are already there, like eBay. Some elements of GE are there. Some elements of IBM are there too, like our supply chain.
We periodically ask 33,000 companies in the G7 countries about their use of Internet technology. The number of companies moving to the on demand stage is twice the number a year ago. Still a small percentage, but the trend is clear.
The benefits of seamless integration, more responsiveness and better connection with customers are obvious. However, we learned very quickly that the reality is more difficult. As we engaged with clients to help them redesign their business models, we discovered that the practical aspects of on demand vary by industry, by business and by the components of a business.
In something we called "Project Catalyst," our business consultants teamed up with IBM Research. Together, they came up with a method to identify the logical components in a business. This component approach also provides a three-dimensional view: strategic, financial transformational. We did this for six industries.
This methodology offers a way to highlight those areas of the business that are differentiating. For example, if we applied this methodology to Wal-Mart, we'd see that the core element of that business is the supply chain. Wal-Mart manages its supply chain in a way that is fundamentally different than its competitors.
Other components that aren't necessarily differentiating can be evaluated on a cost basis. The point of the exercise is to show clients where to begin their on demand transformation. For example, to pinpoint those areas of a business that would be better served through an outsourced partnership.
On this point about outsourcing, 20 years ago, we talked about core and non-core processes. That's not what we're talking about today. We're talking about fundamental differentiation — how to provide a better level of service to customers; how to get vertical scale on a global level even if you're not a global company; how to identify components in a business that need to be transformed to maintain competitive edge.
So I'm very optimistic about the long-term growth of the information technology industry. There's absolutely no doubt it will grow, but it won't grow as it has grown in the past. The boundaries of the IT industry are shifting.
Business transformation outsourcing is a great example. BTO will become a $150 billion market next year, growing at between 12 and 14 percent over the next five years.
We're managing HR processes for Procter & Gamble. We're managing benefits, payroll, travel and expense and the like for 100,000 P&G employees around the world. Together, we're transforming those P&G processes.
We're in similar partnerships with Lincoln Financial, the government of Alberta and others. We're offering BTO services in four spaces: human resources, procurement, customer care, and finance administration — where we have a very large relationship with British Petroleum.
Some companies are already participating in the BTO opportunity. GE is one. UPS is another. The opportunities are not necessarily going to be captured by the folks who captured it in the past. The technology underpinnings of on demand are going to be different. What the IT industry did for personal productivity or back-office automation is not going to help horizontally integrated businesses solve the problems of the on demand era, because on demand is premised on the use of open standards.
When we talk about integrating the application layer, we say it has to be done in a standards-based way. When we talk about an infrastructure for on demand, we're talking about an infrastructure based on standards.
The advantage of open standards goes beyond cost. With standards, you don't have to redo applications every time some piece of hardware or software changes.
One element of an open infrastructure that captures everyone's imagination is Linux. Everybody gets the concept of open computing with Linux. It's the fastest-growing operating system in the world — 35 percent annual rate. There are 50,000 companies today that have Windows applications that will, in the future, have the option of choosing a Linux version. More than half of all the mid-sized to large companies in the world are using Linux in some capacity.
Four years ago, IBM stood up and said "Linux is ready for the enterprise." And we gave Linux a little bit of a boost by putting a billion dollars behind it.
Government is adopting Linux faster than any other sector. Yes, it's partly about saving money. It's partly about closing the digital divide. But it's more than either of those. When I meet with the leaders of China, Brazil, Japan, the United Kingdom or Germany, they link Linux with economic development. They want to create a software industry. They want IT jobs in their countries. That's why there's so much support for standards outside the United States — because so many nations see standards as a growth opportunity.
Linux is just one example of the adoption of standards. You also see it in things like Java. Half the programmers in the world now write on Java. Leading universities are training students in Java.
Grid computing is another example of adoption of standards — basically taking the computing capacity of the Internet and making it available for productive work requires standards.
When we talked about grid computing a year ago, a lot of people said we were making a futuristic statement, and that maybe we'd get there in 10 years. Well, maybe it will take some companies 10 years to get there, but I know of 100 IBM clients that are using grids right now. And they're not using grids for research in particle physics.
Schwab, Wachovia, insurance companies, distribution companies — they are using grids for analytics. The State of North Carolina is going to create a broadband-based grid in a Web services open standards environment. North Carolina projects that its grid generate 24,000 jobs over the next 10 years. We're not talking about something that's five to 10 years out.
Last year when we announced our on demand strategy, we had a physician talk about the benefits of grid. Dr. Hollebeek of the University of Pennsylvania was using a grid to look for the cure to breast cancer. At Cambridge University in the UK, the same kind of work is underway.
