The Palmisano Game Plan

IBM CEO-to-be speaks out on the business of being IBM.

Samuel Palmisano, president and chief operating officer of IBM, was named the eighth CEO of the Armonk, N.Y., company Jan. 29 and assumes those duties this week. During his 29 years at IBM, Palmisano has headed the PC, server and services businesses at the company. Following a speech to IBMs business partners at PartnerWorld in San Francisco last week, he discussed IBMs strategy with eWEEK Executive Editor Stan Gibson in an exclusive interview.

eWEEK: When you retire from IBM, will it still be an integrated company, selling hardware, software and services?

Palmisano: Weve debated and discussed this strategically over the last decade and even before that. If you go back to the IBM principles we established in the last decade, it will give you insight into the answer: We are a customer-driven, core technology company. In our e-business model, theres clearly a need to provide world-class technologies in the basic component business as well as in servers and software. Its a fundamental requirement to provide an integrated solution. I dont see that changing. Now if our customers change—if customers are saying, "We want piece parts, we want pure-play fragmentation"—that would drive us. I just got back from our CEO conference in Europe. They are right where we are: Its about productivity; its about competitive advantage and cost structures. To do that requires integration. Fundamentally, we do not see that changing.

eWEEK: IBM was first again in the number of patents issued last year, but where are the killer inventions?

Palmisano: Lets talk about what I would call a killer invention: federated data and a product called DiscoveryLink, which is huge in the life sciences. Its the ability to deal with all forms of data across the Web as if they are structured. Its the ability to collaborate with that data in clinical trials. Its a huge breakthrough in how data is structured, searched, retrieved and managed.

Youre going to see breakthroughs in systems architectures, like Blue Gene: The ability to cluster thousands and thousands of small servers into a system that is autonomic and self-healing. Id also add were not blowing those inventions. Were productizing them very quickly.

One that I absolutely love is the Power 4 Gigaprocessor. Five years ago, a bunch of the guys came in and said, "Give us $500 million and five years, and well kick Sun [Microsystems Inc.]s ass." So we funded it. These guys had to go and invent the materials and invent the module. It didnt exist in the industry. And then they hit the schedule to the day.

We are good at this stuff. Were a core technology company. Were not an integrator. We dont buy crap off the shelf and then spin ourselves in a marketing campaign as technologists.

eWEEK: Spending $1 billion on Linux—it was great as a bumper sticker. But is Linux going to be a significant investment year after year?

Palmisano: The billion-dollar figure included marketing expenses and support centers and was spread over time. But, yes, Linux and open industry standards will be ongoing investments. People want to spin it as an operating systems debate or a Windows substitute. It has nothing to do with that. It enables applications to be developed against an open infrastructure. It gives people speed and flexibility, and they dont get themselves tied down with the infrastructure.

We also looked at the adoption cycle, including kids being trained in schools. We talked to partners developing on the platform; we looked at the work in the scientific community. And we looked at the Internet. By any measure, it was the fastest-growing server environment on the Internet. So we said this has got the potential to change the way applications are developed and deployed. Thats where we came from and where we still are.

eWEEK: Were you the driving force?

Palmisano: It was the week before Christmas 1999. We sat around the table at my house: myself, Bill Zeitler, Irving Wladawsky-Berger, John M. Thompson and Nick Donofrio. We decided to launch a new business organization in early January. I told them I wanted to announce at LinuxWorld a year from then a bunch of enterprises using Linux. I didnt want universities and supercomputers. I told them I wanted German and Japanese banks—the most conservative places in the world.

Its still the fastest-growing entry-level server platform by far. And 15 to 20 percent of our mainframe growth was Linux-based. But this thing is really about open industry standards. People want to polarize the debate. Its not about operating systems. To implement a true computing grid, whether its a shared grid or your own internal grid, you need to work in this heterogeneous world. No one company is going to be able to dictate that the grid will be .Net [or] the grid will be Solaris.

Its not about what you like. Its about what solves the problem. The only way this problem will be solved is open industry standards.

eWEEK: You didnt mention Lotus in your speech. Is Lotus still strategic to IBM?

Palmisano: Oh, absolutely. First of all, Lotus—and Tivoli —got us into the software business. But the old days of mail and messaging systems, that is yesterdays war. Now, its really about the collaborative platform with Lotus as a platform. How do you exploit Lotus as a platform, and how do you re-architect Lotus around both middleware that allows you to expand beyond where it is and participate in an open environment? [Lotus General Manager] Al [Zollar] and the team are driving that.

The game plan is all about collaboration for Lotus, including e-learning and knowledge sharing. And we really want to take advantage of the underpinning of the product.

Lotus [Notes] was architected around the personal productivity model of client/server. Now the world has moved to this new computing model, and Lotus will move with it.

eWEEK: Ten years ago, IBM had a near-death experience. What was the greatest lesson you learned from that time?

Palmisano: Dont lose sight of the marketplace. [Former IBM CEO Louis] Gerstner gets most, if not all, the credit for what Im about to say. Lou brought this idea to IBM: Dont get so focused on the technology. We were so absorbed in the technology that we lost sight of the customer. And we had incredible technology, except they werent buying it. We learned you cant lose sight of the market; you cant lose sight of the customer.

So, if things are driving open industry standards, dont sit there and defend your business model. Or youll be out of business. We had a perspective that you cant live in a world with anything less than 60-something-percent gross margins. We now live in a world of 37 [percent], and our gross margins have improved for the past two years. But you have to be focused on the customer and the marketplace; you have to adjust your business model and your cost and expense structure to go where the customers are going. Thats what weve learned.

You see IBM today driving the e-business infrastructure. But thats all driven off the marketplace. Thats our No. 1 principle: customer- and market-driven. No. 2 is were a core technology company.

We have those principles, and if we live by those principles, we shouldnt go back to where we were in the past. Not all companies in our industry live by those principles. And they get absorbed in trying to create a world as they would like it to be vs. what it is.

At IBM, we think the customer dictates what the world is, and we want to adjust to be successful in the customer world, not an IBM-created world and then impose it on the customers. Were not arrogant anymore. I hope we never become arrogant again.

eWEEK: Have you heard from [Microsoft Corp. Chairman and Chief Software Architect] Bill Gates since you got the top job?

Palmisano: No. But I do talk to Bill, and weve always been on pretty good terms. I expect Ill meet with him before long.

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