Subject: [NEXTEL-1] IBM Has a Vision Too

From: Marcel <[email-masked]>
Date: Thu, 14 Nov 2002 12:07:01 -0500

IBM Has a Vision Too
Here's its answer to all those frustrated tech customers.
FORTUNE
Monday, November 25, 2002
By David Kirkpatrick

In October, on the day after the board anointed him chairman, IBM CEO Sam
Palmisano met with customers, reporters, and analysts to lay out a vision of a new
era he calls on-demand computing. Afterward he spoke with FORTUNE's David
Kirkpatrick.

What's on-demand computing?
People think it's all about getting computing as a utility. The more exciting aspect has
little to do with technology. It's the concept of the on-demand business, the
on-demand government, the on-demand health-care provider. It means organizations
do their best to sense and respond to the dynamic and unpredictable realities of
markets, customers, supply, demand--the closing of the docks in California, bad
weather, you name it. This is really challenging, because historically most companies
(including IBM) have managed themselves by discrete function. You have to be willing
to transform your most critical processes--which is why we acquired PwC Consulting
this year. We needed many more people who understand business across many
industries. Now we have 60,000 of them.

What is your primary motivation in announcing this direction now?
Partly, it's what the technology makes possible. But mostly, on-demand computing is
grounded in what we're hearing from our customers. They need to see real benefit
from the billions they've spent on technology over the previous decade.

Will it fundamentally change IBM?
We will certainly become an on-demand business ourselves. Our business is 60%
software and services. Our software business is completely committed to open
industry standards, including the stuff that we're driving in open-infrastructure
middleware with web services and WebSphere.

Does taking better advantage of the infrastructure mean you'll sell less hardware?
No, but we'll consolidate into bigger servers. Customers will want bigger
machines--that's how they will get savings.

Will customers operate on-demand computing for themselves, or will you operate
it for them?
Some will do it themselves. The next dimension is us helping customers do it.
American Express said, "Give me the financial benefits up front." We bought their
infrastructure from them. Now they're paying a variable price based on workload. At
Blue Cross we took on the whole claims process. We'll take out a ton of cost and offer
the service to the entire industry.

How does IBM make more money?
One way is helping customers fuse business process and technology, using our
consulting services. In our deal with Nextel, the more sales they get, the more we get.
The other piece of it is that customers have all these things like ERP, CRM, supply
chain, whatever. A lot of them just want seamless connectivity.

And that's a big profit opportunity?
Our software margins are--what?--83%? There's only one thing better than software
margins, and we're not in the business--drugs. So software and services will benefit
the most. Hardware will do well by gaining share.

How will investors be able to tell if this works for IBM?
Look at consistency of EPS, return on invested capital, and cash flows. We used to
say we were going to grow our business with the industry, but the industry's
contracting, so I don't like that anymore. We think that open standards will drive people
to expand the usage of technology, and that's where the industry is going.

How much of customers' receptivity to standards is because they resent
Microsoft?
I will tell you people aren't excited about Microsoft's licensing costs going up so
dramatically this year. I have not met any CEO in the world who is not envious of
Microsoft's pricing power in the worst economy probably since the Great Depression.

When will we see an IT industry recovery?
The consensus is that the industry will start growing next year, somewhere between
3% and 4% for the full year, off a two-year decline. We have no reason to argue with
that.

http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=210284

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