At IBM, we asked our employees to volunteer their PCs to create a grid to help find the vaccine or a cure for smallpox. And 15,000 of them donated the internal computing capacity of IBM. These things are here and they're real today.
Innovation is what brings all this together. We're not just talking about invention. Innovation is the application of the invention. We're talking about points of intersection that create an opportunity for innovation.
Let me tell you about some of the innovation occurring at IBM:
WebSphere Business Integrator provides a middleware layer that allows businesses to write applications that are free from the infrastructure. We've created "accelerators" that allow businesses to map a process, prototype it, and monitor it with business metrics associated with it.
Project Symphony: a year ago, we said that IT systems need to be more self-managing and take advantage of the capacity that's out there. With Project Symphony, businesses can provision internal capacity in a heterogeneous environment.
We also talked about simplifying the computing environment. We talked about all these thousands of specialized servers that are so complicated and so difficult to manage. You have three- and four-tier architectures. To make the IT environment more efficient, we said, "Do away with the labels." We've come up with technologies that puts blade servers in the front end of the multi-tiered architecture, so that you can consolidate thousands of servers into a blade and then pass the transactional work to a large SMP type processor.
Blue Gene is another example of IBM innovation. Blue Gene is a peta-flop capacity computer that supports research in protein folding. The interesting thing about Blue Gene is that it consists of 10,000 computers. What's more, the core technology of Blue Gene is the same used in game machines like Playstation and XBox.
Now the other thing we asserted last year is that businesses would insist on buying computing differently. You're not going to have to have the computing scale of an IBM to access supercomputing capability. We said clients would do things differently.
We weren't saying that the whole world was going to outsource. We weren't just talking about the data center. That was all interpretation by some of our colleagues in the industry who wanted to define something they had instead of describing what was going on in the industry.
Our servers are now architected for capacity on demand. You can turn capacity on and off. We also have an offering in which you can buy all the capacity you need for the next 3-4 years for your the entire infrastructure — IBM and non-IBM — and pay a fixed amount. A lot of companies are doing this. If you measure contract signings as an indication of adoption rates, it's about $7 billion since we've announced it.
We're also offering supercomputing on demand. We've seen a lot of interest in this in life sciences, in the petro-chemical industry, and in the media industry.
Customers get access to the capacity of our supercomputing facility in Poughkeepsie (New York) when they need it. Some customers are using it for reservoir modeling, others for crash simulation or product design.
We're doing something similar in the area of Linux virtual servers. We've created vast capacity in a Linux infrastructure so you can take advantage of the economics of an open standards world without necessarily having to create the infrastructure yourself.
So we've seen a lot a progress in many areas related to on demand. As many of you recall, we said that we'd come back in a year and give you a progress report on our assertion that on demand was really an industry trend.
A lot of companies in the IT industry jumped on our assertion. That didn't really surprise me. If a company makes an assertion based on market data — as IBM did — you have to expect other companies to jump on it. So you had other IT companies talking about data centers, or adaptive enterprises, or seamless integration, or what have you. We expected that. At the same time, our assertions were reinforced by some thoughtful analysis.
What did surprise me was my own organization. We decided in a meeting on August 5, 2002, that we were going to go out and assert where the industry was headed, even though we hadn't invented all this stuff yet. And over the past 12 months, IBMers got together and invented all this stuff.
For example, Project Catalyst, which we never could have done without having acquired PricewaterhouseCoopers Consulting. In the past, the consultants never appreciated the scientists and the scientists never appreciated the consultants. The other day, a consultant who came to IBM from PricewaterhouseCoopers told me that in 25 years he's never been more confident about the business. Why? Because everything he can dream up, IBM scientists can invent.
Another example is Project Symphony, which I mentioned a moment ago. It's hardware, software and services. Our customers always talk about the IBM silos. They're all big. I understand that, and I respect your point of view. Those silos all came together and created this wonderful thing called Symphony that works in a IBM and a non-IBM environment.
So the IBM organization has really come together in a way that I have not seen it in a very, very long time. That was truly exciting. But forget the IBM side of it. You know what's even more surprising? It's the innovation I see from customers and the clients.
Compared to a few years ago, we are now in a very difficult economic environment and a phenomenally complicated geopolitical world. Of course, not everything in the world has changed. But the things that did change led all of us to hunker down. That was the appropriate thing to do. Hunker down, preserve your cash, get competitive. That was the sentiment.
But now that world is changing. You can feel it. You can see it in these examples. The world now is beginning to take some risks and beginning to move out. And it's very, very encouraging, as we look out to the future.
Thank you.
