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December 12, 2000

Lou Gerstner's E-business Expo Keynote Address

IBM chairman and CEO Lou Gerstner Jr. gave the keynote address Tuesday morning in New York City at the e-business Expo. Here is the transcript of that speech.

ood morning. The last time I was on this stage was exactly four years ago yesterday. I delivered the keynote at Internet World in December 1996.

I was tempted to say it's been an interesting four years, but why skip all the way back to the primordial days of the Internet? The events of this year have been plenty interesting all by themselves!

Of course, 2000 will be remembered for the dot-com shakeout, and with it, the overturning of the belief--in the media and in many boardrooms--that if you weren't a "dot-com," you were "dot-toast."

We saw the brief fascination with B2B E-marketplaces, many of which still live only in press releases.

And just the other week, The New York Times was wondering if there's really this thing called a "New Economy."

So [there have been] lots of twists and turns, fortunes made and lost--the kind of high business drama that used to play out over years and decades compressed into months and quarters. How exhilarating! What sport!

But I suspect that those of you who don't work inside the information technology industry--and even some of you who do--are asking: "Excuse me, but was this all just fool's gold?"

Is E-business and the Internet just a digitally remastered version of client/server? Another paperless office? The checkless society revisited? A collusion between the IT industry, which wants to sell boxes, and the media, which wants to sell papers?

All this was running through my mind as I prepared for this talk, and I feel I owe you, if not an explanation, at least a perspective. After all, I was one of the first to say the Net was going to take its place alongside all the other great, world-altering technologies like electricity and manned flight.

I think what's happened with E-business parallels what's happened with many of those other transformational technologies.

First, there's a period of wild enthusiasm--intoxicating optimism that the new technology will rewrite the laws of competition and economics, create new wealth, wipe out old industries and create new ones.

Predictably, that fever passes, only to be replaced by utter disillusionment. People open their eyes. They don't see new industries. They don't see radical new business life-forms. And they say: "Bah, forget it."

That passes, too, and the world finally gets down to the important work of taking the technology and integrating it into the structure and fabric of society and business. And that's where we are with E-business.

In its first phase, you all remember it well, there was a lot of confusion about what the value of the Net would be.

Remember all the commotion about content? "Content is king. Gotta own content. Gotta partner to get content."

Why? Because people thought the Net was all about online magazines and sports scores and digital artwork.

Then, the first real killer app, consumer E-commerce. The race to sell books, groceries, airline tickets, toys, videos, flowers, pet food--you name it--over the Net. After we all got tipsy on Internet retailing, we lurched over to the next drunken binge--B2B, business-to-business E-commerce.

And once again, something important, something real, got obscured by simplistic schemes, cozying up with competitors and co-mingling supply chains, or even taking the supply-chain public.

And what was the driving force behind much of this frenzy? The desperate, aching desire to be seen as leaders of, players in, builders of "The New Economy."

The New Economy. That's a very interesting concept. What would constitute a New Economy?

It might have new currencies. E-bills, or E-bucks.
Instead of musty old metrics like revenue and profit, we'd measure our businesses on things like eyeballs and stickiness.
Instead of bona-fide customers and genuine loyalty, we'd have hits, clicks, page views and downloads.

What a wonderful world, and some people really believed in it. But I think most people now realize that the business world doesn't work that way. Too many people failed to remember that the Internet is a technology, a tool. Yes, a very powerful one, but it didn't change the fundamentals of consumer behavior, like the desire for choice, like wanting to inspect the product and return products.

Despite the fact that a lot of Internet retailers burst onto the scene proclaiming new business models, in reality, their business was built on a centuries-old value proposition--lower price.

Trouble was, they didn't have a business and economic model that could sustain those lower prices while generating a return. And when they couldn't subsidize those models with easy access to capital, welcome back to earth.

So where are we? Today, E-business is just business--real business. And real business is serious work.

After the hype, after the IPO alchemists have had their 15 minutes, it's time to understand that we've come to the hard part.

And the winners, the people who stick with it and do the work, understand that this next phase of E-business is going to be all about two things: Integration and Infrastructure.

That's what I want to talk about this morning.

First, integration.

IBM has believed from the very beginning that the Net was going to transform every important transaction and relationship.

Not just one--not just E-commerce--otherwise, we wouldn't have invested over $1 billion building this category called E-business.

