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The Smarter States of America

Samuel J. Palmisano, National Governors Association, 2010 Annual Meeting, Boston, Massachusetts, July 9, 2010

Samuel J. Palmisano Thank you, Governor Douglas, and good morning. I am honored and pleased to be here with you today. We meet at an interesting and consequential moment, and our states lie at its epicenter. If we are to believe Time magazine's cover story a couple of weeks ago, our country is now "The Broken States of America."

Without question, governors—and CEOs—must be laser-focused on near-term issues, as we face a severe fiscal crisis. Everyone understands that we confront a historic challenge. But the key question is: What do we do?

The answer depends on how you understand the present moment.

If you think this is a cyclical economic slump, then you ride out the storm—cut costs across the board. Spread the pain. Get through it.

If you believe the crisis was not cyclical, but caused by gross imbalances in our system, then you may drive a reform agenda—more regulation and oversight, a rebalancing of who pays and who benefits.

But if you believe that this is a turning point, not only in the state of our United States, but in the context of what's happening across the world, then you take a different approach.

This is what I believe, and what I would like to talk about with you today.

I believe that what's at stake isn't just next year's budget—as important as that is—but America's long-term global competitiveness. This period will create winners and losers. And I believe the winners in the new era that lies on the other side of the present crisis will not be those who play duck-and-cover—or even those who concentrate on repairing our current systems.

I believe this, because I've seen what is happening all over the world—and especially in the emerging economies...I see it in the trajectories of global economic activity...I see it in all the market data...And I've seen it firsthand.

I was in Shanghai last month. IBM convened a forum there with 1,000 civic and business leaders from across Asia, mostly from China. We were discussing how to make our cities smarter. We have held more than 100 of these conferences around the world and across America.

Let me tell you...the ambition, vision and innovation that are driving China and other emerging markets is breathtaking—the investments, the build-out of infrastructure, the modernization of entire societies and economies...spanning electric grids, wireless capacity, transportation, water management and more. It is attracting people, businesses and capital flows, and creating a formidable new force in the world.

This is much more than low-cost manufacturing.

This is not news to you. But I would like you to think about it from a personal standpoint—what your peers in all those nations are doing: the leaders of provinces, municipalities and cities. What is their agenda? What choices are they making today? What is their value proposition to their societies?

Because the reality is, your counterparts are making decisions with an eye toward the global marketplace. They are leapfrogging over legacy systems and legacy approaches. They are not just repairing what is broken...they're preparing for what is coming.

If we want to remain competitive, we must do the same.

Now, I recognize this is all easy to say. The economic downturn may make any talk of investment and innovation seem wishful thinking or foolishness. But I believe America has the same leapfrog opportunity. American states can use this crisis to take transformative steps—to become smarter.

In that, I believe that you, our governors, are absolutely crucial. You will have more impact on America's future standing than any other leaders at either the federal or local levels. Why?

Because where you sit is where all the systems that we care about and depend on—as citizens and as businesses—come together.

And that puts you in a position to actually solve problems and drive transformation. You have to govern or operate—as business executives say.

The subtext of that Time magazine cover story, to me, is that the states are where the action is...and therefore where the greatest opportunity lies to change the game.

To capture this moment, though, we will have to look at our companies, our organizations and our states in some new ways. We'll need to see them not as isolated entities, but as part of broader systems.

At IBM, we know something about systems. As must be obvious by now, I don't mean "computer systems." I mean the economic, logistical and societal systems by which our world operates. Over nearly a century of work with businesses and institutions, we have helped to design, build and manage these—from Social Security, to modern electronic banking, to retail, to transportation and more.

In doing so, we have learned what is required for a system to be well-functioning, reliable and resilient.

  • First, there must be clarity on the system's purpose or goal—a vision of its end-state.
  • Second, its elements must actually be connected.
  • Third, we must be continually able to know the status of the system and its critical components.
  • Finally, the system must be able to adapt as conditions change, often in real time.

Viewed against these four characteristics, every well-functioning system looks strikingly similar. An ATM system looks very much like a public safety system...or like the Apollo mission that sent astronauts to the moon, and brought them back safely.

Similarly, it becomes clearer why other systems are in crisis. Like the one on which you are focusing today—the American healthcare system. In truth, when it comes to healthcare in America, we need to put the word "system" in quotes.

In theory, everyone agrees on its purpose. There is a broad consensus that American healthcare must become patient-centric.

