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Who Is IBM’s IM-ing CEO?

May 23, 2008

By Andy Patrizio, ITBusinessEdge

The event took place in November 2006, when Palmisano appeared, complete with buttoned-down suit, in a model of China’s Forbidden City to announce a $100 million investment in 10 different projects, one of which would be 3D worlds like Second Life’s virtual world.

Palmisano boasted “I have an avatar” to BusinessWeek twice. Actually, he had two, one suited up for work, the other a more casual self that could roam Second Life in peace. His employees thought it was great. Other CEOs thought he was crazy.

“He said afterwards, when he would meet other CEOs, they kept asking ‘why did you do that?’ That’s not the kind of thing they do. But that was a way for Sam to signal how much he supported this kind of disruptive innovation,” said Irving Wladawsky-Berger, Chairman Emeritus of the IBM Academy of Technology and a visiting professor of Engineering Systems at MIT.

Did he do it to buy some street cred for IBM? Those who know Palmisano say he did it because of how he understands technology and its implications. “Prior to [Lou Gerstner, former CEO of IBM], people were studying things instead of executing things,” said John Patrick, a retired vice president and 38-year veteran of IBM. “Lou turned the ship but Sam put it into high gear.”

Wladawsky-Berger said that’s what separates Palmisano from other high-level executives. “In IBM, people will tell you they get instant messages from Sam all the time, asking how things are going. Sam is extremely hands-on,” he said. (Palmisano declined comment for this article.)

Straight to IBM

Sam Palmisano joined IBM in 1973, fresh out of Johns Hopkins University, where he’d been a stand-out football player in addition to earning a BA in History. He had a chance to go pro but decided for something a little less rough and tumble.

Palmisano would spend the next 20 years working in various IBM divisions, including services. Over the years, he played a key role in growing services into a sizable portion of IBM’s revenues. Today, global services generates over half of IBM’s revenues.

Another one of Palmisano’s projects that helped pave his road to the executive suite was the launch of the AS/400 operating system in 1988.

On his own initiative, Palmisano took the AS/400’s specifications to software firms and persuaded them to write programs for it before the computer was ready to market, something unheard of in the days of big iron.

When the AS/400 launched, it had more than 1,000 applications ready to go. This made Palmisano a rising star at IBM.

Palmisano’s appointment as CEO in 2002 and then as chairman of the $90 billion computing giant in 2003 ushered in a new management style compared to the firm’s predecessor, Louis Gerstner.

Back when IBM hired Gerstner in 1993, the company was in dire straights, its very survival in doubt. There were years of antitrust tussles with the U.S. government and its ill-fated decision to license an operating system from an upstart company called Microsoft, which later led to the sale of PC Clones and IBM’s waning influence in the personal computer revolution it helped launch.

Early on, Gerstner recognized Palmisano as someone who shared his vision on the potential of services. Palmisano was made head of IBM’s Integrated Systems Solutions Corporation, which had been something of a laggard to hardware. When Palmisano took it over in 1993, it grossed about $15 billion. By 1996, it made $23 billion. In its most recent fiscal year, Global Services brought in $54.1 billion, more than half of IBM’s annual take.

When Gerstner retired in 2002, though, it was time for a technologist to take over. “Gerstner brought professional management and did what he had to do to deal with reorganizing the company,” said David Moskowitz, president of Productivity Solutions and a long-time consultant for IBM customers. “What he did was deal with things at the helm of the ship that needed to be done because someone from IBM wasn’t going to do because of the culture.”

So after the outsider fixed up the mess, it was time for a technologist to move the company forward. That person would likely be an IBM veteran. Perhaps no company is better at moving its executives with upward potential around than IBM.

Someone with a future in the company is moved across a variety of departments and businesses to get the full length and breadth of what the company does, and Palmisano certainly got the world tour. Patrick met him in the late 1980s, when he was an executive assistant to chairman John Akers, a job he earned thanks to the AS/400 launch success.