What transactions and relationships are important to businesses and institutions? There are many:

Interactions on the front end of the enterprise--yes, with customers, but also with people who want to invest in you, people who want to work for you.
Interactions at the back end: across the supply chain, and transactions that connect an enterprise to markets and within industries.
Vital internal transactions: order processing, fulfillment, logistics, manufacturing, employee processes.
Finally, all those relationships companies want to have with their own products--appliances, industrial machinery, automobiles, consumer electronics--so they can provide after-sale service and also to understand how those products are performing so they can make better products.

Now, five years ago, we asserted that every one of these business processes and relationships would be transformed by the Net. But if you think about it, we've actually seen the transformation of only one business process so far--business-to-consumer E-commerce.

And that was OK, because if nothing else, it ignited everyone's interest. But now a lot of companies have discovered that taking orders over a Web site is only a piece of what needs to happen to complete a successful sale.

E-commerce triggers a chain reaction through the rest of the enterprise. Across pricing systems, inventory, logistics, credit, distribution, and on out to B-to-B relationships.

So now the leaders see that the E-business transformation must sweep through all of these core business processes. And that is driving huge investments in applications such as:

Supply chain management;
E-procurement;
E-service;
Customer-relationship management; and
Knowledge management.

And while all of these business relationships and processes are being transformed, something else very important is happening. They're being connected, fused together, integrated. This is a huge change in the fundamental organization and governance model for corporations.

Historically, every one of these business processes was a self-standing operation. But to get the benefits of real E-business--the speed, the cycle-time improvements, the customer responsiveness--these processes and the applications that support them must be integrated.

Without that integration, the lifeblood of the E-business--customer data, pricing information, inventory levels, supply management--cannot flow easily throughout the business.

The integrating technology is the easy part. The middleware is available today.

The hard part for business leaders is making the commitment to re-conceptualize their management system and organization model. I can assure you that is hard, hard work.

So in this next phase of E-business, the goal now for CEOs and other business leaders is to go beyond E-commerce. The goal is to build a fully integrated enterprise, a fully realized E-business. The Integrated E-business.

Let me give you an example. Whirlpool.

The core processes: They've consolidated 45 order fulfillment and financial systems, and they're E-enabling their workforce.
The back end: A supply chain portal to connect trading partners, sellers, distributors, and back-office operations.
The front end: That same portal is available to individual consumers, who use it to order small appliances and accessories.
Finally, transforming the relationships with their products--refrigerators, washers, and dryers are all being outfitted with a little intelligence and a Web connection. The first of these products come into the market next year.

That's what we mean by an "integrated E-business." End to end. Every relationship and interaction.

And, as I said, this model represents a full frontal assault on the prevailing mantra of organizational theory: Decentralization is good. Centralization is evil.

Now, I happen to believe in decision making being pushed down to the lowest level possible. But I will say this categorically: In a networked world you cannot operate in a fully decentralized mode.

The Net is an integrating medium. It makes it possible--it makes it imperative--to unify processes and information that were splintered in the rush to decentralize.

That leads to the second important development in this next generation of E-business--infrastructure. This is about where and how the work of computing gets done.

Today, we all know that in a networked world the heavy lifting of computing isn't going to be done by PCs, or game consoles, or your washing machine, for that matter. E-business workloads are going to be managed and processed on transaction and Web servers, middleware, and storage devices. And interestingly, in the network itself, somewhere between the end-user initiating a transaction and all the gear in the traditional data center.

That's why, amazingly, infrastructure--a business usually associated with roadways, pipes and concrete--has become trendy, even sexy. Look how many technology companies claim to be an "Internet infrastructure" company these days.

But I'm not sure everyone agrees on what that E-business infrastructure will look like, how it should be built, and what the requirements are.

So let me share with you three aspects of E-business infrastructure that we think are going to be very important.

First, E-business infrastructure is "end-to-end" infrastructure.

Up till now, "end-to-end computing" meant desktops at one end and servers at the other, all within the same enterprise. But think about what "end to end" means in the E-business world that's coming toward us.

At one end, you've got every partner, supplier, distributor, regulatory agency, licensing board, and tax authority.

At the other end, there's the explosion of devices, with 700 million personal computers by the year 2003.

But they will be dwarfed by other kinds of networked access devices--personal digital assistants, Net-enabled cell phones, and game consoles.

We've all seen the forecasts: Within the next few years, there are going to be well over a billion wireless appliances connected to the Net, and mobile E-commerce is going to be a $100 billion marketplace by 2003.

