Taking The Lead For IBM

Just an hour earlier, the man who will become IBM's eighth CEO on March 1 had finished addressing 5,000 IBM employees and business partners attending the company's PartnerWorld 2002 show in San Francisco.

Now, in a private conference room off a secluded hallway in the Moscone Center, Palmisano sheds his blue blazer and prepares to discuss with CRN editors his channel game plan for a new IBM that he helped grow from a hardware goliath to the global leader in IT services.

"Everybody wants to dwell on the fact that [IBM Global Services is $37 billion and when I got there 10 years ago it was $350 million," he said. "Those are wonderful headlines. But the fact is, we're really small, and there is so much opportunity that we can't get to."

Palmisano pegs today's IT services market at $450 billion and calls IBM Global Services (IGS) a "niche player" with roughly a 10 percent market share. IGS now has about 155,000 employees, but to get to 20 percent market share it would need to hire almost 100,000 additional employees, he said.

Instead, Palmisano has the channel in his crosshairs. In his PartnerWorld keynote, he said that about one-third of IBM's 2001 revenue,or nearly $29 billion, more than the combined 2001 sales of key rivals Sun Microsystems and EMC,was generated by solution providers.

"Customers are going to want more solutions and more integration services. The key to us being successful in that market is a partnering strategy," he said.

At the same time, however, Palmisano wants solution providers to have faith in IBM. To build what he calls "horizontal digital integration" across the enterprise, IBM and its partners must trust one another and share opportunities, he said. To that end, Ralph Martino, vice president of strategy and marketing at IGS, said at PartnerWorld last week that IBM would let partners take the lead on consulting and systems integration services in enterprises with $100 million or less in annual revenue.

With that line drawn, IBM will pass leads to partners in the less-than-$100 million market and, in turn, expect partners to feed IBM leads for larger enterprises.

"The proof is in the pudding," Palmisano said. "If we actually see demand passed back and forth, then people are trusting each other. I don't know if we're there yet, on either side. We don't see a lot [of leads coming our way, either," he laughed.

Channel executives who met privately with Palmisano in San Francisco said he made it clear that if solution providers want more from IBM, they will have to grow their IBM business. Rick Hamada, president of Phoenix-based Avnet Computer Marketing, one of IBM's largest business partners, said Palmisano is "going to task partners more."

"He wants more growth in the SMB market, and he wants to get through any issues with the channel on services," Hamada said. "But I'm very enthusiastic [about Palmisano taking over as CEO."

Solution providers say IBM has already made progress in forging tighter partnerships between IGS and the channel.

Dave Lavanty, managing director at Miami-based solution provider Answerthink, said his company boosted its business with IBM by 300 percent last year in part because it developed tight relationships with local IGS reps. "We do a lot of planning at the local level so we're not stepping all over each other in the account," he said.

Still, constant communication with IGS is necessary to maintain the relationship, Lavanty noted. "It's like herding cats," he said.

Palmisano said he knows that partnering isn't easy, but IBM and its solution providers must recognize that the changing nature of the IT landscape demands that they get the job done.

"The relationship is about sharing, not 'We give, you take,' " he said. "I know it's been a sore point for years, but we don't in any way intend to disintermediate the channel. It's a huge opportunity, and IBM can't get at all of it [alone."

By the middle of next month, IGS plans to identify its IT services capabilities in each of its 16 regions worldwide. "ISVs have been looking for help from us to declare where we are going to have service delivery capabilities and where we are not," Martino said. And by spelling out IGS' capabilities, business partners will get a better grasp of where they can step in and fill gaps with their solutions, he added.

The clearer rules and improved communication are beginning to resolve conflicts with IGS, some solution providers said.

"A year ago, I would rate my relationship with IGS as a 6 [on a scale of 10. Today, I'd give them an 8," said Mike Henry, CEO of Jack Henry and Associates, a Monett, Mo.-based systems integrator. "They are sitting down and listening to us and not competing against us. Clients will pick up in a hurry if you're working together or if you are competing."

But in his quest for closer channel relationships, Palmisano knows he is asking solution providers to forgo some of their multivendor product tendencies in favor of IBM's offerings.

"What I would love to see over time is that the channel will help us gain share. I respect the fact that they are going to always be able to offer multiple platforms," he said. "But I'd like to be pragmatic and say that there are some IBM partners that are really with us and are going to go for [market share with us, and we should really have a relationship that helps us accomplish that goal. In an industry that's solution-based, it's going to be a white-knuckle battle for share, and we need to have some key partners that work with us and drive that."

And solution providers that partner with IBM can expect greater rewards from the vendor, Palmisano and other IBM executives said.

For instance, at PartnerWorld, the IBM Software Group revealed that it would extend its Top Contributor Initiative rebate program to consultants and integrators that have influenced IBM software sales in the midmarket space, said Anne Smith, vice president of consultants and integrators for IBM global business partners. IBM and its integrators jointly set partner sales objectives for IBM software, and solution providers that reach 100 percent of their sales goal will receive a 4 percent rebate. Partners that top 100 percent up to 150 percent of their goal get an 8 percent rebate, and those topping 150 percent of their goal receive a 12 percent rebate.

IBM also is encouraging partners that build tighter relationships with it to expand their certifications and skills. Harvey Najim, president and CEO of San Antonio-based Sirius Computer Solutions, one of IBM's largest North American business partners, said his company is taking the leap into Linux, which IBM declared a major initiative last year.

"IBM has raised the noise level so loud that if you are not involved [with Linux, you are missing the boat," Najim said. "If IBM says Linux is important, it is. When they talk, we listen. When they have a cold, we almost die."

Palmisano said the stability of IBM's strategy and the breadth of its offerings minimize the risks for solution providers that align their businesses closely with the vendor. "We have no need for a major strategy shift, unlike our competitors," he said.

Such stability is largely responsible for the more than 210 new business partners that have entered the IBM fold from competing vendors over the past year, Palmisano said. Though realizing that the widening scope of IBM's business could make partnering even more complex, he said that he remains committed to creating strong, long-term relationships with solution providers.

"It's starts with accepting the fact that the channel is fundamental to IBM's long-term success. And this relationship will have to evolve because this industry will have to evolve," Palmisano said.

"The model that existed, a hardware fulfillment model, has evolved to a solution provider model that is pulling through the infrastructure," he said. "As the industry evolves, we will have to evolve together. But IBM is not going to evolve in such a way that we leave the channel behind."

JOSEPH F. KOVAR and KELLEY DAMORE contributed to this story.