IBM CEO Sam Palmisano Talks With Global CIO

Technology waves roll in 10-to-15 year cycles, says IBM CEO Sam Palmisano, and two rising waves whose full global impact is imminent are cloud computing and business analytics. And after they hit, business will never be the same. And neither will healthcare. Or education. Or energy distribution, global supply chains, traffic, food and water management, financial markets, and much more.

It's no coincidence that IBM fully intends to be a player in each of those areas, and that its Smarter Planet campaign and products and technologies are intended to make IBM's market position inextricable from those unfolding initiatives.

But what is surprising to some competitors and perhaps even some customers as well is that this is not just an opportunity IBM stumbled upon, or some clever gimmick its ad agency dreamed up to try to put some conceptual distance between Big Blue and its rivals. No, Palmisano said in an exclusive interview this week, it was no surprise at all to IBM.

"We've been very conscious of the value of information, and we knew the market behavior was going to shift from the bad economy and budget pressure," Palmisano said in an exchange at IBM headquarters in Armonk. "So we sold things because we knew the old model was going to end, and we turned around and made acquisitions where things were going to grow and you know the numbers—100 acquisitions for $20 billion.

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"But no matter how many acquisitions we do we always do our research up-front because we're very rigorous about that and we're conservative and we always pay cash."

The flip side of that buying binge was IBM's rigorous divestiture of hardware businesses that Palmisano and his team found could no longer carry their cost of capital and provide great value to customers. And so over the past several years, IBM has relentlessly sold off sizable chunks of its hardware business in order to provide itself with not only the capital but also the organizational nimbleness and market focus necessary to become a new kind of company from what it had been over its first century.

(For more on Palmisano and his strategic vision for IBM, please check out the "Recommended Reading" section at the end of this piece.)

And while various competitors—none of whose financial performance matches IBM's—have attempted to position those sell-offs as signs of IBM becoming risk-averse or narrow or shallow or greedy, Palmisano says the exact opposite is true:

"We obviously felt the PC era was over—and so did some other companies, but we actually did something about it," he said, emphasizing that the PC business had essentially turned into a consumer-electronics category "while we're an enterprise company—a business company—and not a consumer-electronics company."

And while Hewlett-Packard CEO Mark Hurd has said recently that a distinguishing competitive advantage of HP's is its broad presence across a huge range of hardware categories, Palmisano said in this interview that IBM jettisoned its PC business because of diminishing customer value and increasing inventory risk-exposure.

"Dell and HP say they've learned how to make money off their PC businesses. They brag about their 4%, 5% margins. But grocery stores do better with a lot less risk in their inventory. Groceries don't change much—but with PCs, you get a big change in technology, which you always will, and suddenly the $2 billion you've got in inventory has lost a huge amount of its value."

All that, as Palmisano sees it, is prelude to the new-technology waves that are about to hit—particularly business analytics and cloud—and the parallel explosion in the number of intelligent devices of every shape and size that are being stuffed into more and more pieces of the world around us. And when you take the flexibility and economics of the cloud, and add in the predictive power of business analytics, and apply them in concert with the billions upon billions of intelligent devices making their way into transportation and water management and food supplies and appliances and machines and more, you've got all the makings for a more-intelligent world, Palmisano said.

"So now we see all this manifesting itself in Smarter Planet—and we think the analytics wave is just at the beginning," he said. "Cloud computing—what we're really talking about is 'highly virtualized infrastructure'—it's also just beginning, but it's an unfortunate name.

"There's tons of hype in the beginning and then the industry starts to ascertain what's real and what's not, and that's where we are now. It's starting to take off on the consumer side, which has been very visible, but we don't play there, we're an enterprise company—but even with all the talk and rhetoric about cloud starting to slow down, the real thing behind the name is starting to ramp, with everything from Lotus Live, to Desktop Cloud, to Test Cloud."

The significance of that transition from geeked-out technology hype to real business value is a theme Palmisano touched on a few times: "The big challenge now is, with all these devices out there, how do you create an infrastructure to deal with all the inputs—sensors, devices, phones, everything?"

And in a speech given one year ago tomorrow to the Council on Foreign Relations, Palmisano provided the answers to that question (you can view a video of that speech here): First, our world is becoming instrumented: The transistor, invented 60 years ago, is the basic building block of the digital age. Now, consider a world in which there are a billion transistors per human, each one costing one ten-millionth of a cent. We'll have that by 2010. There will likely be 4 billion mobile phone subscribers by the end of this year… and 30 billion Radio Frequency Identification tags produced globally within two years. Sensors are being embedded across entire ecosystems—supply-chains, healthcare networks, cities… even natural systems like rivers.

Second, our world is becoming interconnected: Very soon there will be 2 billion people on the Internet. But in an instrumented world, systems and objects can now "speak" to one another, too. Think about the prospect of a trillion connected and intelligent things—cars, appliances, cameras, roadways, pipelines… even pharmaceuticals and livestock. The amount of information produced by the interaction of all those things will be unprecedented.

Third, all things are becoming intelligent: New computing models can handle the proliferation of end-user devices, sensors and actuators and connect them with back-end systems. Combined with advanced analytics, those supercomputers can turn mountains of data into intelligence that can be translated into action, making our systems, processes and infrastructures more efficient, more productive and responsive—in a word, smarter.

Armed with those capabilities, IBM is competing for opportunities set forth in the federal stimulus plan that total about $28 billion in health care IT, smart grids, and broadband—opportunities that Palmisano said have the potential to create between 1 million and 1.2 million jobs in this country in those three broad industries.

"The strategy's working," he said in Armonk last week. "We have hundreds of reference customers around Smarter Planet. And the stimulus is helping as well," he added, underscoring his comment about the potential to boost employment for up to 1.2 million workers by saying, "You can count the jobs. It's very defensible."

As I reflected on the rapid-fire flow of Palmisano's ideas during the interview regarding where IBM has been and where he intends to take it, I looked back again to the speech he gave one year ago tomorrow and in particular to a couple of excerpts that capture the essence of the strategy Palmisano has woven out of a vision where the world is headed, a clear sense of what services and products will be needed to get there, and his own sense of the profound changes that our technologically driven world is already coping with.

So in closing, whether you're a CIO or a CEO or a plumber or a teacher, these next few paragraphs from Palmisano's year-ago speech to the Council on Foreign Relations should give you plenty to think about as we all move forward into the more-intelligent world we're creating; as our companies compete and strive for competitive advantage in a challenging global economy; and as we consider that the future we're creating and the decisions we're making today will no doubt result in lots of unexpected consequences:

What this means is that the digital and physical infrastructures of the world are converging. Computational power is being put into things we wouldn't recognize as computers. Indeed, almost anything—any person, any object, any process or any service, for any organization, large or small—can become digitally aware and networked.

With so much technology and networking abundantly available at such low cost, what wouldn't you enhance? What service wouldn't you provide a customer, citizen, student or patient? What wouldn't you connect? What information wouldn't you mine for insight?

The answer is, you or your competitor—another company, or another city or nation—will do all of that. You will do it because you can—the technology is available and affordable. . . .

There is much serious work ahead of us, as leaders and as citizens. Together, we have to consciously infuse intelligence into our decision-making and management systems… not just infuse our processes with more speed and capacity.

But I think one thing is clear: The world will continue to become smaller, flatter… and smarter. We are moving into the age of the globally integrated and intelligent economy, society and planet. The question is, what will we do with that?