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July 31, 2000 |
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A New Lineup For IBM
The vendor shakes up its executive team as it works to revitalize stagnant business units
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BM exec Linda Sanford was aboard a company jet last week when she learned things were moving faster on the ground than in the air. Enterprise group senior VP Sam Palmisano called to say IBM's storage division would now operate as its own business unit--and she would be the senior VP in charge of it. Sanford also learned that Palmisano--credited with building IBM services into a multibillion-dollar powerhouse and with invigorating Web server sales--had been named president and chief operating officer."It was a good thing I had my seat belt on," Sanford said from the same Falcon 2000 on her way home from a customer site the day after her promotion. Sanford, previously general manager of IBM's substorage division, wasn't the only one surprised. In one stroke, IBM chairman and CEO Louis Gerstner reshuffled the company's executive lineup, putting new senior VPs in charge of five operating divisions.
Given the vendor's unimpressive second-quarter results, the changes might have been expected. After watching his company close out the 20th century with declining revenue and falling profits, Gerstner told top managers they had six months to prove the slump was an aberration. It didn't happen: Revenue fell 5% in the first quarter and 1% in the second quarter, which ended in June.
Gerstner last week also accepted the resignation of David Thomas, the man in charge of IBM's troubled PC business, which lost $69 million in the recent quarter. He also tapped software head John M. Thompson for a vice chairman's role. Thompson will focus on emerging markets such as wireless communications and broadband data delivery. He's off to a good start: Last week, IBM said it will invest $1 billion in wireless development for cell-phone-crazed Europe.
Palmisano is emerging as Gerstner's heir apparent. The idea behind the promotion, observers say, is to unleash his operational and managerial smarts on the rest of IBM. "This was long overdue," says Goldman Sachs analyst Laura Conigliaro. "They're starting to understand that IBM can't be a 10,000-foot company that's nothing more than a joining point for all the divisions."
As head of IBM's server business, Palmisano helped drive the success of its RS/6000 S80 line, among other efforts. New customers include FedEx Ground in Pittsburgh, which recently replaced two Sun Microsystems 450 servers with two S80s to support expansion of its wireless tracking services. "They're advancing the technology at an amazing rate," says Ken Spangler, FedEx's director of IT field operations. "As far as sheer horsepower goes, they've got it nailed."
Other changes may offer insight into what Gerstner thinks the company must do next to meet customer requirements and increase sales. Palmisano handed leadership of the server group to Bill Zeitler, formerly general manager and now senior VP of enterprise systems. A major repositioning of IBM's server lineup is in store under Zeitler's guidance. The line has been dragged down by sluggish mainframe sales even as Web server revenue, including midrange RS/6000s, jumped 30% in the second quarter. Sources say Gerstner and Palmisano have all but signed off on a plan to unify IBM's Netfinity, RS/6000, AS/400, and mainframe servers under a single brand by the fourth quarter. The goal: reduce confusion over IBM's byzantine product lineup.
In addition to rebranding the systems, IBM will use Linux as the lingua franca that ties them together. The company has already enabled its servers to run Linux apps, and it's encouraging independent software vendors to write programs in Linux so they can be more easily ported across systems. "Linux is extraordinarily important to us, and you'll see it featured on all our servers," Zeitler says. That strategy will be formalized later this year when IBM unveils details of Mach 1, an application development project. "It's about building applications in an open way and deploying them on an open environment," says Zeitler.
IBM has long promised server interoperability through Java, but Linux is a better alternative, says Curt Finch, CEO of project-management software developer Journyx Inc. "The idea was that you would write all your software to Java, but that takes a lot of work, and it was never a cure-all," he says. Recompiling applications from Linux to other operating systems, such as AIX, is much easier, Finch adds.
However, important details still need to be fleshed out. "With Linux, the question isn't so much about the operating system, it's the surrounding software," Spangler says. "We haven't seen much in terms of systems management, which is important to us."
IBM is also working to improve mainframe sales--flat in the second quarter. Later this year, it will unveil Freeway, a 64-bit mainframe that features faster performance, enhanced memory management, and improved load balancing. A target market is application service providers that want to offer usage-based pricing on a sliding scale. "In many ways, this is the most important thing we have under way right now," Zeitler says.
Revitalization of the server business alone won't restore growth to a company that had more than $87 billion in revenue last year. For that, IBM is also looking to storage, which International Data Corp. predicts will be a $53 billion market by 2003.
Senior VP Sanford says running IBM's storage business as a separate entity will let her more aggressively develop new technologies and fashion alliances, such as IBM's recent deal with Compaq to cross-market their storage products. "Our strategy will be to deliver architectures with E-business in mind, which means we'll focus on open storage networking and not take a box-building approach," Sanford says.
With users longing for improved interoperability among storage devices, that approach might help IBM chip away at EMC Corp.'s share of the high-end storage market. EMC had $4 billion in storage revenue last year vs. IBM's $1 billion, Dataquest says.
Analysts say the newly independent storage unit will help. "It's difficult to convince the world your storage solution is server-neutral if your budget is controlled by a server group," says Nick Gall, a VP at Meta Group. "Now IBM is free to partner with whomever they want."
IBM must determine how less-promising businesses will play in its future. Its personal systems group, which includes desktop, notebook, and server PCs, reduced its operating loss by $100 million in the second quarter. But that progress couldn't hide the fact that IBM's commercial desktop business is awash in red ink, and questions linger about its commitment to PCs. Gerstner replaced Thomas with Bob Moffat, previously VP of finance and operations for the enterprise server group.
Ostensibly, Moffat's job is to restore profitability to IBM's desktop business. "I wasn't sent here not to turn the business around," he says. "Desktops will be a contributor." Yet Moffat could also use his strong operational background to prep at least part of the unit for divestiture. "I would imagine the business is being examined pretty closely," says Goldman Sachs' Conigliaro, who believes commercial desktops aren't strategically important to IBM.
IT executives at Dixon Ticonderoga Co., a pencil manufacturer in Heathrow, Fla., hope the PC group will return to health. A former IBM PC customer, Dixon Ticonderoga decided to give IBM's new NetVista 40 PC a try. CIO Garrett Grainger says IBM made strides in reducing PC prices and that "if this machine proves to be decent, we'd consider standardizing on IBM again."
IBM will be looking for greater contributions from its microelectronics manufacturing business, which also got a new chief last week. John Kelly, who was named senior VP in charge of the technology division, says IBM will pursue increased sales of its technology to third parties. Among the big opportunities are chips that power intelligent networks.
"Companies want to take E-business to the next stage, where it's not just transactional, and collaborate with partners on design and implementation," Kelly says. "That requires a lot of horsepower within the network." He says IBM will aggressively pursue lucrative manufacturing deals, such as the one in place to produce chips for CPU vendor Transmeta Corp.
IBM's software group, which develops middleware that ties together complex supply-chain and marketplace systems, is part of the revitalization plan, too. Steve Mills, who becomes senior VP for the group in the wake of Thompson's promotion, believes he can further kick-start sales--up 5% in the second quarter--by making the group's complex suite of middleware, database, and customer-relationship management applications easier to implement. Mills says IBM will "provide cookbooks and better training" for its products. "The easier we make it for customers to adapt the product, the more we'll sell."
Mills says his marching orders are clear: "I'm focused on growth--that's key for IBM right now."
--with additional reporting by George V. Hulme
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