Palmisano To Partners: Drive Midmarket Business

A gracious Palmisano thanked partners for their contribution to IBM's success in 2006, when the company posted record profits, earnings per share and what he said were the largest margins in a decade. But he had one caveat to those results: U.S.-based sales were not up to par compared with a flourishing international business in 2006, though he noted that in the storage market IBM leapfrogged Hewlett-Packard to take the No. 2 spot behind EMC.

At the end of the day, however, it's about profit, Palmisano said.

"Everyone loves to obsess on revenue, but profits and cash flow at end of day are what sustains," he said, adding that IBM's profit pie is better-balanced across its segments today, with 40 percent coming from software, 37 percent from services, and 23 percent from systems and financing.

One of the primary areas where IBM is looking to grow its business is the midmarket. In an interview with VARBusiness before he took the stage, Palmisano pegged the global midmarket to be valued at close to $500 billion and growing at 6.5 percent annually. In the next three years, IBM's midmarket sales are poised to surpass its financial services business, which has been Big Blue's leading revenue generator for the past 50 years, he said.

Today, about half of IBM's midmarket sales go through partners, and the company is investing "heavily" to increase that percentage through its current channel and by recruiting new partners, according to Palmisano.

What all of that means is taking on HP, which has proved to be a formidable challenge, he said.

"It's a strong task because HP is the incumbent here," Palmisano told VARBusiness. "But you can't assume it will just remain that way."

Palmisano's contention is that the midmarket customer -- which IBM defines as companies with 100 to 999 employees -- has the same IT solutions needs as companies in the enterprise, where he said IBM is the "undisputed leader."

"They want what the large guys want. If we can give them that and use partners as the conduit, then we will get there [with respect to HP]," he said.

Innovation is a key growth driver, and Palmisano was emphatic that IBM continues to take a lead in a number of technology areas that represent business opportunity for partners. He cited blade servers, which analysts project to grow to a $10 billion market by 2010.

Partners strictly selling blade servers are just the tip of the iceberg, according to Palmisano, who pointed to the opportunity driven by partners developing add-on products and solutions around blades and the venture capitalists investing in them. SOA is another major growth area for partners, driven in large part by customer demand for more flexibility, quicker time to return and shorter cycles of innovation, he said.

Palmisano also named Web 2.0 as an emerging space where partners should get their toes wet. In June, IBM is rolling out Lotus Connections, a Web 2.0-like software suite aimed at businesses. It will enable social networking technology that today's users find in consumer phenomena such as the YouTube, MySpace and FaceBook sites on the Web.

"This collaborative need we have as consumers is the same need that corporations have to work together," Palmisano said. "It's the same fundamental concept."

One partner at the event who does consulting for IBM's collaboration portfolio applauded Palmisano's vision, in particular his quest to grab more of the midmarket.

"IBM can make significant inroads in the midmarket, even against HP, from what I've seen," said Mike Nevin, managing director at U.K.-based Alliance Best Practice. "They are doing some great collaboration-related work through partners right now."

Interestingly, as Palmisano stood today before a screen projecting pie charts breaking down IBM's many businesses, he took pains to reassure partners that IBM is not morphing itself into a General Electric-like holding company or private equity firm. The company is committed to driving innovation, integration and collaboration around IT solutions and making partners central to that, he noted.

However, IBM's acquisition strategy will not abate, he said. The company will continue on the path of divesting commodity businesses, as it did with components, and to look to acquire firms that add strategic value.

"We bought 50 or 60 companies in recent years, and we very well may buy that many more," Palmisano said.

All in all, partners were pleased with Palmisano's message, hopeful that the midmarket investment will continue. During his interview with VARBusiness, the IBM chief said the investments are significant and cover everything from territory sales models to the Express product offerings to linkages to key ISV applications and services.

"We are going to need partners to do it all in this space," he said. "This goes way beyond the role of a distributor or fulfiller of product."