IBM Looks Back on 2000s, Sets Sites on Next Decade
March 22, 2010 Alex Woodie
As an IBM System i user, you may think you have a good idea who and what IBM is. After all, for over three decades the titan of American high-tech has consistently delivered and supported perhaps the most dependable business computing platform ever developed. But as Big Blue’s recent annual report clearly shows, the Power Systems platform is a vestige of the old IBM business model, and the new IBM, as evidenced from its “Smarter Planet” initiative, is all about software and services.
IBM has undergone profound changes over the last 10 years. For example, in 2000, IBM made almost as much money selling hardware ($2.7 billion in pre-tax income) as it did selling software ($2.8 billion). By 2009, the profit mix had shifted dramatically, with software and services each bringing in $8.1 billion in pre-tax income (and accounting for 84 percent of overall profits). Meanwhile, hardware profits plummeted by almost 50 percent in 2009, to $1.4 billion, and accounted for just 7 percent of overall company profits.
But the swing is perhaps most vividly illustrated with the fact that the “new” IBM makes more money today by lending money ($1.7 billion in pre-tax income for IBM’s financing business) than it does selling hardware. In other words, being a bank is more profitable for IBM than building enterprise servers and storage devices.
Of course, this shift away from hardware should come as no surprise to regular readers of The Four Hundred. This newsletter has openly speculated over the years whether and when IBM would decide to sell off its server and storage businesses, as it did other businesses it stuck with the “commodity” label, such as PCs, disk drives, and printers, which were sold off to Lenovo, Hitachi, and Ricoh, respectively.
While nobody expects IBM to begin selling car loans any time soon, its dedication to growth and ever-higher levels of profitability require it to explore new forms of IT, including new ways of developing and delivering it.
Bottom Line Focus
IBM’s financial results demonstrate this “follow the growth” strategy has worked for IBM over the last decade. Top-line revenue (excepting those divested businesses mentioned above) rose from about $75 billion in 2000 to $104 billion in 2008 (revenue plummeted to $96 billion in 2009, which was a very bad year for many companies). IBM’s bottom-line profits increased at an even faster pace, growing from about $10 billion in 2000 to about $18 billion in 2009.
This growth allows IBM to tout some pretty impressive figures to shareholders. Earnings increased at a double-digit pace during the last decade, rising from about $4 per share in 2000 to more than $10 last year. The company returned almost $100 billion to shareholders through dividends and share repurchasing programs, while $65 billion was spent on more than 100 acquisitions, and $56 billion went into R&D.
Internal tweaks have also helped IBM’s numbers. The company axed its pension program, moving instead to defined benefit programs, such as 401(k)s. And while the company doesn’t detail big job-related moves, it’s estimated that IBM slashed more than 10,400 U.S. jobs last year, leaving a total of 105,000 IBM employees in the U.S. (IBM employs more than 400,000 worldwide). Last week, IBM began cutting American jobs again, this time laying off about 2,700 people. The jobs are sent to places like India and China, where costs are lower, according to Alliance@IBM.
So where does IBM go from here? Can it keep its technical edge while moving jobs off shore? Will it be able to repeat the increases in profitability and efficiency that made the stock a solid (if not a standout) performer on Wall Street for the last 10 years? Will IBM’s stock finally surpass the all-time high of $137 set in July 1999? It broke through $130 this January, but has retreated since then.
The short answer is IBM will do whatever it takes to keep growing. The next question is how.
IT Industry Changes, According to Sam
Sam Palmisano, IBM’s president, chairman, and CEO, provided some glimpses into the “how” in an opening letter in IBM’s 2009 annual report, which can be downloaded here. In his letter, Palmisano looked back over the last decade to identify three major changes that occurred in the IT industry and the world at large, and how IBM capitalized on them.
The first change was globalization. The rise of the “developing” world and the maturation of the World Wide Web dramatically lowered trade barriers and gave rise to new business models (not to mention huge cost savings in labor). The second change was the rise of “smart” devices, and the introduction of computer processors in phones, cameras, cars, clothes, power lines, roads, and even things like rivers.
The final driver of change in the last 10 years was a result of the first two, and is more abstract. “Enterprises and institutions were no longer content with cost savings from off-the-shelf technologies and solutions,” Palmisano writes. “They now sought to innovate–not just in their products and services, but also in their business processes, management systems, policies, and core business models. To accomplish that, they needed to integrate advanced technology far deeper into their operations.”
In other words, iterative improvements in existing business applications would no longer cut it, and customers instead would demand radical new ways of using technology to enhance business processes, and even to re-write the rules of business. The same types of standardization and automation improvements that revolutionized the manufacturing industry would soon apply to IT. Businesses that were content to keep their existing ERP system running smoothly would be potential road kill for the great IT innovators and business disruptors to come.
IBM foresaw these big industry shifts coming, Palmisano writes in the annual report, and adapted the company to be ready. The company moved to make its software “embedded and modularized.” It got rid of the PC, hard disk, and printer divisions. Big investments were made in service oriented architecture (SOA) software development, business intelligence and analytics, and the company built up lots of industry-specific expertise.
Palmisano says these investments made in the 2000s also position IBM well for the next decade, and will continue to differentiate IBM from other IT vendors set up to compete in “rapidly commoditizing business models.”
“As the new decade begins,” Palmisano writes, “some in our industry still seem to believe that history will repeat itself–for example, that clients will invest in IT simply because of product upgrade cycles. Once again, we have a different view.”
Today, the best opportunities for growth and “attractive profit margins” reside in its Smarter Planet and Industry Frameworks initiatives, business intelligence and analytics, and cloud computing, the CEO says.
IBM’s Smarter Planet initiative was launched in the summer of 2008 and refers to the capability for people, objects, processes, services, and organizations to become “digitally aware, networked, and intelligent.” This, IBM says, will drive higher productivity and responsiveness into industries, infrastructures, processes, cities, and “entire societies.” Currently 25 percent of the work that IBM Research does is on Smarter Planet initiatives, and that will soon double, according to IBM. “The opportunity to make our planet smarter is both real and inspiring,” Palmisano writes.
It could be inspiring all the way to the bank for Palmisano and company. IBM has come a long way from the world of “business machines,” and today is positioning itself to be the integrator of choice and consultant-in-chief for all kinds of IT projects. For now the company is focused on nine industries with the Smarter Planet initiative: healthcare; oil and gas; energy and utilities; transportation; telecommunications; retail; banking; government; and electronics. But who knows what the next decade might hold for IBM.