The idea is simple: The patient's time, treatment and experience should be the initial design point. And a system's design point matters. What you optimize it for—the way you envision its end state—will determine the value it ultimately delivers.

Governor Douglas's Blueprint for Health in Vermont is a wonderful example. It is helping primary care providers operate their practices as patient-centered medical homes, offering well-coordinated care supported by local multidisciplinary teams...expanding use of health IT...and developing a statewide health information exchange network and financial reform that will sustain these processes and align fiscal incentives with healthcare goals.

Governor Douglas's Blueprint for Health in Vermont is... helping primary care providers operate their practices as patient-centered medical homes, offering well-coordinated care supported by local multi-disciplinary teams. Services are free to all patients, with no eligibility requirements. The pilot is being financed as a shared resource by employers like IBM, which is Vermont's largest corporate employer.

A key dimension of patient-centered healthcare is wellness and prevention. Within IBM, we have also substantially reshaped our own healthcare programs—for the 450,000 employees, retirees and family members we cover in the United States, at a cost of more than $1.3 billion annually.

In 2004, we pioneered the concept of wellness incentives for employees.

IBM has several wellness rebate programs available to U.S. employees that focus on such issues as exercise, healthy eating and weight loss, smoking cessation, health risk appraisal and children's health.

As a result, IBM employees have become healthier and the company's costs are rising more slowly than those of the population at large.

Between 2005 and 2007, IBM saved $190 million in healthcare costs because employees took responsibility in adopting healthier behaviors. More than half of IBM's employees in the U.S. participate in at least one rebate.

But the problem matter how much efficiency and improved care is achieved at a given company, community or state, its impact will be limited if the broader system isn't connected.

In many areas of life, this kind of connectivity is so basic that we simply take it for granted. Consider banking. We take it for granted that we can transfer funds and make payments among institutions. Or take retail. We take it for granted that we can use the same payment and billing systems, regardless of store, website or industry. These systems have standards and interfaces that permit information to flow—not just the digits moving through wires and through the air...but the processes and protocols that comprise the work of any system.

Clearly, healthcare in America today fails this key test of a well-functioning system.

Third, many of the components of healthcare are not instrumented—or are differently instrumented from hospital to insurer to doctor to employer—so that it is impossible to know with confidence what their current status is. This isn't just a colossal waste of time and money. It also introduces inconsistencies in quality and multiple opportunities for error.

And when it comes to the fourth characteristic of a well-functioning system—adaptability—ask yourself...Is the healthcare system in your state—spanning providers, researchers, governments, payers, patients and communities—is that ecosystem ready for what's coming?

Because demand is only going to increase...with population growth, an aging cadre of baby boomers and urbanization continuing their march. We will need far more physical and digital capacity from our healthcare networks.

Put it all together, and it's not hard to see why we find ourselves in the current crisis regarding healthcare costs—which hits hardest at the state level. Healthcare costs are expected to explode more than 70 percent in the next decade, outpacing GDP growth.

So, if we agree on the need for, and lack of, a true healthcare do we get there?

IBM works with the top 10 U.S. hospital systems, the top 20 healthcare insurance companies, the top 30 pharmaceutical companies and 18 of the top 20 biotech companies...with similar relationships across Europe, Canada, Singapore, China, India, Australia and elsewhere. As we have worked with these clients over the past several years, we have validated that the key to smarter systems is not the chip—or the sensor, or the mobile device or the router. It's not even the electronic medical record, per se—as important as that is.

In Governor Riley's Alabama, the state's largest school district, Mobile County Public Schools, is using analytics to track student performance, identify those at risk and adjust academic programs.It's the data.

Thanks to a planet that is increasingly instrumented and interconnected, we're capturing data in unprecedented volumes. In just three years, IP traffic is expected to total more than half a zettabyte. (That's a 1 followed by 21 zeroes.)

We're receiving these enormous streams in real time, and they are coming in multiple forms—from text to rich media...embedded sensors and RFID tags to cell-phone cameras. And we're capturing it from just about every kind of system or event imaginable—supply chains, traffic flows, weather patterns and billions of individuals using social media.

But the most important point about this is not how much data there is. The important point is what it could tell us. To capture that, you need to dive deeper—to move from "big data" to smarter data.

That's why analytics are key—sophisticated mathematical algorithms that can detect the patterns, spot the correlations and see the context of the data. Because a data point by itself is just about useless. You need to see what it relates to—and you need to see that in real time, not after the fact.

