IBM will rule the services roost, says Gerstner

The future of the IT industry is in services and consulting, but never mind the Big Five -- the real services leader is Big Blue, IBM Corp. Chairman and Chief Executive Officer Lou Gerstner said Thursday during his annual meeting with Wall Street analysts.

IBM's focus on services was a central theme of Gerstner's remarks. "Four years ago we bet the company on e-business," he said. "E-business is for real, and it will prescribe customer IT spending for the next decade. You are headed for commoditization hell if you don't have services."

Several analysts had predicted that this meeting could be Gerstner's swan song. Gerstner's contract with IBM expires in March 2002, and the 59-year-old executive is not expected to renew. President and Chief Operating Officer (COO) Sam Palmisano has been Gerstner's heir apparent since he was promoted to COO in July 2000.

Gerstner defused those rumors with a reference to Mark Twain's famous line about greatly exaggerated death reports. He deflected questions about whether or not he'll be attending next year's analyst meeting, quipping that IBM "doesn't plan that far in advance."

Gerstner said that the shortage of skilled IT labor, the speed at which the tech industry moves, and the complex integration tasks customers face drive the lucrative services market. He touted the sector as an attractive one to be in because service companies never become obsolete, they adapt to new technologies and business models. Even better from a corporate standpoint, the services market is recession-proof, according to Gerstner. As evidence, he pointed to IBM's recent track record in Japan: Last year, when the stagnant Japanese economy grew only 1 percent, IBM's outsourcing business in the country grew 24 percent, he said.

IBM's services focus will usher in a new golden age for the company akin to the one it enjoyed in the 1960s and '70s, when it ruled the then-dominant mainframe market, Gerstner said. He also cited several examples of IBM's own internal heeding of its e-business mantra. The company "e-procured" 94 percent of everything it purchased last year, saving US$375 million, Gerstner said. Online employee education saved another $350 million.

Gerstner took swipes at several of IBM's rivals in his speech, pointedly noting that corporate investment in hardware and software grew 11.3 percent in the U.S. in the first quarter of 2001. The only companies having trouble with sales and growth, Gerstner suggested, are those who "were accomplices in this New Economy mumbo jumbo."

"I never fail to be amazed by the binary, in or out, feast or famine mentality in this industry. You know the pattern: mainframes rule, then mainframes are dinosaurs. PCs are king, PCs are dodo birds," Gerstner said.

"Most recently, December was 'like somebody turned out the lights.' And now there is a '100-year flood' in this industry," Gerstner said, riffing on Cisco Systems Inc. chief John Chambers's recent metaphor for the downturn. He dismissed such comments as hand-waving, firing back, "There's no blackout and there's certainly no washout. What's really going on here is that a bubble has burst. The dot-com bubble has burst."

Gerstner also said the PC market is no longer a fertile ground for innovation; instead, he views it as a mature sector on the verge of self-decimation through price warfare. "Thank god we got out of the retail business a year or so ago," he said.

Addressing a question about Dell Computer Corp.'s renewed commitment to aggressively regaining lost sales momentum, he commented, "If you have no technology of your own, and your market goes mature, price is unfortunately one of the few weapons you've got. ... The problem with a price war is that the guy who starts it thinks he's in control. He's not in control. Price wars in commodity businesses are really dumb."

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