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10/26/2011
11:55 AM
Paul McDougall
Paul McDougall
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Rometty's Past Reveals IBM's Future

One early bet: Look for IBM's new CEO, Ginni Rometty, to push harder into industry-specific consulting services that can drive billions in related sales.

IBM, the world's biggest business technology company, has three strategic units led by chieftains who, given the scope of their remits, could all be CEOs in their own right. But when Sam Palmisano, Big Blue's real chief executive, said Tuesday that he plans to step down, none of the group heads got the job. It went to Ginni Rometty—and that says a lot about where IBM is headed.

More than any other big tech vendor, IBM strives, and is in fact built, to be more than the sum of its parts. Rod Adkins' hardware group produces state-of-the-art chips and servers; Steve Mills' software unit develops the middleware and analytics tools that make the hardware useful; and Mike Daniels' tech services organization puts it altogether.

Combined, the hardware, software, and Global Tech Services units produced $78.7 billion in revenue last year. Not bad.

But IBM wants to be more than the IT equivalent of a Turkish bazaar, where shoppers fill their baskets with random items from this or that stall. It really desires to be in the business of providing holistic, dare I say it, "solutions" for its enterprise and government customers. That is, it wants to help them redefine the way they operate--and then sell them the tools and services needed to carry out those operations on an ongoing basis.

Enter Rometty. She's head of global sales until she takes over the corner office on Jan. 1, but over the past decade she built and led the unit that IBM is counting on to create synergies across its various piece parts--consulting. It was Rometty who pushed Palmisano into making a big time bet on such services by acquiring the consulting arm of PriceWaterhouseCoopers for just under $4 billion in 2002.

And it was Rometty who was immediately placed in charge of the group.

IBM consulting now lives within its Global Business Services group, which on its own is relatively small. It posted $18.2 billion in revenue last year. But the numbers are deceiving. Consulting is the pointy end of the spear when IBM approaches accounts like Shell, JP Morgan, or American Airlines with deals that will ultimately drive billions of dollars worth of hardware and software sales down the road.

And those kinds of engagements aren't limited to big, Western multinationals. Perhaps more significantly, IBM is now pushing "transformation" at customers in emerging markets, where growth is in the double digits and many companies in cornerstone industries like energy and agriculture are backed by state dollars that need to be spent.

Just this month, IBM struck a deal with Kenya Petroleum Refineries Limited, to help it modernize operations and, incidentally, sell it a bunch of software without which the transformation can't take place.

Such contracts are significantly more lucrative over the long term than the one-offs that HP and Oracle, whose consulting efforts have sputtered, are still chasing, and Rometty has spent years cobbling together those kinds of deals.

In light of all this, it's not surprising IBM's board tapped her to replace Palmisano instead of one of the product heads. To boot, Rometty's said to have the personal skills and political smarts needed to run a company that's the size of a small country. "She's a team player and she took care of her upline, and she wasn't obsessively tied to her own resume," says Rob Enderle, a former IBMer who went through the company's executive training program and is now president of Enderle Group consultants.

At the same time, "she's every bit as tough as Sam Palmisano, but she's got a cooperative style," adds Sam Khanna, a former IBM sales VP who's worked with Rometty and now runs Technology Project Finance in Wilton, Conn.

So where does Rometty go from here? To the extent that the past predicts the future, expect her to push even harder into strategic business consulting. She will look to complement IBM's strong core of PWC general operations wonks with experts in specialized areas like healthcare, financial services, energy, and green sciences for the same reason that bank robbers rob banks--that's where all the money is.

There's big demand for such expertise, so watch for Rometty to use IBM's financial clout to get the talent she needs through acquisitions. There will be smaller deals with obscure players, but don't be surprised to see bolder moves as well. Rometty, for instance, might take a long look at the healthcare IT and consulting arm of an outfit like McKesson to counter Dell's take out of Perot Systems.

She also may try to move the needle on IBM’s huge but growth-challenged top line by entering the applications market—an area that Palmisano rejected. “One thing IBM learned from its near-death experience in the Nineties was that it can’t stand still,” says Khanna. That means Rometty might, at the very least, take a look at the books of pure play ERP providers like SAP or Lawson.

One thing is for sure: Rometty likely will be sitting on about $11 billion to $12 billion in cash and equivalents when she takes office on New Year's Day. She's going to use it.

