Palmisano Rallies IBM Business Partners

Sam Palmisano in his keynote at PartnerWorld tried to rally IBM business partners around IBM platforms and IBM's vision of where the computing industry is headed.

SAN FRANCISCO--Sam Palmisano in his keynote here at PartnerWorld tried to rally IBM business partners around IBM platforms and IBMs vision of where the computing industry is headed.

The IBM president and soon-to-be CEO, echoing a theme voiced by partners, urged them to join IBM to "go get business in this environment—as tough as it is—and win marketshare."

Highlighted by Palmisano was the amount of business generated last year through partners; he said IBM partners had a hand in generating $28 billion in revenue. "Call it a tie with Microsoft. Thats how much commerce we generate together," he said.

Over half of IBMs server and storage business and a third of its software business was generated with the help of IBM business partners. "That being said, we have the opportunity of a lifetime ahead of us," he said in pointing to the opportunities generated by the shift in the basic computing model enterprises are adopting.

In looking at the long-term trends in the industry, Palmisano said that ITs share as a percentage of capital assets owned by enterprises is building. He described the first era of mainframe computing as a back-office function that matched how the technology was deployed as a centralized, glass-house asset.

As the digitization of the enterprise progressed, the client/server era emerged to advance personal productivity. Journalists in the era of departmental computing heralded the death of the mainframe, but now they are "eating crow," Palmisano said, because mainframes are still needed.

"Now in the e-business era its about end-to-end integration. It drives phenomenal strategic advantages," he said. But the need for integration, rather than point products, requires a "completely different approach," he said.

Just as the mainframe model wasnt appropriate for personal productivity improvements gained through client/server computing, that same architecture "will not take us to the next generation," Palmisano said.

In looking back over the dot-com boom and bust, IBMs strategy "was always about integration--not voodoo economics. A lot of our successful competitors then arent doing so well in this mature phase of the adoption cycle," he said.

But the integration effort is a much more difficult task than creating disconnected automation projects like ERP.

"Taking a silo process like customer supply chain or MRP and trying to make those horizontal to get this digital transaction flow is a lot harder. We think it requires a lot more services and skills to bring it off. But there is more margin associated with it because it is tough to pull it off," Palmisano said.

At the same time, the shift to a digitized enterprise, IBM believes, "demands open industry standards. You cant solve the problems with a proprietary approach," he said.

IBM looks at this "trillion-dollar industry in three "buckets."

The first, the business insight bucket, represents 13 percent of the opportunity—largely in services and consulting business. That bucket can yield the greatest margins. The second bucket, the infrastructure, represents 72 percent of the opportunity, although portions of that can be profitless. The third bucket--the technology bucket--is represented by semiconductors, DRAMs and so on. It makes up 15 percent of the opportunity, but it is a "tough environment" in which to compete, according to Palmisano.

Changing strategies

Over the last 15 months, many IBM competitors attributed their hard times to the economy. But those same competitors strategies changed in that time, he asserted.

The intent behind the Hewlett-Packard Co./Compaq Computer Corp. merger is to create "a solutions play," Palmisano said.

Microsoft Corp. too, as its .Net initiative unfolds, "sees the need for a different play in the infrastructure" than providing operating systems and client/server software.

And Palmisano saw Scott McNealys appearance last week in a penguin suit as an example of Sun Microsystems Inc.s strategy shift. "The fact that Sun sees the need to adopt Linux is a dramatic move," he said.

About Dell Computer Corp., Palmisano said, "its business model has a lot of power associated with it. Well see if it can be adapted elsewhere into the infrastructure and wrap services around it."

IBM, meanwhile, has made its own dramatic shifts in its portfolio. "Were an infrastructure player primarily in servers and storage," which represents 11 percent of its business. Some 81 percent of IBMs portfolio is in the business insight bucket, with 8 percent of the portfolio in technology.

But IBM at $37 billion in revenue is a "minor player in services," Palmisano said. "There is a huge amount of opportunity for us to work together," he told the audience.

Over that tough 15 months IBM in the infrastructure bucket managed to gain "eight points a share in servers. Weve passed Sun by a few points," he said. At the same time, IBM has made a "phenomenal comeback" in the storage business against EMC, he said.

IBMs database business also saw a growth rate in the "high 20s," while Oracle Corp. focused on applications and its business remained flat, he said.

IBM did well in services, although its nearest competitor, Electronic Data Systems, also "has done really well," said Palmisano.

In the PC business IBM did not do as well as Dell did, but the company made significant changes to make it more cost-competitive, and it intends to stay in that business, according to Palmisano.

In describing the evolution of the computing model, Palmisano said it will not rise out of client/server computing. He described a variety of different devices emerging in the infrastructure space, along with dozens of different server types and blades. All of those will be "brought together by robust middleware," he said. "That is the core of IBM and something we do extremely well. Its what allows WebSphere to outgrow BEA two or three times. Well play across a spectrum of the industry. We know the reason we could gain share over the last year is because were focused on this play," he added.

"The computing model is shifting," Palmisano said. "Just as in the past the shifts are great opportunities, and great dangers. We believe this is an open world, and weve adjusted our business model to thrive in that.

"Someone has to work together to create these infrastructures, and were looking for partners to get this done. We understand it takes time to build alternative business structures, but wed like to play with you in the long term. Well invest with you and work with you," he concluded.