Palmisano: Tough Times Makes IBM-Channel Relationship Even More Critical

IBM's indirect channels account for more than half of the company's revenue in the storage, server and SMB market space, and for more than one-third of its software business, Palmisano said. "The theme has been, let's go get business [together," he said.

About one-third of IBM's overall revenue--about $28 billion or $29 billion--was generated by solution providers, said Palmisano. That figure exceeds the total revenue of key rivals Sun Microsystems and EMC, he said. "Put these two [rivals together, and we beat them as a team," he said.

A big part of this success has been an IBM strategy to emphasize integration and solutions and not "voodoo economics," he said, referring to strategies followed by many other vendors during the dot-com era. IBM and its channel partners have been successful at specific strategies like CRM, he said, even though they can be tough to integrate into more complex solutions. At the same time, he said, the difficulty of these solutions can create opportunities. "The good news is, there's a lot more margins in this because it's so hard to do," he said.

IBM's $37 billion services revenue makes it only a minor player in that market, with an 8 percent to 9 percent market share, he said, and that was accomplished with a team of about 150,000 people. However, if IBM expects to reach its goal of 20 percent market share by itself, it would need 250,000 people, and that is just not possible, he said. "My point of that is, there is a large opportunity for us to work together," he said. "We've made a start."

Palmisano said IBM's strategy has been a consistent one, despite changes in the economy. However, he said, the same cannot be said for Big Blue's competition.

The most obvious strategic shift is the pending merger between Hewlett-Packard and Compaq Computer, he said. The two are making a strategic attempt to become much bigger services players while removing themselves from the Unix market to focus on Wintel. Describing the merger that way, he said, summarizes "about two tons of paper."

Microsoft's move to .Net is another big strategic shift for the IT space, said Palmisano. In the past, Microsoft said it did not need middleware if it has the operating system, but the company is now changing its strategy with .Net.

Sun, which two years ago dismissed Linux, is now committing resources to the operating system, Palmisano said. He noted that Sun Chairman and CEO Scott McNealy two weeks ago came out on stage dressed in a penguin suit to talk about Linux and open standards. "That's a real strategic shift," he said.

Dell Computer today is not just a PC distributor trying to move into storage, but instead is looking at a whole new model, said Palmisano. Dell is focusing on PCs, storage, software and even routers, and is trying to wrap services around these businesses.

IBM, on the other hand, during the same time, saw no need to change strategies, Palmisano said. "Others are coming after us, chasing our model," he said.

IBM continues to gain market share over its top competitors in nearly every key area of the IT industry, including Oracle in the database market, BEA Systems in transaction software, EDS in services, Sun in Unix servers and EMC in storage, he said. The only area in which IBM did not come out on top was PCs and Intel servers, which did not seem to bother Palmisano. "Dell is clearly the winner [in this space," he said.

Going forward, IBM will continue to place more emphasis on integration and its services business, and on bringing that business to its solution providers, said Palmisano. "Integration requires more services skill," Palmisano said. "The good news is that there is a lot of margin. I know you are all struggling in a tough market for profitability."

Palmisano closed his keynote saying that he realized there were people in the audience not completely dedicated to the IBM platform, and are instead selling several vendors' products. "I want to give you an alternative [to a multivendor strategy" he said. "[Not all vendors are going to do the transformation [of their strategies well. We want to help you reduce risk and present an alternative."

Palmisano concluded that 2002 will be a tough economic year. Regardless, "we want you to go out in the marketplace, take share, and beat up the other guys," he said.

KELLEY DAMORE contributed to this story.