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BOBBRUNO
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BOBBRUNO,
User Rank: Apprentice
11/3/2011 | 2:50:50 AM
re: Rometty's Past Reveals IBM's Future
There is when you're the leader in patent filing every single year. IBM is just that - they invest lots on patents to keep the competition away. That, the getting out of businesses that lost their marging (like printers, PCs and similar stuff) and buying companies when they pick their researches wrong. I'm not saying IBM is entirely low-risk/high-margin (hech, I'd buy all the shares I could if they were that), but they invest a lot so that their products are.

Also, that was not the core of my point - my point was that IBM doesn't like the consulting business, because it's too risky, too specific and non-reusable and mostly because it isn't based on getting revenue from their intellectual property, but on creating intellectual property for the consulting clients. That means no long-term cashflow and little repeatability, two "no-no's" in IBM.
cxf
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cxf,
User Rank: Apprentice
10/31/2011 | 2:50:57 PM
re: Rometty's Past Reveals IBM's Future
Get real, there's no such thing as a low risk high margin business unless you're Bernie Madoff, and even then..
BOBBRUNO
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BOBBRUNO,
User Rank: Apprentice
10/29/2011 | 1:51:42 AM
re: Rometty's Past Reveals IBM's Future
The idea sounds great, but I don't buy it. IBM is entirely driven, from strategy to daily operations on high-margin, low-risk markets. That's why they gave up on PCs and that's why they invest so much on research and IPs.

Consulting, on the other hand, is a high-risk business, with medium, but unsteady margins - it's no cash cow. Besides, it's based on creating value for the client, who stays with it. All of this makes it go against all the culture, strategy and operations of IBM. I worked for PwC, and I was on the bunch that was bought by IBM. One by one, I saw the people with business consulting skills leave after getting tired of fighting a losing battle against culture, policies and rules that were designed to keep IBM on the low-risk, high-margin that's not consulting.

I wish Rometty all the luck, I've got lots of friends there yet. But the tip of the spear got blunt, and the consulting muscle is weak in there now. And I don't see IBM's investors interested in changing the way IBM pays them for their money. Mostly, I don't see IBM giving up the short-term profitability to change into a consulting company.

The ERP/Apps market, I can buy that. But that's not business consulting, that's software implementation. And it's about time IBM got there, instead of seeing its partners get bought by the competition.
Lillyyy
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Lillyyy,
User Rank: Apprentice
10/28/2011 | 8:47:41 PM
re: Rometty's Past Reveals IBM's Future
Rometty's Past Reveals IBM's Future Really raelly i have best news, you want work on line? Read about it here MakeCash5com
Guest
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Guest,
User Rank: Apprentice
10/27/2011 | 4:15:16 AM
re: Rometty's Past Reveals IBM's Future
I seriously doubt Rometty is going to focus on consulting services. IBM already has a health care consulting practice as well as all of those other verticals you mentioned. As consulting is a relationship based business as compared to an IP based business, the leakage from an acquisition is too high. All of IBM's recent acquisitions have been software companies.
Guest
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Guest,
User Rank: Apprentice
10/27/2011 | 4:09:56 AM
re: Rometty's Past Reveals IBM's Future
Yes, in addition to the business v. consumer aspect, using revenues as a measure of size is not meaningful (as people equate "largest technology company" with leadership and market control). The best measure is market capitalization where IBM is number one in enterprise IT followed by Oracle. Microsoft and IBM are about equal in market cap, but Microsoft obviously has a huge consumer or client side presence.
Guest
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Guest,
User Rank: Apprentice
10/27/2011 | 4:00:06 AM
re: Rometty's Past Reveals IBM's Future
HP is the largest in revenues... which is meaningless. IBM intentionally dropped PCs and components, which lowered revenue but improved profitability. HP is trying to lower their revenues (PC spin-off) to focus on higher value-add, higher profit businesses.
PMcDougall
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PMcDougall,
User Rank: Apprentice
10/26/2011 | 5:58:26 PM
re: Rometty's Past Reveals IBM's Future
@kt1122. The story states that IBM is the world's largest BUSINESS tech company. If you take away HP's consumer sales, it's considerably smaller than IBM. Thx for reading.
HenryReardon
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HenryReardon,
User Rank: Apprentice
10/26/2011 | 5:30:19 PM
re: Rometty's Past Reveals IBM's Future
HPQ is larger in terms of revenue... $126B compared to IBM's $107B... but IBM is larger in number of employees.... 426,751 compared to HPQ's 324,600... and IBM is larger in terms of market capitalization.... $211B compared to HPQ's $50.8B.... I guess it depends on what is used for the measurement.
kt1122
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kt1122,
User Rank: Apprentice
10/26/2011 | 5:00:04 PM
re: Rometty's Past Reveals IBM's Future
IBM is not the world's largest technology company.. HP is.
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