“He left a lasting impression because he was so sharp. You couldn’t put one by him. He had a tremendous grasp of the numbers,” said Patrick.

Wladawsky-Berger said he wasn’t surprised at the choice of Palmisano as Gerstner’s heir in 2002. “It was expected since he had been named president years before. I think it was pretty clear to all of us in IBM for quite a while that Sam would be Lou’s successor because Sam had accomplished so much,” he said.

Gerstner, now chairman of The Carlyle Group, declined to comment for this story. In his book “Who Says Elephants Can’t Dance?” Gerstner said of his successor, “He has an emotional, 24-hour-a-day attachment to winning and to achieving ever-increasing levels of success.”

Bold changes

One of those earlier accomplishments came in 1999, when IBM decided to embrace Linux, Apache and open source, a move that left more than a few IT companies scratching their heads.

“Embracing Linux to the degree we did was a very gutsy thing to do,” said Wladawsky-Berger. “It took people by surprise, not the fact that we did it but how aggressively we did it.” But it was not an impulse decision. IBM had seen the growing interest from customers, which lead to the decision. It was Palmisano who pulled the trigger.

“I can remember talking to him about [Linux],” said Patrick. “In the case of Linux, I recall him saying we’re gong to have a little study group take a quick look at this to validate that it’s the right thing, but it’s not going to be an 18 month task force, which would have been typical of IBM in the past decade.”

Palmisano made more bold moves once he took control of the company, cutting loose all of its commodity businesses. In recent years, IBM has jettisoned its memory, printer, hard drive and eventually its entire PC business while increasing its services business.

IBM minus its PC business might seem unthinkable. After all, PCs are still often referred to as “IBM PCs” in a generic term. Gerstner probably couldn’t do it, Moskowitz theorized. “Gerstner set the stage to allow more change that Palmisano carried out with greater success. Others might disagree with that point of view, but it’s easier to deal with change if you’re not the first one,” he said.

Patrick was the vice president of marketing that brought out the ThinkPad notebook in 1992, so he viewed the sale with some regret. “But Sam forced the company to take a really comprehensive look at it and make ask is this strategic to what the company is trying to do, and the answer was no. He had the credibility because he had run that business, so he knew the details,” he said.

Not every big move has been about divestiture. Palmisano also presided over some big acquisitions: PriceWaterhouseCoopers in 2002 for $3.9 billion and Rational for $2.1 billion in 2003.

IBM’s focus under Palmisano has been services, something Moskowitz said was coming back in the late 1990s. “He had to recognize IBM’s strength in the non-commodity market and services. Tom Watson’s creedo was ‘thou shalt know the customer’s business better than the customer.’ I think what Palmisano does is bring IBM back to that creedo.”

Wladawsky-Berger also sees Palmisano leading the company into becoming a global integrated enterprise. “You can see it now with the evolution of doing business in a “flat” world model, where you treat the world as if it’s one entity,” he said. “Pieces done in one country are done for the world, and make the decision where to do jobs based on where do you get the best skills.”

That much was evident in 2003 when Palmisano disbanded the Executive Management Committee, the hallowed group that ran the company for its entire history and was responsible for making him boss in the first place. In its place, he put three teams set up to work in a decentralized manner to speed up decision-making. With its monthly meetings, the old EMC was just too slow for his liking.

“He’s taken ‘global services’ to a new level,” said Patrick. “IBM was always global but it was more geographics fiefdoms. Sam has made it into a company that executes globally. A customer in Germany might use a service in India, or vice versa. This allows a company to seize an opportunity anywhere in the world based on the best match.”

How long he stays is known only to him. IBM no longer has mandatory retirement for its executives. Patrick didn’t want to speculate on potential successors, although he’s sure there are young hotshots all over the company being groomed for the job.

“Jack Welch was always asked who would replace him when he retired from GE and he never would say, but it was always speculated it would be someone from a big business unit,” said Patrick. “And if you remember, when [current Chairman Jeffrey] Imelt was picked, all the other [potential successors] left.”

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