IBM: being blue

IBM has survived changes in business practice and technology for almost 100 years - despite teetering on the brink a few times. Today, Lesley Meall finds it mirroring the experiences of many of its clients, as it prepares for an uncertain future

Nobody ever got fired for buying IBM. Apparently. Or so the saying used to go. From its incorporation in 1911 (as the Computing Tabulating Recording company, CTR), to its mass-market successes in the 1970s, Big Blue could do no wrong. But the company was thrown into turmoil during the 1980s and 1990s when the PC and client-server revolutions it helped facilitate radically changed the way businesses bought and used information technology.

As computers found their way onto the desktops of millions, purchasing decisions moved out of the hands of the few into the hands of the many. Mainframes and centralised processing gave way to PCs and distributed networks. But the departments and individuals that bought them were not the traditional IBM power-base, and by 1993 stock prices were at a 20-year low, annual net losses had reached an all time high of $8.1bn, and Big Blue was on the brink of break-up.

Then Louis V Gerstner Jnr became chairman and CEO: the first IBM leader to originate from outside its own ranks, he dragged IBM back from its near-death experience and transformed its fortunes. From 1995 onwards the company grew and produced steady profits, and by 1999 Gerstner had grown the business by $20bn (from its low point in 1993), in what was widely regarded as the business turnaround of the decade. 'He didn't just turn the ship around,' says analyst Robin Bloor. 'He stopped it sinking and then turned it around.'

Generating growth

Before joining IBM Gerstner was CEO of RJR Nabisco for four years, and had previously spent 11 years as a senior executive at American Express. But a background in consumer sales didn't stop him being a technology visionary. In 1995, he was one of the first computer company CEOs to push the Internet/networking model - while the amazing Bill Gates almost missed the boat (witness his 'visionary' work, The Road Ahead). Rather than depending on hardware, Gerstner pulled IBM out of declining businesses and into new and more promising areas, and attempted to maximise its returns by any means available. These included selling IBM technology and products to competitors, exploiting its position as a patent holder, and looking to services and resellers as a way of generating growth.

While all of this was affecting the way IBM related to the outside world, its internal processes were simultaneously undergoing radical change - in common with many of its clients. Gerstner transformed the business processes, technology and culture at IBM. By breaking down the traditional barriers between lines of business and implementing common processes, IBM was able to simplify its infrastructure and governance, and turn itself into an e-business - the sort of 'on-demand' enterprise it is now selling to its customers.

Last year, when IBM president Sam Palmisano succeeded Gerstner as CEO, he picked up the torch. A 30-year IBM veteran, Palmisano has been a big influence at Big Blue for some time. 'Over the past decade, Sam Palmisano has taken on some of IBM's most significant challenges,' explains Gerstner. 'From building the services business to transforming our server line.' Palmisano helped turn Global Services into IBM's biggest unit, and backed the Linux operating system.

Lucky with Linux?

Over the past few years, IBM has been criticised for its growing involvement with Linux, particularly by those with vested interests. At the moment, IBM is fighting a $3bn lawsuit by the SCO Group (formerly Caldera) alleging breach of contract and the sharing of trade secrets; Big Blue and Red Hat are counter-suing. But the IBM customer base likes Linux. As Jim Stallings, IBM's general manager for Linux, explains: 'They're looking for ways an operating environment can reduce costs and improve ROI.' As accounting & business reported in the May 2003 edition, the need to get more bang for a buck has been one of the prime movers behind Linux's more recent successes.

You might reasonably expect the lawsuit to slow adoption down, but that doesn't seem to be the case. A recent Linux Development survey by Evans Data Corporation shows the opposite happening. 'People are adopting Linux more and more,' says Nicholas Petrely, a Linux analyst with Evans. 'They're switching from Windows to Linux faster.' Which is good news for IBM, because it is one of the biggest beneficiaries of Linux's growing popularity with cash-strapped corporates. The open source operating system is helping IBM to grow its business in software, services, and hardware. According to Stallings, 17% of IBM's mainframe shipments now 'go out to run Linux workloads'. IBM's Linux-related revenues hit the $1bn mark in 2002, more than double the figure for the previous year.

Over the past few years, as IBM has repositioned itself for a more open future, where the Internet becomes a gigantic virtual computer with distributed resources linked by high bandwidth (grid computing), the technology titan has once more been a mirror for many of its clients. 'They want to leverage network technology to help them build a business that can respond dynamically to whatever the world throws at them,' says Palmisano, 'but they know they can't build such a company on top of stand-alone computing systems and piece-part technologies.' Corporates need technology capable of unifying the disparate processes and systems they have in place, improving productivity and delivering tangible business benefits, with minimal cost and disruption.

Integration and imagination

'To pull it off, customers must optimise business processes and pull those processes together into an integrated system,' asserts Palmisano. 'In short, they must re-imagine business design.' Just like IBM. 'We have committed that IBM will become the world's premier on-demand business,' he adds, 'because those companies who move first will have enormous competitive advantage over those who are slow to adapt.'

Last year, IBM opened what it calls 'the world's most advanced semiconductor facility', in East Fishkill, New York. 'It exemplifies 'touchless' manufacturing that senses and responds to changes in chip configurations and orders,' says Nick Donofrio, senior VP for corporate technology and manufacturing. Customers can track their chip orders through the manufacturing process electronically in real time, and suppliers can access the plant's operation remotely to diagnose any potential problems and make immediate repairs. Donofrio asserts: 'It's a perfect example of an on-demand facility.'

But the real benefits and ultimate payoff from the networked world involves the transformation and integration of the entire enterprise. 'The challenge of cross-enterprise integration is tough stuff,' says Palmisano. 'It's complicated, but it creates a lot more opportunity for productivity gains.' However, pulling it off is impossible alone - for IBM or its clients. 'The computing model doesn't change very often. But it's changing now,' asserts Palmisano. 'We believe it's an open world. We're not hung up in the world of a proprietary past. We've adjusted our business model to be able to thrive in this environment.' Have you?

Lesley Meall is a writer on business and technology issues.