IBM CEO ducks rumours, plays up strengths

Amid rumors of impending layoffs and after a quarter in which IBM Corp. missed analysts’ earnings expectations for the first time in a decade, newly installed Chief Executive Officer Sam Palmisano managed to skirt those issues for the most part Wednesday during the company’s annual meeting in New York with financial analysts.

Palmisano did not elaborate on the company’s recently-ended financial quarter and dodged questions about employee cuts, saying only “you’ll hear more about what we’re doing” to reduce costs, in response to a question from Sanford C. Bernstein & Co. analyst Toni Sacconaghi.

Historical attrition patterns show that a hiring freeze would reduce IBM’s employee ranks by 15,000 annually, Palmisano noted. Sacconaghi had suggested IBM would need to cut 20,000 from its worldwide workforce of 320,000 to offset revenue losses.

IBM’s new CEO instead focused his remarks on an overview of IBM’s long-term strategy and an optimistic assessment of its market position.

The IT industry is splitting, and those seeking to be “a winner in a major way” have only two options, he said: to invest heavily in research and development and lead through technological innovation, or to develop new types of business models.

Dell Computer Corp. is an example of the latter kind of leadership, Palmisano said, while IBM has chosen the first path. Without naming names, he insinuated that IBM’s rivals are still trying to find their course.

Apparently referring to Hewlett-Packard Co., he said that “some people coming together” are mixing business models, planning an R&D machine that can stack up against IBM’s but which will be funded by sales of products competing in low-margin sectors dominated by business-model innovators, he said. Boosting R&D spending was an impetus often cited by Hewlett-Packard Co. for its acquisition of Compaq Computer Corp., a move that increases HP’s dependence on the PC market.

Other vendors are still trying to figure out where they are, toying with an embrace of open standards and eyeing the software and storage markets.

“You watch the argument … and then the management team decides to try another company,” Palmisano said. Several top Sun Microsystems Inc. executives, including the company’s president, have recently announced their departures. Oracle also has lost senior staff members in recent months.

Palmisano touched on IBM’s own trouble spots. The company is taking quick action to stem losses from its PC and hard disk drive operations, he said.

With its PC business, IBM had a cost problem and a business model problem, according to Palmisano. The first it fixed by outsourcing production of its desktop line, a move initiated in January through a deal with Sanmina-SCI Corp. The business model problem is being addressed through a focus on building a system for direct distribution.

“We now have an acceptable equation for our PC business that we think is sustainable even in a tough environment in which volumes are declining,” Palmisano said.

IBM is continuing negotiations with Hitachi Ltd. on a deal to pool the companies’ hard disk drive businesses into a new venture that would be majority owned by Hitachi, according to Palmisano. Long term, the technological differentiation in that business won’t be what it was, he said, a recognition that led IBM to begin considering its options for the slumping operation.

“Yes, we invented all this (the hard drive), but it was an issue, we’re addressing it, and we hope to come to closure,” he said.

Palmisano avoided making predictions about a spending comeback, saying only that the IT industry is fundamentally sound and that the customers he speaks with are “teed up” and ready to start buying again once they see improvement in their own businesses.

“If anything good came out of the whole dot-com exuberance, it is that business leaders around the world get it; they have been enlightened,” he said. “They understand that network technology is the fundamental driver of productivity.”

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