CEO Sam Palmisano outlines the company's vision of businesses buying computing power the way they buy electricity today. Big Blue is staking $10 billion on that vision coming to pass.
Sam Palmisano, IBM's CEO and newly elected chairman, outlined the company's vision at a meeting here Wednesday before several hundred key customers, analysts and journalists. He described a future in which huge computer networks are made up of powerful, self-repairing machines.
Ultimately, IBM foresees that the combination of these networks and other advances such as grid computing will allow businesses to buy computing power on demand, similar to the way electricity is purchased.
IBM plans to establish a new On-Demand group and commit $10 billion to bringing about this new era through research and development, company initiatives and acquisitions, Palmisano said.
IBM's first such initiatives will be the opening of four On-Demand Design Centers, in the United States, Japan and elsewhere, to help customers test the new concepts and products. IBM is also adding to its consulting services a practice for assessing customers' present capabilities and future needs. The company plans to launch a new advertising campaign to introduce the on-demand concept to a wider audience.
"It's a $10 billion bet...to put all of these things together to make on-demand e-business a reality," Palmisano said. "A bold bet, yes. A risky bet? I don't think so."
In IBM's vision, on-demand networks will rapidly adjust to spikes in usage or to disasters such as fires or floods to keep businesses up and running. They will use standards to maintain interoperability between different varieties of hardware and software, and they will offer customers more flexibility in payment and in choosing services rendered. Companies in such an environment, Palmisano said, could contract with an outside partner and, say, pay by the month for a financial accounting system rather than maintaining it in-house.
IBM says that by adopting the on-demand concept, customers could save money and gain competitive advantage by gaining access to more responsive computing capabilities. But IBM will have to convince them to adopt its particular technology versus similar constructs from the likes of Hewlett-Packard or Sun Microsystems.
A cultural transformation
Palmisano appealed to his company's customers in the audience to adopt on-demand computing.
"You have the key role to bring your business to on-demand. You know the technology required, you know the points that need linkage to make the supply chain down to finances work," he said. "It requires a cultural transformation, so you have to go get your CEO engaged."
Many of the initiatives have been in the works for some time at IBM. The company has built computing grids, which pool the collective data processing and storage capabilities of large networks, for the U.S. Department of Energy and for Oxford University to link cancer researchers in the United Kingdom.
"We've been at this for a couple of years, obviously, but we're ready to go the next steps," said Palmisano.
For about a year, IBM has also been pushing its autonomic computing initiative, which aims to build machines that can diagnose and repair problems. But it has recently stepped up efforts in those areas by establishing a new autonomic computing group to coordinate the research within the company.
IBM will name an executive to head the On-Demand group next week, Palmisano said.
Meanwhile, the company put Irving Wladawsky-Berger, currently vice president of technology and strategy for IBM's server group, in charge of some on-demand initiatives--areas such as grid computing and autonomic computing--that IBM sees as emerging business opportunities.
"Irving Wladawsky-Berger, you may remember, drove our Internet initiatives, drove the networking strategy for IBM," said Palmisano, adding that the executive is the right person given his background and credibility--and a knack for having predicted the future a few times. "He is sort of like Babe Ruth--Irwin points to the fence and, most times, hits it over."
Big Blue has been in need of a good pep talk. A sales decline in the first half of the year caused the company to temper its earning expectations for the year.
Palmisano, who took office March 1, has since been behind a number of maneuvers to control costs while pushing ahead on research.
IBM has realigned its businesses, including the Technology Group, while selling off its hard drive business and several other smaller operations. Cost-cutting measures have also included the elimination of 15,000 jobs, about 5 percent of its work force.
The efforts have helped: IBM recently posted flat net income and better-than-expected profit for the third quarter.
During an address May 15, Palmisano told analysts that IBM needs to cut costs and become more efficient. Now that he's realigned some of the businesses, the meeting in New York served as a way for IBM to put forth its view of the good times ahead once the industry turns around.
A return on the investment?
IBM's strategy for on-demand computing might dovetail well with the current economic climate in which chief information officers and other corporate buyers of information technology are wary of earmarking any more funds to IT spending.
"I think the IT industry has problems that are unique to itself beyond the pure issues associated with the economy," said Palmisano, who added that he has traveled around the world in the past year talking to customers and world leaders about how their businesses and economies are ailing. "Clearly we are suffering from hypergrowth, overinvestments and expansion (done) during the dot-com bubble."
Although business and political leaders around the world all raised questions about when they will see a return on their investments in technology, Palmisano said he senses there is still a firm belief that technology will help companies through the downturn.
"The encouraging thing to me is that customers still see IT as the fundamental driver of productivity and cost savings" despite lingering doubts from the New Economy bust, said Palmisano.
Technology buyers who like the sound of IBM's initiative--which essentially molds the company's past e-business efforts with autonomic computing in a new business unit--will find that Big Blue isn't the only company working to deliver utilitylike computing power, analysts said.
HP, Sun and others are working on similar initiatives and delivering similar services.
HP, for example, offers a range of management services that deliver computing on demand to customers. GATX Capital, a leasing firm, outsources its data center to HP, buying computer power by the month. For customers that don't want to outsource completely, there's also a service that lets companies pay as they go on computer systems that HP provides, representatives said.
"Where we see things going is to take all of the things in the data center and virtualize it...and apply that infrastructure to any application at any time...so you can move it to financial systems, Web retail or whatever at any time. Then you can give cost savings to a customer," said Nick van der Zweep, HP's director for infrastructure solutions.
HP's Utility Data Center, a bundle of software and services, offers these capabilities across a variety of hardware and software, he said.
Meanwhile, Sun is pursuing a strategy it calls N1, which will allow companies to get more out of its computers by automating tasks.
But IBM is offering a soup-to-nuts pitch that customers may find attractive, analysts said.
"IBM is saying it's in the best position because it can do the whole thing, from business process integration...down to autonomic computing," said Tom Bittman, an analyst with Gartner. "It's a good message. It's the right strategy for IBM. But it does have a couple of things blocking its way. One of them is Microsoft, and Intel is, frankly, an issue as well."
Many of the autonomic computers that IBM builds will be based on Intel's chips. IBM will have to rally the chipmaker to its cause and try to reach an agreement that sees both companies adopting similar autonomic-computing standards.
"If the world is not heterogeneous, IBM loses," Bittman said.