Small in services? Didn’t IBM Global Services produced some $42.6 billion in sales last year?
Palmisano: The world thinks we’re big only because we’re two times the other guy [EDS].
We’re very small. We’re only nine percent share, 9.5 or 9.7. We’re not even relevant in this space. But because everybody else is like 5 [percent], you know. I think a reasonable share position is like 15 or something. You know, everything else we had in the 20s or 30s [in market share]. This is our smallest share business. It’s true. I mean, we’d like it be more like our other businesses.
But is it still a big piece of IBM but low in market share. That’s the way you look at it
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Palmisano: No, a huge piece of IBM, but relative to the market. Relative to the market of our servers which are in the 30s in share, storage is in the teens, which is one of our lower share businesses. Our middleware, now WebSphere vs. BEA, is 30.
But back to ease of doing business. Is IBM almost too big for it to be easy to business with?
Palmisano: No. And here’s my point. I’ve got to answer your question, but my point is that we dealt with the partners in the way IBM dealt with itself. So it wasn’t inconsistent. Then we said, no, no, the market’s re-integrating, the clients are re-integrating. So we have to deal with the partners differently. We need to re-integrate. We can’t give them 30 versions of our terms and conditions sliced and diced. And so what we need to do strategically is establish a relationship with the partner and IBM and make it a lot easier to do business.
So what kind of changes does that portend?
Palmisano: Software is now going to be solving client problems not going to market by WebSphere, database, Lotus, Rational, etc. but by industry set.
Services has been half industry and half, they call it line of business, but it’s product line–BCS, integration, outsourcing–it’s always industry. And the hardware also. I mean, Bill Zeitler’s team [IBM’s hardware group] is also looking at how you bring it all together. So strategically when we talk about re-integrating, because that’s what’s the market’s driving, we need to get to an environment strategically where the partner can be able to pick the capabilities from IBM, whatever they happen to be.
Hardware platform, middleware express layers, let’s say if it’s SMB, or middleware platform. You’re right, services if they’re going to resell our services or their own services, they’re going to build it around there, so that they take the capability of IBM not strictly the brand term and condition of IBM. Now, strategically, as you guys know, I think everybody would say that’s exactly the right thing to do.
So, are you getting there?
Palmisano: Transitioning, well, it’s a more complex transition because yes, we can’t just transition and leave them behind because of the income flow. I mean, it’s easier, quite honestly, guys, for me to transition IBM and get people focused this way than to transition [the entire partner ecosystem] because I’m dealing with my own economics.
So what about the transition for partners?
Palmisano: That ecosystem I need to help with. I mean, as we say this is where we want to go, I’ve got to make sure as we move them I don’t hurt the profit. I mean, I shouldn’t say I, but IBM. I think the partners would say, yes, it will simplify it. I got it, it makes sense. So strategically, conceptually the world says yes, I just want to take IBM capability and help me create value. But if I say this at PartnerWorld, there will be no debate.
But partners will worry about the bumps along the way.
Palmisano: I know, evolving it’s the tricky thing. And evolving it around the world, because our partners are global, they’re not regional. So it’s multi dimensions of the evolution. But I think if we could agree, all of us could agree that this is the path we want to go down and then keep working together, because the best way for us to work with the partners as you know is to have an open dialogue and communications.
And we have to be fluid, and in a way we have to trust each other. We have to trust each other. So therefore this is open dialogue and communications. At the same time IBM today has a very strong point of view. We do. We have a strong point of view around the importance of standards. We have a strong point of view around the importance of adding value around integrating. We have strong points of view. We want more people in our ecosystem committed to standards-based computing architectures. Now, I understand that that can run on our stuff, it can run on H-P, it can run on Sun. I got it. We’ll go make sure that we have the best cost points and the best technology.
But we’re committed to standards and we want our partners with us there, on open standards based architectures. We are going to be biased, right? People that are committed to a proprietary approach, we’re not going to have as much interested in helping as those committed to standards.
People that want to work with us to get to standards based computing models, we are very open and willing to invest in. People that feel that they’ve to stay on proprietary approaches, they’ve made a business decision.