As IBM's Dr. Paul Grundy likes to say, healthcare IT is going to do for doctors' minds what the x-ray did for their vision. It is going to change how they look at things.

Thanks to advanced analytics, where once we inferred, now we can know. Where once we interpolated and extrapolated, now we can determine. That's the promise of a smarter planet.

Let's talk about smarter healthcare. Let's do it by example:

  • We see it in Governor Rendell's Pennsylvania—where the University of Pittsburgh Medical Center has improved the delivery of healthcare while reducing operating costs—saving $104 million and increasing processing capacity by more than 220 percent.
  • We see it in Governor Perdue's North Carolina—where the University of North Carolina Health Care is using analytics to improve the quality of patient care, support research and manage diabetic patients. Records for every patient can be quickly examined for blood pressure, risk of chronic illness or drugs that have been administered.
  • We see it here in Governor Patrick's Massachusetts—where the University of Massachusetts is building internal and external health information exchanges that will centralize patient and provider registries and connect with the physician community—providing faster, safer and more comprehensive clinical care with reduced costs.
  • There is also much that businesses can do. For instance, at IBM, we are working with the major primary care societies, the American Association of Medical Colleges, the AMA and many Fortune 500 companies to promote the concept of the Medical Home.

It is aimed at helping doctors think about themselves as a business...about continuous quality improvement, about efficiencies in the office. In demonstration projects with the American Association of Family Practice, we found that practices adopting a Medical Home approach were making, on average, 14 percent better income.

Moreover, studies show that the medical home model can reduce emergency room visits by as much as 50 percent and can contribute to a 40 percent reduction in hospitalizations for individuals with chronic illnesses such as asthma.

And this is not just about healthcare.

Any system can become smarter—and in many ways, your greatest opportunity lies when you look at your cities and states across all of their key systems.

Let's talk about smarter government services.

  • We see this in Governor Schwarzenegger's California—where Alameda County Social Services is using advanced analytics, real-time reporting and dashboards, enabling caseworkers to find the immediate status of any child, as well as the staff members, support services and programs associated with that child. Reports are generated in minutes, rather than weeks or months, and more than $11 million has been saved through greater efficiency.

Let's talk about smarter transportation.

  • We see this in how the Washington, D.C. Metro Area Transit Authority is managing and maintaining all of its assets that include more than 12,000 bus stops and train stations, 106 miles of track, 1,144 rail cars, and 1,500 buses, plus escalators and elevators. All of these parts of the transportation system—267,000 in total—can be tracked, monitored, and managed from a central control center using simple on-screen displays. Once information is gathered from across the system, the WMATA can manage nearly 180,000 work orders each month. It can even suggest maintenance to ensure that equipment is repaired before it breaks.

Let's talk about smarter public safety.

  • We see this in Governor Patterson's New York, where New York City's Real Time Crime Center system queries millions of pieces of information to uncover previously unknown data relationships—leading to a 27 percent drop in crime since 2001.

Let's talk about smarter educational systems.

  • We see this in Governor Riley's Alabama, where the state's largest school district, Mobile County Public Schools, is using analytics to track student performance, identify those at risk, and adjust academic programs—all in real-time, to prepare students with 21st century skills.

This list could go on. In state after state, forward-thinking leaders are seizing upon the new capabilities available to us, and applying their ingenuity and coalition-building skills to drive transformative change.

And by the way, smarter systems can also help with our nation's economic recovery. A recent study from the Information Technology & Innovation Foundation found that:

  • For every $1.25 billion invested in smarter transportation infrastructure in the United States, 35,000 jobs are created and supported.
  • An investment of $10 billion annually in smart grid deployment for five years could create or save 239,000 jobs per year.
  • And investment of $10 billion over a one-year period to support broadband network deployment could create or retain nearly 500,000 jobs.

Yes, these are challenging times...but we should invest with an eye to the future.

And though it may be surprising, coming from an IT guy, I'll tell you that the most important factor in achieving this kind of progress is not technology.

It's leadership. I want to close by seeking your help in four key areas.

First, we must establish data standards—for healthcare, and for all of the critical systems of our states. This is long overdue. And as we do, it is essential that those standards be open. That's the only way to interconnect processes and data sets across a whole system—or multiple interconnected systems.

For example the Obama Administration has pledged $34 billion to incent healthcare providers to digitize health records, with the goal of 90 percent of doctors and 70 percent of hospitals adapting electronic medical records in the next decade. But if healthcare providers have separate EMR systems, then those stimulus funds will be wasted.

