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IBM's Palmisano sets sights on business customers

IBM president and chief operating officer Sam Palmisano sees Big Blue's new mainframe and server offerings and the company's Linux push as key to winning business customers.

7 min read
Sam Palmisano means business about e-business.

IBM's president and chief operating officer--and heir apparent to CEO Lou Gerstner--hopes to make 2001 the year of Big Blue. But he must tackle a few logistical problems first, sorting out supply issues that kept IBM from meeting demand for notebooks, servers and mainframes during the second half of 2000.

Palmisano assumed his responsibilities Sept. 1, making the fourth quarter the first he will have a broad effect on company operations.

He is also one of IBM's biggest Linux advocates, placing the alternative flavor of the Unix operating system near the center of a broad plan to catch the second wave of technological revolution. The Internet, being the first wave, is giving way to Linux, and both share similar characteristics, he said.

On Tuesday, Gerstner committed to spending $1 billion on Linux next year, as the company hopes to expand its lead over server rival Sun Microsystems and narrow the lead of storage giant EMC.

>The concern with Linux is that it's not ready for the enterprise environment, because it's not industrial-strength. Well, there's nobody  more industrial-strength in the world than IBM. Palmisano spoke with CNET News.com on Wednesday, as IBM prepared to ship on schedule its long-anticipated Freeway mainframe and an enhanced version of its Shark storage system.

CNET News.com: In October, IBM acknowledged some S/390 server sales slowdown in anticipation of z900, or Freeway. How significant is your shipping date?
Palmisano: What it really is from a technology perspective is incredible...This is a completely revamped architecture for the high end for our servers, as far as it's 64-bit completely enabled across the platform, the way it partitions itself and is self-managing. It's absolutely been designed for the e-business world.

Although people were always hoping we'd do it in the fourth quarter, our technical teams were on a first-half (2001) schedule. The fact they were able to pull this thing in and pull it in with some reasonable volume of shipments, it's very, very encouraging.

In addition to shipping Freeway, we're shipping all the new functions on our Shark box. Now we're going to have equivalent function with EMC, with a price point that is probably 50 to 60 percent of theirs. And by the way, we operate at similar gross margins even though our prices are a lot less.

What does shipping in December mean for sales?
I obviously cannot talk about sales, especially given it's this close to the end of the quarter. But I would say customers seem to think it's very reliable and have been very pleased with it, which is why we've been able to go more aggressively.

You don't know what happens when you get these early installs. It's one thing in the laboratory, and it's another thing when you put it full production in the field...We had to get past these little production tests in the field at these big banks, security firms and insurance companies. Now we've done that. We're very bullish we're going to have a successful product here. Our services capability is very strong here, and that business has been growing about 70 percent a quarter.

All eyes will be on you in January, when IBM reveals fourth-quarter results. IBM's recent problems have been more supply than demand, and many people will be looking to you to clean up operations.
Our problems, as I said in the third quarter, were...sales execution on software. But on the hardware brands, it was more supply, logistics and ramping up our technology business with ceramic capacity.

On the ceramic side, we have ramped it, and we are much more in balance than we were in the third quarter. That's IBM as well as the Ciscos and the Nortels and Juniper Networks of the world. On that one, we've been able to get balance. I think we will have to chase some demand in the network processors, the high-end stuff that's used in the routers. But to be honest, my phone's not ringing off the hook the way it was in September.

How have you tackled the logistics problem?
As far as our own supply chain...it's a daily process run by a senior vice president, (who) heads all technology and reports to me daily on the status. So our supply and demand is in balance for the quarter. As we go into next year, we'll make it less what I call command and control--with me going through it daily--to more of a tool-based, systemic approach. But that will take a little more time. Until then, we'll be running it the way we've been running it, which is over-managing it to keep things in line.

You are very bullish on Linux. How important is the Unix variant for IBM as you look ahead to 2001?
The original thinking has been more confirmed when you think about where we were coming from. We always felt when we saw the adoption rate of Linux and the number of students coming out of schools trained with skills, this reminded us of the Internet four or five years ago.

We could see there was going to be an environment much like the Internet, where from an application perspective these--what I call open standards, to keep it simple--were going to evolve so people could write applications in a very open way. Much like they were doing with the Internet that could move quite quickly into the corporate space.

How are you using Linux in products?
We decided to enable all of our hardware and server platforms, all of our middleware, around Linux. We have Freeway with Linux, and Shark...will roll out with Linux. From a hardware perspective all of our major e-business infrastructure offerings are Linux-enabled.

If you look at our software, all of our middleware software--DB 2, WebSphere, Tivoli, etc.--is Linux-enabled. We're very encouraged by the progress.

We felt if we could enable all of these e-business infrastructure products, this could really accelerate (Linux's) adoption rate.

How do you see Linux adoption progressing?
The ramp on these things tends be years, not months. But this thing has moved very, very quickly. We have banks in test getting ready to go into production. We won Lawson, which is a large retailer in Japan. We just won a big Linux supercomputer at Shell.

You see a lot of people at the financial institutions looking for ways to consolidate these thousands of edge-of-network servers that they have into a much more manageable environment.

It's early on. It has a long way to go. All of these initiatives take years to evolve, just like the Internet world took time to evolve. But we really think we've made tremendous progress, and next year could be a big breakthrough for IBM.

Some analyst firms, such as Gartner, don't share IBM's optimism about Linux. Why is it so important?
The concern with Linux is that it's not ready for the enterprise environment because it's not industrial-strength. Well, there's nobody more industrial-strength in the world than IBM. There's no platform more industrial-strength than Freeway or 390.

I am going to be presenting (a keynote) at LinuxWorld in January...If I stroll in there not with some Net-gen company but a German bank, Japanese bank or U.S. securities firm--these are very conservative places--it will give this whole movement a lot of momentum. And we're going to stroll into LinuxWorld with those references.

What is your competitive upside to Linux?
It has great appeal to customers. It's open. It's a great economic solution. And you've got skills.

What are the biggest problems the customers wrestle with? Well, skills. And they want an environment where they don't have all these incompatibilities that they have to manage through.

Obviously, price and cost is always a big issue...From a customer perspective, what it really means is that (Linux) gives them (the ability) to develop applications in such a way that they're easy to deploy, they're open, and they run across the entire infrastructure.

As you look to 2001, what is at the front of your mind regarding IBM?
The key thing from an IBM perspective in 2001 is really this whole e-business infrastructure. It is a reality in the marketplace. Most of our big enterprise customers are going to have to do this themselves or rely on big service providers. Either way, it's a huge opportunity. Our ability to capture that opportunity is really going to be defined in year 2001.

That's why we launched this ad campaign and put a half a billion dollars behind it...You sort of have to educate the market about how important it is to have this infrastructure. E-business is no longer about a front-end Web server where you get your market information...It's really about the efficiency across your enterprise.

Our services capability is very strong here, and that business has been growing about 70 percent a quarter. The other reasons why are that our infrastructure products--servers, storage, etc.--are designed to run in this kind of environment, a heterogeneous, open world vs. the proprietary niche focus.

We believe as this world moves toward a much more serious play, real business on the Internet vs. content being displayed or browsing, there is a terrific opportunity. I think that will really define IBM in 2001.