But there are proprietary companies that probably want to invest in them, but we’re not that proprietary company. So I’m trying to be…we are insisting that guys buy in.
Now, you buy in to our standards based approach, we’ll more than [INAUDIBLE] a lot around marketing, collateral materials, a lot of the things we’ve done through the partners and all the programs. We’re willing to go leverage our marketing to help the partners.
But if you’re going to go take a proprietary approach not a standards based approach, then we don’t have the same level of interest, because that’s another ecosystem.
So you want these guys to commit more to the IBM way of thinking…
Palmisano: No, more to standards. Open standards. It’s not an IBM thing; it’s an industry thing. We want them committed more to open standards. And it’s not an IBM thing; this is the industry. We just think there’s a need for an ecosystem committed around standards. There’s clearly a huge ecosystem committed to proprietary approaches, as you know. Huge. And so all we’re saying is we want some counterbalance.
Earlier when you were were talking about re-integration at the customer level, it sounds like a mid- to high-market enterprise sell. What is the message to partners that are in the SMB space?
Palmisano: Well, what do they suggest we should do differently? [Get] more local relationships?
Perhaps it’s that and communication the IBM value in the SMB space, understanding the solutions and being easier to do business with.
Palmisano: Let me come back at it because one of the things we’ve tried to do, that’s why I was trying to get your feedback, but it’s good feedback, because one of the things we tried to do was this territory model, we started with 300, I think it’s 277… put them back in the field, they can do promotional pricing, they create their own ecosystem with partners.
I just reviewed the guys in the District of Columbia [they got capital] the other day, they’re growing 25 percent a year and they’re going to grow 25 percent this year. And they have a couple thousand customers in their territory, probably half are not IBM half are IBM, typical, as you’d expect.
And they work with, gosh, she showed me the chart [I’d be wrong] but it’s probably 60 or 70 local partners. It’s not just the big guys. And we did co-marketing together, doing demand creation together, they’re passing leads.
The territory managers have the capability to promotional price, so they’re working this thing. ibm.com is generating demand, they’re passing it. So some places it’s working, I just saw one that’s working really well. I’m sure, You could give me…I [hope] you’ll give me 10 others that aren’t working very well.
I mean, I got…the 300, I know that’s clearly going to be the case. But my only point is I think the model is right, and if you think about what the regional guys want, the regional guys want the ability to sort of work with us, be able to be quickly on pricing so if there’s a competitive situation, that’s why we gave them promotional pricing, to the territory managers.
And some way to jointly do demand creation. I mean, the [INAUDIBLE] we all want the same thing. We’ve got to create demand, so it’s a little of that local advertising, what have you, go to some business shows, get some leads,
You know, HP is making a big push in the consumer electronics space. Are you planning to jump in?
Palmisano: We are enterprise. We used to be in retail. We were in retail, we were in retail PC. Remember we had, we were an Internet service provider, a thing called IBM GN, the IBM Global Network.
We are enterprise. We [make] no bones of what we are, we know what we are. We are the leading company in the enterprise. There’s only one sector we’re not number one in, that’s industrial. And then mid sized enterprise, we’ll be two. We were three; we’ll be two.
Why enterprise? Faster growing than the other segments [including] consumer. Right? Better margins. On our model, it’s very straightforward: we want to be able to generate return on invested capital better than the average.
We’re better than the industry, so put that aside. Better than the S&P 500, because if we can generate higher returns than the average of the S&P 500, our multiple of our stock is at a premium for this year and last year for the first time since 1985. We’ve got to continue to do it. And that’s why we like enterprise, because it generates more shareholder value.
Strategically I don’t think you can do both. I know other companies think you can. They think you can learn in consumer electronics and music downloading and exploit. I mean, I listen to it…it’s so different. The business model is so different. I don’t know how you do that. I’m not saying it’s wrong; I just don’t know how you execute it. I do know how you execute enterprise, I do understand how to take share enterprise and win with clients. I understand how to generate better returns, significantly better than guys who are trying to do both. It’s not even close. But you know, better returns.
But other people have made other choices strategically. I think it’s hard to do. It’s hard to do.