Even a Giant Can Learn to Run
In 2004, I.B.M. sold its PC business to Lenovo of China. Mr. Palmisano says he deflected overtures from Dell and private equity firms, preferring the sale to a company in China for strategic reasons: the Chinese government wants its corporations to expand globally, and by aiding that national goal, I.B.M. enhanced its stature in the lucrative Chinese market, where the government still steers business.
In total, the PC, disk drive and other hardware businesses that Mr. Palmisano sold off generated nearly $20 billion a year in sales, if not a lot of profits.
The divestitures meant that I.B.M. was no longer the world's largest information technology company. Hewlett-Packard took that title and took a different strategic path as well, doubling its bet on PCs by acquiring Compaq in 2001. "You see the choice that was made, and how the economics worked out," Mr. Palmisano observes.
Today, I.B.M.'s stock market value, at $217 billion, is more than four times that of the struggling H.P.
I.B.M. invested heavily elsewhere, buying the business consulting firm PricewaterhouseCoopers Consulting, for $3.5 billion in 2002, for its expertise in specific industries. For I.B.M., the emphasis was to move up from selling customers computers and software to helping them use technology to solve business challenges in marketing, procurement and manufacturing.
Corporations and governments are drowning in a flood of data from internal systems and the Web, struggling to make sense of it. To get ahead of that challenge, I.B.M. has spent more than $14 billion since 2005 buying 25 software companies that specialize in data mining and analytics, looking for useful patterns in data in fields as varied as disease treatment, traffic management and crime detection. And it has increased its research and development budget by 20 percent under Mr. Palmisano, to about $6 billion a year.
Combining research, specialized skills and sophisticated technology is the recipe behind I.B.M.'s Smarter Planet initiative, begun in 2008. It now has more than 2,000 projects worldwide, applying computer intelligence to create more efficient systems for utility grids, traffic management, food distribution, water conservation and health care.
The idea, Mr. Palmisano explains, is to "go to a space where you're uniquely positioned and use the value of I.B.M.'s integration."
For him, the Smarter Planet effort is a return to I.B.M.'s roots. Shortly before he became chief executive, he dipped into corporate archives, reading speeches and memos from the founder, Thomas Watson Sr. When Mr. Palmisano was an executive assistant to John F. Akers, then the chairman, in 1989 and 1990, he had lunch with Thomas J. Watson Jr., a former chairman, once a month. The Watsons, he says, always defined I.B.M. as a company that did more than sell computers; they believed that it had an important role to play in solving societal challenges.
"It's old-fashioned, but it's motivational," he says.
And it resonates with the young people I.B.M. is recruiting these days, he says. A couple of times a year, Mr. Palmisano speaks to groups of elite students whom I.B.M. is trying to woo to its research labs. The pitch, he says, is that I.B.M. is a place where you can make a difference and do deep science.
"You can change the world, and you can compete for a Nobel prize," he says, referring to I.B.M.'s five Nobel winners.
(Eighty-seven percent of the candidates who were offered jobs by I.B.M. Research this year joined the company.)
Mr. Palmisano's appeal to young technologists is just one example of an answer to one of his four questions. All four, he says, must be addressed. That challenge is now passed to Virginia M. Rometty, who this week becomes the ninth chief executive in the company's 100-year history.
"The hardest thing is answering those four questions," Mr. Palmisano says. "You've got to answer all four and work at answering all four to really execute with excellence."