But what we call "pervasive E-business" won't stop with the integration of new kinds of end-user access devices. Coming up right behind that is this world of a trillion or more connected "things"--things we'd never think of as "computers," but which will be doing a little computing.

This pervasive world is already with us. There's Whirlpool's smart appliances; Medtronics is working on pacemakers that have Internet addresses; and very soon your car will be a client device on wheels. So that's what we mean by "end-to-end E-business infrastructure."

The second aspect of infrastructure that's really important is standards.

I'm not going to say very much about standards because if you understand what end-to-end is going to mean, the need for standards-based computing is easy to understand.

The infrastructure must be open and based on cross-industry standards so you can connect to those millions of people and businesses, wherever they are, and to those billions of devices, whatever they are.

That's why the fight for open standards is worth fighting.

That's why XML has to remain open.

That's why we're betting a big piece of IBM's future on Linux. We're going to invest nearly $1 billion in Linux next year. We have 1,500 IBM developers dedicated to Linux-enabling our products and services, and not for applications that run on only on wristwatches--which we've built, by the way.

We're moving Linux into commercial, production environments. Today we're announcing that we'll install a supercomputer-scale Linux cluster--the largest Linux installation in the world--at Shell International Exploration and Production.

Keio University in Japan is integrating two campus networks supporting 15,000 users with Linux.

Last week Telia, the largest telecommunications company in Scandinavia, announced it's going to run its core business applications and consumer Internet services on a mainframe running Linux.

And along with Intel, NEC and Hewlett-Packard, we've already announced a huge Open Source Development Lab in Portland, Ore., an independent, nonprofit resource to give the open source community a place to test enterprise-class Linux software.

Why? Because we're convinced that Linux can do for business applications what the Internet did for networking and communications--deliver on the promise of truly open, interoperable, any-to-any computing.

Linux shipment growth is expected to increase more than any other server operating environment over the next few years. It's growing at twice the rate of NT, and some estimates say that Linux will cross over and become more prevalent than NT.

This is a big issue for every server company. It's going to be interesting to see if three or four years from now, anybody with a proprietary Unix system will still have a leading position.

In fact, the movement to standards-based computing is so inexorable, I believe Sun--and EMC and Microsoft, for that matter--is running the last big proprietary play we'll see in this industry for a good long while.

A final point on infrastructure: The infrastructure technology that exists today isn't ready.

I know it's not fashionable to point out the limitations of technology, but the fact is, the infrastructure today can't handle what's coming.

I've seen projections of a thousand-fold increases in Internet traffic in just the next few years, and I think that's very reasonable.

Inside IBM, we talk about 10 times more connected people, 100 times more network speed, 1,000 times more devices, and a million times more data.

Whatever it is, very soon this networked world is going to be several of orders of magnitude more complicated than anything we know today.

So we're headed for a wall. Customers can't roll in processors and storage fast enough to avoid meltdowns when usage spikes. Or deal with this cacophony of devices. Or fend off viruses and hacker attacks. Or handle translations on the fly.

People are good, but they're not that good.

All of this--the load balancing, traffic management, security, transcoding--all of it has to happen in real time, naturally and spontaneously, based on much greater levels of intelligence built right into the infrastructure itself.

And by "intelligence," I'm not talking about computers that can write the next Ninth Symphony. I'm talking about the kind of intelligence we take for granted in our own bodies.

We walk up three flights of stairs. Our heart rate increases. So does our oxygen intake. When we plop down into a chair, our bodies adjust. It's hot, we perspire. It's cold, we shiver. We don't tell ourselves to do these things.

They just happen. We need something similar for E-business. It's a much more natural, spontaneous... almost autonomic kind of computing.

Let me give you an example from the ultimate extreme of high-end computing. Last year we launched a $100 million project to build a new class of computer, a system 100 times more powerful than today's biggest supercomputer.

We called it Blue Gene because the first application it's going to attack is the mystery of protein folding. Computing on this scale involves millions of linked processors working together, so many that at any given point in time we know that some will be failing.

They'll "die" just as, at any given moment of any day, cells in our bodies are dying, replaced and flushed from the system. The system works around them and doesn't miss a beat.

That kind of autonomic, self-healing system is exotic. But within a few years, it will be commonplace in all kinds of mainstream commercial applications.

Let me mention one more aspect of infrastructure we hear a lot about--scalability.

