Commentary
5/29/2009
03:37 PM
Bob Evans
Bob Evans
Commentary

Global CIO: Sam Palmisano's Grand Strategy For IBM Revealed In $5B Global Financing Plan

The company is offering billions to help customers "mind the gap" until so-called stimulus money begins to flow around the globe. And it expects much of that funding will be used to purchase its very own products and services.



IBM's plan to offer $5 billion to fund IT projects until government so-called stimulus money begins to flow around the world highlights CEO Sam Palmisano's transformation of the company away from commodity hardware and into high-margin financing, software, and services. Because the focus of those government-funding packages, as Palmisano said recently, is "not just on creating jobs to fill potholes and fix bridges."

At a time when many traditional lenders are unable to lend $5 million, much less $5 billion, because they're still recovering from the financial-industry meltdown, IBM has no such problem -- its cash position has never been so strong. So last week IBM said it would offer $5 billion in financing to help customers "mind the gap" until the so-called stimulus money begins to flow in China, the United States, and other countries around the globe. And having earmarked $2 billion for Europe, $2 billion for the United States and Canada, and $1 billion for the Asia-Pacific region, IBM understandably expects much of that funding will be used to purchase its very own products and services.

"IBM Global Financing stimulus financing will mainly target enterprises and municipalities looking to implement technology projects consisting of a majority portion of IBM hardware, software and technology services components," said an IBM press release. "Financing also can be applied to non-IBM technology as part of a larger IBM solution."

So it was interesting to look at comments Palmisano made two weeks ago to investment professionals, specifically with regard to how IBM would attempt to seize the golden opportunity being offered by governments around the world trying to spend their ways out of the global economic downturn. He made no attempt to hide the fact that IBM is ideally positioned to capitalize on key areas on which many governments are looking to spend, and in fact jabbed at analysts for seeming to be surprised that IBM was well-prepared for this situation.

Speaking of some of the initiatives IBM is offering under its Smarter Planet theme, Palmisano told the analysts, "It's nice that the stars line up -- that the things we do in Smarter Planet tend to tie out with the stimulus packages of the world, especially in China and the U.S., that have the biggest stimulus packages. ... Y'know, some people commented to me as I was walking in, 'Well, since you personally worked on the stimulus packages, it shouldn't be a surprise that China and the U.S. line up with Smarter Planet.'

"But hey, it is what it is. We can do intelligent grids, we can do smart health care IT, we can do road systems and traffic-congestion charting, we can do we can do we can do. We can do the Smart Shanghai for the Shanghai Expo in 2010 -- we can do we can do we can do -- right? -- and that's where a lot of the stimulus is geared, not just on creating jobs to fill potholes and fix bridges. So we've been able to align in that regard and we continue to invest in a lot of those areas to capture those opportunities."

Doesn't sound much like a computer company, does it? Or a software company? Or just a financing company? In fact, it sounds a lot like a business- and technology- and financial-services company with deep industry expertise.

And those are not accidents -- they're all the results of very conscious efforts Palmisano has undertaken in the past several years to drive the company's sweeping transformation, which I touched on recently as Palmisano flat-out told the analysts, "We got it all." And they've come about as Palmisano has methodically prepared IBM to be ready to pounce on these massive government-funded programs by divesting itself of hardware businesses and products that have lapsed into commodities, while putting increasing emphasis on what he calls "annuity-type" businesses.

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"You look at the mix of our businesses -- a lot of it, almost two-thirds, is annuity-like: software, services, even maintenance in the hardware business. ... Profits are annuity-like, cash is annuity-like -- so we don't have this big dependency on transactional commodity sales at the end of a quarter in a down market," he told the analysts.

"So we're not saying it's easier for us than for anybody else -- we're just saying we don't have the dependency that other people have -- that's all. We're not seeing a different world: It is what it is. We just don't have the dependency on it that others have. Therefore we haven't slashed the pay of our people, we haven't cut all their compensation, we haven't furloughed, we haven't we haven't we haven't."

But what IBM has done is force his sprawling, highly diversified company that operates in 170 countries to get out of the mind-set that pervaded the entire organization for more than 100 years and remake itself in the image of where business is heading, not where it's been. And that also meant overhauling the capabilities and products IBM offers, top to bottom.

