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IBM: On-demand computing has arrived

CEO Sam Palmisano says the "on-demand" effort to transform how businesses use technology has moved from abstraction to reality, but much energy is still being devoted to explaining the idea.

Stephen Shankland principal writer
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Stephen Shankland
4 min read
SAN FRANCISCO--IBM's "on-demand" effort to transform how businesses use technology has moved from abstraction to reality, Chief Executive Sam Palmisano told a group of customers Wednesday, but much of Big Blue's energy is still being devoted to explaining the idea.

"A year ago, it was an assertion. We've moved well beyond assertion into adoption and reality," Palmisano said of the on-demand effort during a keynote address at the IBM Business Leadership Forum here. IBM itself expects to cut $7 billion in expenses from 2003 to 2004 by employing the idea, Palmisano said.

Big Blue expects one outsourcing area of its on-demand work, in which IBM takes over components of a company's business, to be a $150 billion market in 2004 and to grow 12 percent to 14 percent each year for the next five years. Among IBM customers for this "business transformation outsourcing" area are UPS, Procter & Gamble, Hewitt Associates, FedEx and Lincoln Financial Group.

But Palmisano acknowledged that IBM has had some trouble explaining its on-demand concept, and he devoted much of his time onstage to defining it. "Our own message was a little bit compromised and confused," he said. IBM has heavily laced its corporate communications and advertising with the idea.

On Wednesday, Palmisano gave his vision of what a company that has embraced on-demand principles would be like. In that vision, formerly separate operations such as customer relations, component orders and accounting not only share the same computing infrastructure, but each division's operations are also tightly integrated with the others' operations. IBM, bolstered by in-house technology and expertise acquired when it bought PriceWaterhouse Coopers Consulting, will either sell equipment to achieve the goal or run such equipment for its customers.

"You must eliminate the gaps and seams and spaces in the interaction between your customers, partners and employees," Palmisano said.

On-demand computing dovetails with the utility computing idea, which has it that customers should be able to pay varying prices for computing power depending on how demand for that power waxes and wanes. IBM's on-demand effort competes with Hewlett-Packard's Adaptive Enterprise idea and Sun Microsystems' N1 plan.

Palmisano chafes when IBM's on-demand idea is lumped in with utility computing, though. "It's more than that. The computing element is only the enabler," he said. "The big idea is not the tool, it's the business model."

Some analysts applauded Palmisano's words but were also attuned to his attitude. "There was a little bit of defensiveness," Forrester analyst Ted Schadler said. "It's a much better articulation of what technology-enabled business process improvement is."

Illuminata analyst Jonathan Eunice said IBM's vision is sound and that the problem has been the speed at which the rest of the world catches up to the company. "I think it's to their credit that they're fighting the fight of 'What does it really mean?'" Eunice said.

The distinctions can be difficult even for IBM employees to grasp, though. "It's a bit of a struggle to get the message out to 185,000 engineers at IBM. They're much more comfortable with the concept of tools than concepts," Palmisano said.

Palmisano said another obstacle for the on-demand vision is cultural momentum in companies--particularly when it comes to the entrenched idea of breaking up companies into autonomous divisions, each with its own profit and loss. "We have to get people to behave beyond the profit and loss centers. There's not this level of sharing that's required," he said.

IBM's on-demand strategy
is bigger than IT

Big Blue's vision is much clearer today,
and 320,000 employees are energized to
win the business and data center deals
that ensure the company's future.

Palmisano stood by his earlier definition of an on-demand company, though: "an enterprise (with) business processes--integrated end-to-end across the company and with key partners, suppliers and customers--(that) can respond with speed to any customer demand, market opportunity or external threat."

UPS endorsed the idea. "We can be hungry and young and nimble," CEO Mike Eskew said in a videotaped statement.

In recent weeks, IBM has begun boasting of its on-demand customers. Among them:

• Men's clothing retailer Ahlers, which set up a self-service Web site through which its retailers can quickly get product information and track orders

• Holiday gift specialist Harry and David, which installed IBM mainframes, Unix servers and Intel servers to deal with an annual traffic surge before the gift-giving season. About 65 percent of annual sales take place between mid-November to late December

• Russian transportation company Mostransagentstvo, which built a new system that lets customers immediately make travel reservations

• Swets Blackwell, which set up a new online system to let customers see immediate responses to searches for information in library collections of periodicals.