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Global CIO: Sam Palmisano's Grand Strategy For IBM Revealed In $5B Global Financing Plan

The company is offering billions to help customers "mind the gap" until so-called stimulus money begins to flow around the globe. And it expects much of that funding will be used to purchase its very own products and services.

IBM's plan to offer $5 billion to fund IT projects until government so-called stimulus money begins to flow around the world highlights CEO Sam Palmisano's transformation of the company away from commodity hardware and into high-margin financing, software, and services. Because the focus of those government-funding packages, as Palmisano said recently, is "not just on creating jobs to fill potholes and fix bridges."

At a time when many traditional lenders are unable to lend $5 million, much less $5 billion, because they're still recovering from the financial-industry meltdown, IBM has no such problem -- its cash position has never been so strong. So last week IBM said it would offer $5 billion in financing to help customers "mind the gap" until the so-called stimulus money begins to flow in China, the United States, and other countries around the globe. And having earmarked $2 billion for Europe, $2 billion for the United States and Canada, and $1 billion for the Asia-Pacific region, IBM understandably expects much of that funding will be used to purchase its very own products and services.

"IBM Global Financing stimulus financing will mainly target enterprises and municipalities looking to implement technology projects consisting of a majority portion of IBM hardware, software and technology services components," said an IBM press release. "Financing also can be applied to non-IBM technology as part of a larger IBM solution."

So it was interesting to look at comments Palmisano made two weeks ago to investment professionals, specifically with regard to how IBM would attempt to seize the golden opportunity being offered by governments around the world trying to spend their ways out of the global economic downturn. He made no attempt to hide the fact that IBM is ideally positioned to capitalize on key areas on which many governments are looking to spend, and in fact jabbed at analysts for seeming to be surprised that IBM was well-prepared for this situation.

Speaking of some of the initiatives IBM is offering under its Smarter Planet theme, Palmisano told the analysts, "It's nice that the stars line up -- that the things we do in Smarter Planet tend to tie out with the stimulus packages of the world, especially in China and the U.S., that have the biggest stimulus packages. ... Y'know, some people commented to me as I was walking in, 'Well, since you personally worked on the stimulus packages, it shouldn't be a surprise that China and the U.S. line up with Smarter Planet.'

"But hey, it is what it is. We can do intelligent grids, we can do smart health care IT, we can do road systems and traffic-congestion charting, we can do we can do we can do. We can do the Smart Shanghai for the Shanghai Expo in 2010 -- we can do we can do we can do -- right? -- and that's where a lot of the stimulus is geared, not just on creating jobs to fill potholes and fix bridges. So we've been able to align in that regard and we continue to invest in a lot of those areas to capture those opportunities."

Doesn't sound much like a computer company, does it? Or a software company? Or just a financing company? In fact, it sounds a lot like a business- and technology- and financial-services company with deep industry expertise.

And those are not accidents -- they're all the results of very conscious efforts Palmisano has undertaken in the past several years to drive the company's sweeping transformation, which I touched on recently as Palmisano flat-out told the analysts, "We got it all." And they've come about as Palmisano has methodically prepared IBM to be ready to pounce on these massive government-funded programs by divesting itself of hardware businesses and products that have lapsed into commodities, while putting increasing emphasis on what he calls "annuity-type" businesses.

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"You look at the mix of our businesses -- a lot of it, almost two-thirds, is annuity-like: software, services, even maintenance in the hardware business. ... Profits are annuity-like, cash is annuity-like -- so we don't have this big dependency on transactional commodity sales at the end of a quarter in a down market," he told the analysts.

"So we're not saying it's easier for us than for anybody else -- we're just saying we don't have the dependency that other people have -- that's all. We're not seeing a different world: It is what it is. We just don't have the dependency on it that others have. Therefore we haven't slashed the pay of our people, we haven't cut all their compensation, we haven't furloughed, we haven't we haven't we haven't."

But what IBM has done is force his sprawling, highly diversified company that operates in 170 countries to get out of the mind-set that pervaded the entire organization for more than 100 years and remake itself in the image of where business is heading, not where it's been. And that also meant overhauling the capabilities and products IBM offers, top to bottom.

"You know the moves we've made there -- we divested in the commodities businesses that don't cover their cost of capital, regardless of how well you execute them, and we invested in other areas, both organically and through acquisitions -- as you know, 100 acquisitions, $20 billion, etc. etc. etc.

"The other thing that was gonna drive all this in addition to the technology shifts was client behavior: They were gonna get more towards outcome and less toward 'I'll be the assembler of other people's parts.' More towards outcome, and 'I'm no longer an assembler.'

"Why? Economic pressure. When you're under budget pressure, you cannot afford to do other people's work for them, i.e., the industry. Awright? And buying at good prices in little pieces and then assembling them doesn't generate value for your enterprise. As soon as you're under budget pressure, behavior shifts. Guess what? We're here. We see that occurring today as more and more people want outcome, solutions, front-office transformational things versus just 'I'll assemble piece-parts better than somebody else,'" Palmisano explained.

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