We're building for a day when our e-Servers are virtually impossible to outgrow. We're almost there now.

Not just "always on," or available, or reliable. You can get that today with technology that exists today. When usage spikes, say, in response to a retailer's holiday promotion, the server automatically shifts resources to handle it. That's important, but it's not enough, so our e-Servers extend that kind of capability to cooperate with Cisco networks.

When the loads increase, the networking gear doesn't just indiscriminately spray transactions into the servers. It picks the ones the customer wants handled first, with the best response and highest quality. Buyers go first. Browsers wait.

Before I leave this discussion of infrastructure, let me offer one more observation.

We all know that the E-business infrastructure will be a converged infrastructure: voice and data, dial tone and Web tone, switching and transaction processing. Despite this shared vision, I don't think the leaders of the computing industry and the leaders of the networking equipment industry have done enough to articulate a unified architecture that does more than just accommodate each other's products.

I believe this converged architecture must be based on a fundamental commitment to open, standards-based technology. The infrastructure that is being built is too important for any one company, industry or nation to "own" or dictate.

So, in the integrated E-business and infrastructure, there's a final aspect of E-business's future I'd like to mention because it's a biggie.

I think that five or 10 years from now, we're going to look back on this as one of the real game-changing developments. This is the trend we call e-Sourcing.

You know what outsourcing is. It helps customers convert fixed cost into variable cost. It lets them focus on their business and lets IT specialists focus on IT. E-Sourcing is the logical extension of outsourcing. It capitalizes on the intersection of several historic developments: the massive build-out of broadband, the rise of standards-based computing, and the escalating requirements of E-business infrastructure that we've just talked about.

Don't get me wrong. Lots of customers are going to run their own information technology operations for a long time to come--own the servers, the middleware, the applications, storage devices, and manage the staffs.

But we know today that an increasing numbers of customers are going to buy IT as a utility-like service, over the Net.

They will e-Source information technology from a variety of third-party providers--today's telcos, traditional IT providers like IBM Global Services, as well as from some new entrants.

These e-Sourcing providers are already building the data centers of the future, massive "server farms," megaplexes with acres of servers and storage and with the kind of advanced infrastructure attributes I described a moment ago.

We've seen this kind of shift to service providers before--for example, in the build-out of the power grid.

When electric turbines first came about decades ago, if your business wanted electricity, you built your own generating plant. There weren't many alternatives.

By the same token, for the past 40 years, if a business wanted information technology, they bought it, owned it and managed it themselves. Now there will be alternatives.

Of course, some customers will always own and operate their own IT infrastructures, the same way some companies can justify owning their own power sources.

But as the requirements for scale, flexibility, and intelligence increase, I believe fewer and fewer companies will find that it makes economic sense to build and own all the assets themselves.

We're already seeing the early stages of the e-Sourcing trend in Web hosting, storage hosting, in application service provisioning, and in computing-on-demand schemes.

That may be where it starts, with companies offering basic co-location services, a kind of kennel for computers. But customers want more than that. They want service providers who can provide sophisticated load balancing, security, storage, network management, and application management.

Today, e-Sourcing is about a $6 billion business, most of it in simple hosting. But by 2003, this is going to be a $55 billion market, and as it takes off, almost all the growth is going to be in the higher value-added segments.

So e-Sourcing is not a simple business. It's more than fancy control rooms and raised floors that stretch to the horizon. It will require experience in managing highly complex systems, and it will have high technology content. It is as much the domain of the computing service providers as it is the network providers.

At IBM, we're building on a traditional outsourcing business that will generate about $14 billion this year. We already manage 175 data centers worldwide, including 25 dedicated to E-business.

On top of that, we'll invest $4 billion over the next three years and open 50 more E-business hosting centers.

But nobody will go it alone, not in a business this complex. So we're working with network and facilities partners like AT&T, Qwest, Telecom Italia, and NTT Communications in Japan, with software and services providers like Akamai, Siebel, i2 and Ariba, and with wireless providers like Nokia and Motorola.

I believe the shift to e-Sourcing will fundamentally alter the go-to-market models of IBM and other computing infrastructure companies. Over time we will sell more and more products to a smaller and smaller number of mega-customers, who will "resell" computing services.

By the end of this decade, 20 or 30 of these mega-customers, including our own services business, could consume 25 percent of our output. It could happen.

