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IBM CEO Sam Palmisano Talks With Global CIO

In a rare and exclusive interview, the man who transformed IBM speaks out on business analytics, cloud computing, and the emerging Smarter Planet.

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):

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