Changing of the Guard at IBM

By naming Sam Palmisano its new CEO, is IBM moving from stability to a new, aggressive stage?

As Lou Gerstner makes ready to exit the IBM stage, to the sound of applause from many observers, he is handing the reins over to a lifetime IBM employee, Sam Palmisano. Most observers are saying its the end of one era and the beginning of another one. The question is, what will the new era be?

"Gerstner shook IBM very hard. Now it is stable financially. He came in and slapped the teenager around, and now it has to go out in the world and earn a living. The question is, what will IBM be when it grows up?" said one CIO and longtime IBM customer who asked to remain anonymous.

Its hard to imagine IBM as something other than a company that sells computer hardware and software, and yet those two mainstays have been taking and will continue to take a back seat to services at the company. And although IBM no longer manufactures its own desktop personal computers, no one is predicting that Big Blue will get out of the server and storage hardware and software business any time soon.

"They have transformed IBM from a hardware and software company to a services company. And its becoming a solutions company," said Sam Albert, president of Sam Albert Associates, a consultancy in Scarsdale, N.Y. The change in emphasis makes sense for a simple reason, Albert added. "By 2005 or 2006, 75 percent of IT will be outsourced. And the beneficiary will be IBM."

The emphasis on services in the future and Palmisanos ascent to the throne is no coincidence, since Palmisano ran the services business for several years in the mid-90s, helping that unit grow to become nearly half of the companys business. Palmisano also was in charge of the Server division for a time and supported the companys backing of Linux. Most observers agree that IBM will continue to heavily back non-IBM technologies, something that never would have happened before the Gerstner era.

"IBM has a very high percentage of third-party hardware and software in the services business," said Frank Dzubeck, president of Communication Network Architects, a Washington-based consultancy.

When Gerstner took charge, many in the top tier of IBM executives were soon gone, including James Cannavino, Ellen Hancock and Ned Lautenbach. Why Palmisano did not follow them out the door is the subject of differing opinions.

"Hes not afraid to say what he feels. In the old IBM, you would never wear your true feelings on your sleeve. But Sam has always been direct. Gerstner respects people who are direct," said Albert.

Not so, said longtime IBM observer Bob Djurdjevic of Annex Research. "Sam would never be where he is if he spoke his mind. Look at what happened to Cannavino when he spoke his mind. He found himself on the street. So far, there is nothing Sam has shown as a second-tier IBM executive that would indicate anything new, revolutionary or creative about him." said Djurdjevic.

Albert said, however, that Palmisano should synthesize the best of both worlds, inside and outside of IBM: "Sam Palmisano is the bridge between these two cultures. He has the advantage of having had 20 years in and nine years out [under Gerstner]."

Said Dzubeck, "Lou is not a tough act to follow. He saw that the business survived and got cleaned up. Its just stabilized. Now it needs to grow. Palmisano knows how to grow things by taking risk, but insightful risks. In growing things, you may find IBM entering businesses in the future that are new; and making acquisitions they may not have done before."

Although many were puzzled by the choice nine years ago of Gerstner, a non-technologist, to lead the company in its darkest days, most are convinced now of the wisdom of choosing an outsider -- then. Most give Gerstner credit for rescuing a company that seemingly could do nothing right, stemming the losses, stabilizing it and returning it to growth. And few have forgotten the Gerstner statement, "The last thing IBM needs is a vision." Albert said, Gerstner did indeed have a long-term plan for the company when many were saying he should sell off the giant firms different units. "He has been a visionary. The idea of not breaking the company up has been a major vision."

Djurdjevic is not impressed, however: "Since 1994, the growth has been pretty dismal. Amid explosive [industry] growth, they grew in the low single digits. In the last year, 2001, IBM actually declined. What used to be the crown jewel, the services business, actually dropped in 2001. Its not the kind of growth that one would have expected from a company going through a renaissance," he said. He added that IBM does not compare very favorably to major services rivals like EDS, Cap Gemini and Computer Sciences Corp.

Whether or not IBMs current plateau is a lofty one, most agree that its time to move the company to the next level and that it will be Palmisanos task to lead it there. In doing so, he inherits the largest computer company in the world, but one that has lost its trademark arrogance of the decades prior to the 1990s. Could that arrogance come back? Most agree its unlikely.

"Theres no danger of IBM lapsing into its old arrogance again. All they have to do is watch Microsoft do a number on itself every day. Thats all they need to see," said the CIO.