CEO of IBM Reports on Benefits of On-Demand Computing

Nov. 13–A year ago IBM Chief Executive Sam Palmisano said he would spend $10 billion on something called on-demand computing, which would supposedly usher in a new era of technology.

On Wednesday, he stood on a stage in San Francisco and reported that the strategy is working. Palmisano said a wide array of customers have bought into that vision, which essentially means that technology can enable companies to become agile enough to respond to changing conditions like peaks in customer demand or external business threats.

To prove his point, Palmisano pulled out the big guns. He held an all-day event at the San Francisco Museum of Modern Art where he rubbed shoulders with celebrity tech leaders like Linus Torvalds, creator of the Linux operating system. Also on hand were such high-profile customers as CEOs Meg Whitman of eBay, Jeffrey Immelt of General Electric, John Chambers of Cisco Systems and Thomas Siebel of Siebel Systems.

“Last year we launched a vision,” Palmisano told the elite crowd of 200 customers. “It was quite lonely at the time. At that point in time it was an assertion. A year later we’ve moved well beyond assertion into adoption.”

During the past year, Palmisano said that IBM has implemented on-demand computing with key partners like General Electric, Procter & Gamble,and UPS. He noted that IBM has signed contracts worth $7 billion to outsource the computing operations at a variety of customers, who will tap IBM’s data centers for comp.

While Palmisano’s CEO guests didn’t give outright endorsements to IBM, both Immelt and Chambers said they see evidence of an economic turnaround and believe technology is essential to the recovery. Implicit in the day’s events was Palmisano’s message that IBM has the customers and partners who will lead the next era of computing, in contrast to Silicon Valley rivals like Sun Microsystems or Hewlett-Packard.

Sun executive Yael Zheng said the company has signed up nearly 100 customers for N1, which Sun’s version of on-demand computing.

Palmisano’s West Coast visit was significant as a marketing event because IBM and its rivals are fighting to define their vision for the role of technology in the wake of the industry’s worst downturn. They acknowledge so many visions haven’t come true, like the ‘cashless society,” “paperless office,” and the “new economy.” But the thinking — wishful or not _is that if one company defines the future and throws all of its resources into it, then it will lead the recovery of the $1.3 trillion information technology industry.

“It’s a powerful and subtle message they sent,” said Mark Stahlman, an analyst at American Technology Research in Stamford, Conn. “There is a competitive subtext here. It’s clear from quarterly results and it confirms that IBM is leading the information technology turnaround.”

An example of IBM’s vision was voiced by Larry Kasanoff, CEO of Threshold Digital Research Labs, which makes animated films in Santa Monica and rents computing capacity from IBM to render its films. “On demand saves us 50 percent on the cost of a film,” said Kasanoff in an interview. “That comes to $60 million per movie.”

Palmisano said the recovery of the information technology industry will be closely tied to such on demand computing. He made a point of insisting that the technology industry’s recovery would not come from “some new gizmo.” He added, ‘A lot of people out here want it to be a gizmo. That’s what people understand. Venture capitalists like the pure play model of gizmos. It’s not going to happen.”

Palmisano noted that IBM has 185,000 engineers still working on innovation, but he said, “Technology by itself is not enough. Computing is the tool. The big idea is not the tool. It is the business model.”

Palmisano, however, was fuzzy on some of the competitive details of this business model, and rivals have leapt on that as a sign of vagueness. Nora Denzel, senior vice president at HP for adaptive enterprise and software, contended in an interview Tuesday that IBM isn’t as good a partner in business transformation as HP. She said that IBM’s preferred style of business is to take over a customer’s computer operations with an army of expensive sales people who will buy only IBM products. “We have a fundamentally different approach,” Denzel said. “We don’t throw a lot of people at it. They are saying get it all from one vendor.”

Irving Wladawsky-Berger, a vice president of on demand computing at IBM, denied that IBM only promoted its own products. He said that IBM has led the way in open standards for software and systems and that it was prepared to help customers manage their data centers regardless of what kind of companies they use.

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