Palmisano changing IBM style from top to bottom

Sam Palmisano is leading big changes in IBM's business processes.

Two and a half years after Samuel J. Palmisano took the helm from Gerstner, the Palmisano era is coming into focus, defined by a big, overarching bet.

Palmisano, 53, believes that while the rest of the high-tech industry struggles with low-cost competition and commoditization, IBM can create and win high-margin opportunities in everything from Web site management software to corporate technology services to mainframe computers.

To get there, the affable but intense Palmisano, a career IBM employee, is expecting every part of the company to grow faster than its industry counterparts.

IBM estimates the overall market is growing 4 to 5 percent per year. To exceed that, enormous IBM, which already has $89 billion in annual revenue, must find ways to add several billion each year. That leaves little margin for error.

It also means services deals must be about more than IBM running some company's tech department. Instead IBM plans to help that company transform its entire business.

Instead of relying solely on industry-standard parts in computing systems, IBM produces its own high-end microprocessors. Much of the core of that work is located in the Hudson Valley, at the $2.5 billion 300-millimeter chip plant in East Fishkill and in research labs in Westchester County.

And instead of just cashing checks from traditional customers in government and big business, IBM is making unprecedented efforts to sell to small- and medium-sized companies as well.

Doing all of this will require IBM to marshal resources from every corner, which won't be easy.

''That's going to require this cultural change at IBM, because we have to quite honestly reintegrate IBM,'' Palmisano said. ''The client is asking us now, 'Solve a problem. Don't just sell me 10 pieces of technology that I integrate myself.' ''

But Palmisano believes the payoff could be huge. For a few years IBM has stressed its ''on demand'' strategy of helping companies align disparate technologies so things can be done in a snap.

Palmisano believes those things also ought to include processes that haven't been integrated with high-performance computing before -- like aspects of medical research -- potentially expanding the $1 trillion information-technology market by more than 50 percent in coming years.

Change could be legacy

''I think if it succeeds that it's going to be his legacy,'' said Charles King, an analyst with the Sageza Group. ''In an industry like IT, despite all the chatter about innovation, there's really not a huge number of innovative ideas out there.''

Unlike many tech executives, Palmisano maintains a quiet public persona, although he pays close attention to how the company is portrayed in the media.

A master salesman nicknamed ''the closer,'' Palmisano says avoiding the spotlight frees him to have more meetings with customers, which account for 60 percent of his time.

Rob Enderle, a former IBM business development manager who now is a technology analyst, sees Palmisano as reluctant to leave behind his past in sales even now that he's chairman and CEO.

''I don't really think he has actually stepped up to the entire job,'' Enderle said.

Among Palmisano's biggest directives is for IBM to dominate ''business process transformation'' services, in which consultants and tech geeks descend on a company and improve everything from data storage to human-resources administration.

Palmisano has made IBM's sales teams reorganize around industry expertise, such as banking or health care. Earlier he bought PricewaterhouseCoopers' consulting arm for $4 billion, and ordered IBM lab researchers to consult with customers too.

Merrill Lynch analyst Steve Milunovich calls IBM's approach ''bear-hugging customers,'' and credits Palmisano for the aggressiveness. ''IBM has the eye of the tiger back under Palmisano,'' he said.

Although Palmisano says his vision will require important changes within IBM, he believes he got a mandate for such reforms in a company-wide ''values jam'' IBM held for its 320,000 employees over its internal network last year. Palmisano says employees asked that IBM slash bureaucracy and let low-level managers make quicker decisions on everything from client relationships to worker pay.

To further that aim, IBM this month set aside $100 million for the company's 21,000 lowest-level managers to use at their discretion if fast action for a customer is warranted.

IBM executives say Palmisano has stressed ethical governance and teamwork. He got $7.9 million in overall compensation in 2003 but put about $3 million of it in a pool for 14 other top executives to share, to emphasize the group's effort.

Not all is positive

Still, IBM has warts. It hasn't resolved a Securities and Exchange Commission investigation surrounding revenue booked from Dollar General Corp. in 2000 and 2001. This summer the U.S. Treasury Department's inspector general said IBM lobbyists had illegally altered a Treasury document during a debate on pension policy.

IBM could be forced to shell out billions to older workers because of a lawsuit in which a federal judge has ruled that IBM committed age discrimination when it -- like other companies -- changed the rules for its pension plan in the '90s.

Retirees complain Palmisano has ignored their grievances over dramatic cuts in their medical coverage. Many retirees had been told before leaving Big Blue that health insurance would be essentially free for the rest of their lives.

IBM contends health-care costs are too high now; retirees say it's executive compensation that has gotten out of control.

Retiree Donald Parry criticizes IBM's refusal to exclude pension-fund profits when executive compensation is calculated, a step other big companies have taken.

Even so, Parry can't forget the promise he saw in Palmisano way back in 1973, when Palmisano joined IBM as a salesman right out of Johns Hopkins University.

Along with other new hires, Palmisano was sent to a 10-week training class in Washington. According to Parry, the original teacher had alienated the group, and Parry was brought in to straighten things out. He soon noticed Palmisano had mobilized the group to complete a project.

''You could see right then, this was a guy a cut above the others,'' Parry said. ''Smooth, smart, he could get people together.''

Since then, Palmisano has been IBM's golden boy, rising through the sales ranks into key leadership slots. He ran IBM Japan, headed the PC division and led the systems and the services units before becoming Gerstner's No. 2 in 2000. In 2002, he became the 93-year-old company's eighth CEO.

Palmisano is considered gregarious, informal and approachable.

''He relates to people very well,'' former IBM executive John Patrick said. ''What you see is what you get. It's not like, 'What did he mean by that?'''

But Palmisano can drop the hammer, too, he said.

''If you get in a meeting and review your monthly performance, that could be a difficult meeting if you're not performing,'' Patrick said.

Profile

A brief look at IBM's chairman and chief executive:

Name -- Samuel J. Palmisano.

Birthdate -- July 29, 1951.

Education -- Bachelor's degree in history from Johns Hopkins.

Career -- Joined IBM in 1973 as a salesman in Baltimore. Later became senior managing director of operations for IBM Japan; president of Integrated Systems Solutions Corp., which is part of IBM's services division; and was senior vice president for the personal systems group, the enterprise systems group and IBM global services. Became president and chief operating officer in 2000. Elevated to CEO on March 1, 2002, and added chairman title on Jan. 1, 2003.

Family -- Wife, Gaier. Four children.

Quote -- ''Everything we have been seeing over the past several years convinces us that we are on the cusp of a fundamental shift and a fundamental change. We believe this change is going to expand opportunity for the entire industry.''