If this is the way the industry is moving, and we think it is, we really are on the verge of a fundamental restructuring of both this industry's economics and its competitive dynamics.

So far we've been talking about all the business and the technical possibilities in this next generation of E-business. But I hope that as we think about what can be, we understand that what is possible is not predestined.

As with advent of every world-altering technology, from the printing press to nuclear energy to television, the arrival of this networked world is raising serious public-policy issues.

Societies are going to have to establish predictable, trusted approaches to issues like Internet taxation, trade rules for digital products and services, and protection of intellectual property.

I will tell you today that paramount among all these policy issues, especially in the near term, is one--privacy. This one is not going away. And if we do not act responsibly, we risk choking off this amazing, but very young, very fragile, economic engine.

I go back to the outset of my remarks. One of the hard lessons we've learned over the past year is that the Internet has not rewritten the laws of economics and competition. It hasn't rewritten the fundamental laws of consumer behavior, either.

We know that trust is a fundamental element in any brand experience. It's fundamental to all consumer behavior, to the willingness to buy, and to brand loyalty. It's all based on trust.

Now, we also know what a lot of consumers do when they go to a Web site and are asked to fill in their name, address, age, income levels, and all that. They say they're Albert Einstein with an income of $5 and an E-mail address of E=MC squared. Worthless data.

But hold on. What are customers really saying when they do that? They're saying they don't trust the security of the site. They don't trust that the owner of that site is going to respect their privacy and not abuse or sell their personal data.

This is a "confidence" issue, not a technical issue. And while serious, the privacy issues we're dealing with today are trivial compared to what's ahead.

What are the implications for individual privacy in a world where millions of people driving Internet-enabled cars have their movements monitored at all times? What happens to privacy for millions of people with Internet-enabled pacemakers?

And forget about the debate over who has access to medical records. Who has access to real-time data on your heartbeat, blood pressure, and cholesterol level? Your doctor? Your insurance company?

The answer here must begin with a responsible marketplace.

Through our policies and practices, industry has to send an unambiguous message that tells people: "You can trust us. You have choices. They will be respected. And you'll know in advance how any information you give us will be used."

Getting a workable privacy framework in place is going to require leadership at all levels, including government. It will require thoughtful examination of what kind of public policies, including legislation, should be implemented.

Let me ask you to do one thing when you leave here. Go back to your organization and find out if it has a designated privacy czar, a senior executive with the clout to drive a real privacy policy through the organization. At IBM, we named ours two weeks ago. We weren't the first, and we won't be the last. And I think that in itself is important.

We--all of us--have come a long way in these last four or five years. We've lived through the wild ride of experimentation--meteoric ascents and spontaneous combustion, new models tried, some validated and some tossed onto the slag heap of Internet Chapter 1.

It's my hope that we learned even in those things that didn't work so that we proceed into this next phase of E-business with a level of maturity, reason, and stability that was absent for much of the period we just passed through.

And I hope one of the lessons we take with us is that the world we are building is far more important than one of this industry's long-standing obsessions. Simply put, this is not about building some Utopian world of personal convenience, perpetual relaxation, and leisure.

That's not what's important. Carmakers aren't investing billions in telematics just so that you can talk to your steering wheel and ask your intelligent house to fill your intelligent bath, all so you can have a hot soak four minutes faster. Applications like that are fun, and I guess they'll improve modern life a little bit. But that's not the economic imperative for making these historic investments.

There are far, far more meaningful, more profitable, more important aspects of E-business before us. In the commercial world, for sure, and we've talked about those, but also ways to:

Deliver better education to more of the world's people;
Create opportunities to close the divide between rich and poor, and the information have's and have-nots;
Decode the molecular mysteries of our bodies to develop better life-saving drugs;

And, yes, even improve democratic institutions and processes for all people, in all states, for all nations.

All that is within our reach.

When I look back on the past five years I think that, for a lot of people, the omnipresent "E" in E-business came to stand for "easy" more than anything else. Easy life. Easy money. Easy business. But I think we all know better today.

I, for one, have never been more excited, more enthused and more optimistic about E-business, and that has everything to do with the wacky period we've gone through, a necessary learning experience in hindsight.

So, looking forward, the opportunity is still there--to improve business, to improve the lives of people, to make our world a more tolerant, prosperous and secure place, and to address the most intractable challenges we all care about as businesspeople, as parents and citizens. Those are the challenges worth our time, our investments and our best thinking. Thank you very much.