On this question of common, open data standards, you must be an active voice.

In Governor Schwarzenegger's California, Alameda County Social Services is using advanced analytics, real-time reporting and dashboards, enabling caseworkers to find the immediate status of any child... Reports are generated in minutes, rather than weeks or months, and more than $11 million has been saved through greater efficiency.Second, we need to build smarter systems—by design: In anything as complex and dynamic as a 21st century American state, the qualities of a well-functioning system cannot be "bolted on" after the fact. Many of you are working actively to redesign state government.

As you do so, you have the opportunity to build in the key criteria of interconnectivity, analytics and security into your own state's operations.

A system-based approach, leveraging advanced analytics, can have immediate payback. For example, we have analytic solutions that can help states experiencing financial losses because of fraud and compliance issues related to taxes and Medicaid.

Third, a smarter state will enable—and require—far more collaboration. I'm not just talking about the familiar idea of private sector-public sector "cooperation." A diverse, multi-stakeholder world requires true collaboration—all the parties actually working together, shoulder-to-shoulder, on a daily basis.

Yes, we all have particular responsibilities—to citizens, to partners, to regulators, to customers, to shareholders. But in today's world, fulfilling those responsibilities requires that we also fulfill our responsibilities to the system as a whole. That will be transformative. But it will also require change.

Finally, policy and ethics: From new models of the increasing empowerment of the individual citizen and new expectations for sustainable living...we are entering a very different world. As leaders, we must come together around clear guidelines on how to manage our organizations and institutions, from an ethical and societal point of view.

Think about it. Cameras placed around a city help alert police and other first responders to emergencies far faster and more precisely than ever before. That saves lives. But some citizens have expressed discomfort. Who has all this data? What will they do with it? Do I trust them?

Similarly with regard to healthcare data. We all see the enormous promise of electronic medical records—not just to achieving greater system efficiency and holding down the exploding costs that threaten to eat up the entire public sector budget...but also to improve care dramatically. But we will never achieve those benefits if we can't assure people that their most sensitive personal information will be protected.

And then there are concerns about security: Companies and governments are excited about the competitive, economic and environmental advantages of smart infrastructure—smart grids, smart rail, smart sewers and smart buildings. But does that mean that our essential infrastructure is only as secure and reliable as a website?

These are serious issues. And they will require serious consideration across all the stakeholders of society. We need to build more than technological and business systems. We must build constituency. If we don't come together around policy frameworks that protect the individual's privacy and the security of our communities, people may say "stop." And they should.

Let me conclude by returning to my message of optimism.

A smarter state is not some grand, futuristic ideal. For one thing, the examples I've mentioned are real, and more are being deployed right now, by governments around the country and the world.

For another, the smarter state is practical because it is refreshingly non-ideological. Yes, debates will continue to rage on many contentious issues—from healthcare, to energy, to security, to climate change. But no matter which viewpoints ultimately prevail...the system that results will have to be smarter—more transparent, more efficient, more accessible, more resilient, more innovative.

To get there, I believe those of us in this room, and our peers across the public and private sectors, must take a leadership role. And here's the good news: We do not have to wait for the federal government… or anyone else.

Someone is going to turn healthcare into a true system, designed with the patient's health in mind. Someone is going to put in place the key building blocks for smarter education. Someone is going to institute standards, accomplish cross-segment connectivity and break down the silos across governments at all levels. Someone is going to unleash—and scale—the expertise and creativity of America's local communities. And someone is going to build the capacity to identify the key patterns in all this data and knowledge.

That someone is going to drive incredible progress in their region...and America as a whole...and across the world. That someone is also going to unlock economic growth and profit.

I suggest that someone should be you.

The key precondition for real change now exists: People want it. And they are hungry for leadership. Such a moment doesn't come around often, and it will not last forever.

So ask yourself this: In hindsight, when the circumstances that cry out for change are gone, when things have returned to "normal"—don't we always wish we had been bolder? More ambitious? Gone faster...gone farther? Did anybody ever wish they had done less?

Despite the litany of challenges we face, I am confident that states across America will do what leaders do—lead. I'm convinced we can build a nation of smarter states. And I'm convinced that in doing so, we will achieve both societal progress and economic growth for our cities, communities and country.

I hope you share my excitement about the opportunity before us, and that you will join with us in this pioneering journey.

Thank you.