There's a New Way to Think Big Blue

Sam

Palmisano has the easy, boyish grin and hearty laugh of the consummate salesman he has been for much of his 30-year career at IBM. He can seem quite a contrast to his predecessor as CEO, Lou Gerstner, a notoriously gruff, prickly outsider responsible for one of the greatest turnarounds in corporate history. But nearly a year after taking over the reins amid a lingering slump in corporate spending on technology, Palmisano, 51, has shown that he has sharp teeth behind that smile.

He has accelerated Big Blue's transformation from a hardware dinosaur to a technology-services dynamo — a firm that, rather than just selling computers and software, can persuade FORTUNE 500 clients to let it provide all their technology needs, from support staff to data storage. Over just the past half-year, Palmisano has spent $3.5 billion for the consulting arm of PricewaterhouseCoopers, which gave IBM the people and contacts to turbocharge its services business, and has paid $2 billion for Rational Software, which provided new software-development tools. He agreed to sell IBM's money-losing hard-drive business to Hitachi. And he's still working his magic on clients: J.P. Morgan Chase just agreed to pay IBM $5 billion over seven years to take over much of the financial giant's elaborate IT operations.

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Even as Palmisano sat down to talk with TIME at IBM's woodsy, secluded headquarters in Armonk, N.Y., he was busy last week announcing a pact to outsource more of IBM's PC and low-end server manufacturing. "This is the opportunity of a lifetime for IBM," he says, "to go from a company that was almost out, to a comeback, to being the undisputed leader."

Palmisano's optimism might seem forced amid the wreckage left behind by the tech bust, with cash-strapped companies wary of spending on technology that often doesn't live up to expectations. Such skepticism is one of the principal reasons that IBM's 2002 earnings, which will be announced this week, are expected to drop more than 10%, a reversal from the solid, double-digit annual earnings growth that Gerstner consistently achieved — and that Palmisano is promising for 2003. That pledge will be all the harder to keep at a time when Wall Street is taking a much closer look at earnings quality, especially at IBM, which, while doing nothing illegal, has been known for boosting earnings with pension income, asset sales and share repurchases.

Listen to Palmisano for a while, though, and you might begin to share some of his contrarian views. With CEOs, CFOs and CIOs desperate to cut costs and focus on their core businesses, IBM believes it can, in the words of a money manager who owns the stock, "wrap its arms around customers even more" by supplying IT seamlessly, on demand, on a variable, pay-as-you-go basis. J.P Morgan Chase bought Palmisano's pitch, as did American Express. But it's not yet clear how many others will be willing to hand over more control to IBM. And fine-tuning the technology to accurately measure and bill customers for their usage will be no small feat. But if Palmisano can pull it off, and finally make all those confounding boxes and wires work the way they're supposed to, he will not just be enriching the lives of millions of IBM shareholders, its 319,000 employees and the entire tech economy — but all the beleaguered office workers who daily curse their PCs.

In its CEO's ambitious vision, IBM is becoming an unprecedented, one-stop shopping destination to help companies electronically integrate their divisions, as well as suppliers, partners and customers. Not only will it help devise business strategy, redesign and even take over key processes like human resources and finance, it will also deploy hardware and Web-enabled software (from both IBM and others) to make it happen. In some cases IBM will provide the entire system — with the hardware often located far from the customer — as a utility that corporations can buy "just like they buy electricity," as Palmisano has said. Instead of having to make a costly bet on an army of new servers and software, companies like American Express can ramp their computing power up or down as market conditions dictate. "There's a lot less risk for the customer if they can work their way up and see the benefits as they go," says Bob Zapfel, head of IBM Services for the Americas.

Big Blue, of course, isn't the only one going after this industry Holy Grail. It will have to do battle with hardwaremakers like Hewlett-Packard and Sun Microsystems; consultants like Accenture; outsourcers like EDS; and software players like BEA, Oracle and Microsoft. Its competitors snort that IBM simply glues together a hodgepodge of inferior systems — all too often pushing its own — and then charges big bucks to have its consultants keep them from breaking down, an approach they predict will soon lose its appeal. IBM's strategy "is an acknowledgment that the very technology it has been peddling all these years has been tremendously complex and expensive," says Barry Goffe, a group manager at Microsoft. Palmisano is quick to fire back at rivals, who have pushed their expensive, "best of breed" tech solutions to hapless customers. "The so-called pure plays were supposed to kill integrated players like IBM every day," he says. "But their model didn't fulfill the economic promises it made."