"You know the moves we've made there -- we divested in the commodities businesses that don't cover their cost of capital, regardless of how well you execute them, and we invested in other areas, both organically and through acquisitions -- as you know, 100 acquisitions, $20 billion, etc. etc. etc.

"The other thing that was gonna drive all this in addition to the technology shifts was client behavior: They were gonna get more towards outcome and less toward 'I'll be the assembler of other people's parts.' More towards outcome, and 'I'm no longer an assembler.'

"Why? Economic pressure. When you're under budget pressure, you cannot afford to do other people's work for them, i.e., the industry. Awright? And buying at good prices in little pieces and then assembling them doesn't generate value for your enterprise. As soon as you're under budget pressure, behavior shifts. Guess what? We're here. We see that occurring today as more and more people want outcome, solutions, front-office transformational things versus just 'I'll assemble piece-parts better than somebody else,'" Palmisano explained.



And in so doing, he was setting up IBM to become the world's largest cash machine. "Now with all that going on we always had the mosaic that we were gonna have a financial guidepost -- a very straightforward financial guidepost. We were gonna get margin expansion, cash generation, and return it to the shareholder. We weren't into PR campaigns: We're the biggest, we're the smartest, we're the this, we're the that, we're into this trend, right? We're not running fashion; we're not running fashion. It was gonna be that simple: margin expansion, cash generation, and give it back to you. Very, very simple model."

Palmisano then ticked off some of the financial-performance highlights across his nine years as CEO that have put IBM in the position to redefine the value proposition it can offer to clients and prospects. Palmisano said that in those nine years, IBM has:

-- generated $84 billion in cash from operations;

-- gave about $86 billion back to shareholders in share repurchases and dividend repayments;

-- invested $20 billion in acquisitions;

-- pumped $60 billion into the business via capital investments; and

-- spent about $50 billion on R&D.

In that context, the $5 billion financing play for IT projects related to forthcoming government spending on stimulus projects maps perfectly to the new IBM, according to Palmisano's vision for the company, which is attempting to underscore the differences between it and other tech companies for two reasons: because Palmisano wants to do that, and because IBM can do it. And it can do it, he maintains in language that's as clear and unambiguous as you'll ever hear from the CEO of a publicly traded company, because IBM has made itself into a type of company unlike any other, one that's capable of delivering to customers and shareholders levels of value that, he maintains, competitors simply can't match.

"Now again, I'm just repeating comments other people have made, and I said it once before: 'You guys are defying gravity -- you're fighting physics -- how can you sit there and say, "At least $9-$10 per share this year, and how can you even give a projection in this environment?" Ya-ya-ya-ya-ya-ya-ya.'

"Now look: We got it all. Why? Since nobody is asking us why -- 'No one expects you to, so why would you do it?' Because you need to keep things in perspective: We are not like the other companies in the IT industry. We're not. We've completely transformed the IBM company. We're not."

It's a powerful argument because the numbers back him up, particularly in this rotten global economy. And now IBM is looking to get out ahead of these massive government spending plans and not only compete to grab a huge portion of those dollars but also grab a lead on those opportunities by using its financial muscle to get customers to sign up on the IBM team before this crazy game even begins!

That's about as audacious and brilliant a strategy as I've seen in this business in a long time. Of course, IBM's competitors are likely to choose some terms different from "audacious and brilliant" in meaning but probably equally strong in gut-level feeling. And, of course, revenue's not revenue until it's in the cash register, so the customers have to be convinced before Palmisano's latest gambit is fully vindicated. But here's why he thinks it will be:

"So the end of this, I guess, is we feel we have the financial flexibility, we are comfortable where we are, we don't think we're being overly exuberant -- we don't think we're overcaffeinated and all those kinds of things, y'know, we just have the basic fundamentals of an economic model that aren't great but are better than others in this environment that will allow us to stay on track through 2010. That's really all we're saying."

Well, that and $5 billion will get you a lot of attention. Especially if you're confident that, as Palmisano certainly is, you can do you can do you can do.

GlobalCIO Bob Evans is senior VP and director of InformationWeek's Global CIO unit.

To find out more about Bob Evans, please visit his page.

For more Global CIO perspectives, check out Global CIO,
or write to Bob at [email protected].

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