Palmisano Faces a Long List of Tough Challenges

Gerstner inherited a company bleeding red ink, suffering from low self-confidence and seemingly lost. But keep in mind that in 1993, the Dow Jones Industrial Average was still north of 4,000, and Clinton was settling into the White House. By early 2000, the Dow was nearing 12,000, and we were at the end of the longest economic boom in history,107 months of expansion. We should all be the beneficiaries of such timing.

Memories are often short in this industry, but when Gerstner took over for the lackluster John Akers (remember him?), people joked that the former Nabisco executive knew more about chocolate chips than he did about microchips. Nonetheless, Gerstner took over the reins of a tarnished Fortune 500 icon and restored its luster. He did it with the help of such turnaround specialists as Jerome York and made the most important decision of his presidency: not breaking up IBM as Akers had proffered. Gerstner saw the opportunity to leverage IBM's strength,he understood how Big Business works.

It's hard to argue with that kind of success, but Gerstner isn't leaving Sam Palmisano in such a great position. Yet IBM is no more adept or agile today than when Gerstner took over. It's a colossus that's bureaucratic, slow to make decisions and loaded with executives who tell you things like "that really isn't something I can influence." And, for as much as his handlers claimed Gerstner understood the channel, I don't believe he did, or perhaps he wasn't comfortable with the subject. Either way, he never took the time to speak to us about it.

But, with Palmisano's appointment as only the eighth CEO in the company's near-90-year history, we now have a man at the helm who has an intimate knowledge of the solution-provider landscape and its troubled PC business. He also played a vital role in growing IBM's services business, which probably makes his lieutenants rather nervous. After all, there's nothing worse than a boss who knows your job, inside and out.

Still, Palmisano faces some brutal challenges and market conditions. IBM faces an enormous challenge in the PC market; it's fourth in market share. That's half the size of market-leader Dell. Many, in fact, believe the company should exit the PC business because it has fallen so far behind. IBM, however, claims its PC and printer business lost only $153 million last year. Just how did it arrive at such a number? Palmisano is going to be misled by those who believe the PC business can be fixed by selling more products directly to end users via the Internet. That is just wrong and plays into Dell's hands, or even HP/Compaq's, if that merger is approved. Palmisano must come up with another page in the playbook that centers on value and technical innovation and then emblazon that innovative message in the channel's mind. IBM's engineers and marketers dream of being as innovative as Apple's.

Palmisano also arrives at the helm when IBM's growth is sputtering. Sales were up only 1 percent in 2000, down 3 percent in 2001 (but down 11 percent in the fourth quarter). From his early statements, he appears an executive intent on cutting costs. If he is to get IBM back on the growth track, he'll also have to resolve its software strategy. Its overall solution strategy for Tivoli's, Lotus' and IBM's legacy software unit remains muddled. Further, just how is Linux manifesting itself in IBM's software efforts? Palmisano needs to offer clarity, not rhetoric.

Gerstner focused on Big Business and could never figure out just how to generate gains inside businesses that comprise 100 to 500 employees. Some units inside IBM define small business as those with fewer than 5,000 employees. Others say it's those with fewer than 1,000 employees. Either way, IBM has yet to package its solutions or scale certain products to address the needs of small business and those selling to it. It's clear that Palmisano will not be remembered as fondly as Gerstner if he fails on the small-business front.

How do you think Palmisano will do as IBM's CEO compared to Gerstner? Let me know at rdemarzo @cmp.com. n