Palmisano, Samuel J. 1951–
Samuel J. Palmisano
Chairman of the board, chief executive officer, and president, International Business Machines Corporation
Born: 1951, in Baltimore, Maryland.
Education: Johns Hopkins University, BA, 1973.
Family: Married Gaier Notman (homemaker); children: four.
Career: International Business Machines Corporation (IBM), 1973–1989, sales representative; 1989–1991, executive assistant to chief executive officer John Akers; IBM Japan, 1991–1993, senior managing director, operations; Integrated Systems Solutions Corporation, January 1993–1996, president; October 1993–1996, CEO; 1995–1997, head of strategic outsourcing; Personal Computer Company, 1996–1997, managing director; Personal Systems Group, 1997–1998, senior vice president; IBM Global Services, 1998–1999, corporate senior vice president and manager; Enterprise Systems Group, 1999–2000, senior vice president; IBM Corporation, 2000–2002, president and chief operating officer; 2002–, president and CEO; 2003–, chairman of the board.
Awards: Alumni Hall of Fame, Calvert Hall College High School, 1999; Distinguished Alumni Award, Johns Hopkins University, 2003.
Address: International Business Machines Corporation, New Orchard Road, Armonk, New York 10504; http://www.ibm.com/us.
■ Samuel Palmisano was charismatic and likable; he was also decisive, passionate about his work, and very competitive. When he ran Integrated Systems Solutions Corporation, a subsidiary of the International Business Machines Corporation (IBM), he was said to have kept a list of a rival company's clients and checked names off the list as his sales force won them for IBM. His usually relaxed demeanor belied a fiery temperament and a strong personality that drove him to micromanage almost every project he directed. Those who worked for him gave him high marks for honesty and candor; they liked him even though he often generated high anxiety levels in his subordinates with demands for almost daily updates on what they were doing. Palmisano's leisure activities included reading history books, skiing, golfing, and jogging to stay in shape. He brought optimism and exceptional self-discipline to his leadership of IBM.
RANK AND FILE
Palmisano was born into an old family that had its roots in eighteenth-century America. Its members had spread their influence across the United States as physicians, politicians, and business leaders. Palmisano's father owned an automobile repair business in Baltimore, Maryland, where young Palmisano learned his street smarts among the rough-and-tumble laborers of Baltimore's docks. He attended a Roman Catholic college preparatory school, Calvert Hall, in Towson, Maryland, where he distinguished himself as an honors student and an outstanding football player. He played center and tackle for the school and was noted for his intelligent and unselfish conduct on the playing field as well as for his toughness. Palmisano was also a gifted musician who joined Baltimore's musicians' union while he was in high school. He once had a weeklong professional engagement playing the saxophone in a backup band for the Temptations, which paid him a thousand dollars. He used his earnings to buy himself a car. Palmisano remembered his youth as a happy one with loving parents and siblings. He lived in a disciplined household where he was taught to behave well and work hard.
In 1969 Palmisano entered Johns Hopkins University, where he became a popular student. His nickname was "Baloo," the name of the jolly bear in the Disney animated feature The Jungle Book. He played football for Johns Hopkins and was considered an outstanding scholar-athlete. When he graduated with a bachelor's degree in history in 1973, he was invited by the Oakland Raiders to try out for their professional football team. Palmisano saw little future in physical collisions with men who outweighed him. Apparently a career in music did not appeal to him either, because he went to IBM's Baltimore office to apply for a job. He was hired as a sales representative and sent to an IBM training school; there he met Gaier Notman, who became his wife.
Palmisano found IBM to be an exciting place to work in the 1970s. The company's employees referred to themselves as IBMers, meaning that they shared a special corporate culture. To Palmisano, IBM was more than a money-making enterprise; it was a corporation that stood as a model for other companies to emulate, a firm that gave women and minorities jobs and equal pay 28 years before the law required fair treatment. His winning personality, intelligence, and drive made him a successful salesman; he hated meetings, however, and was noted for finding excuses to be with his clients rather than attend what were supposed to be mandatory sessions with colleagues and supervisors.
IBM focused on building behemoth mainframe computers and inviting software developers to write programs for them through the 1970s and most of the 1980s. In 1988, however, Palmisano changed the way IBM sold computers. He had been assigned to a team formed to sell a new giant computer called the AS/400. His assertive approach to sales set the pattern for IBM's future. On his own initiative, Palmisano took the AS/400's specifications to numerous software companies and persuaded them to write programs for it before the computer was ready to market. The result was that when the AS/400 was launched, there were already over one thousand programs available for it. Potential customers had a multitude of applications to choose from if they purchased the computer—a powerful attraction that made the AS/400 one of IBM's most successful products. This achievement made Palmisano a rising star at IBM.
Palmisano became John F. Akers' executive assistant in the spring of 1989. Akers, who was then IBM's CEO, later recalled Palmisano as the best executive assistant he had ever had—always ready with what Akers needed when he needed it. In 1991 Palmisano was sent to direct the operations of IBM Japan. During this period, Palmisano gained a reputation for being a maverick who challenged the decisions of upper-level managers while frequently introducing innovations that kept IBM Japan's balance sheet healthy. He was instrumental in bringing the ThinkPad®, a laptop computer, to the Japanese market and making it a success.
A NEW FOCUS FOR IBM
IBM was doing less well in its home country, however—it lost $5 billion in 1992. Akers wanted to break up IBM into 13 loosely affiliated smaller companies, as some financial analysts saw such a breakup as the best hope for regaining profits. The press was already depicting the old IBM—the company that Palmisano had loved because it stood for technical excellence and moral integrity—as dead in the water. In 1992, however, IBM's board of directors replaced Akers with Lou Gerstner, a manager from R.J. Reynolds, the well-known tobacco company. Gerstner chose to shift IBM from being a company that produced commodities to one focused on services to clients, and he recognized Palmisano as someone who shared his long-term goals for the company.
Gerstner made Palmisano president of Integrated Systems Solutions Corporation in January 1993. Integrated Systems had an interesting history within the IBM network. It had been formed in the 1980s when Eastman Kodak asked IBM to take over some of its information technology chores. The corporation was created to meet Eastman Kodak's needs; it was made a subsidiary of IBM, with headquarters in Tarrytown, New York, 20 miles from IBM's corporate headquarters in Armonk and about 330 miles from Eastman Kodak's headquarters in Rochester. At the time that Palmisano was put in charge of Integrated Systems, the corporation provided networking and information technology services. It was also a maverick unit within IBM, making its own rules and encouraging employees to take initiatives. This approach was congenial to Palmisano, who listened to employees and clients as he learned the ropes of IBM's services business. In October 1993 he moved up to become the CEO of Integrated Systems Solutions Corporation.
Palmisano met with his managers for two days each month, examining every services contract that IBM held around the world. He wanted Integrated Systems to grow, and he pressed his sales force to target the clients of rival services companies. IBM's management had long believed that services contracts were for long-term profits, taking possibly as long as several years to enter the black. Palmisano, however, challenged the notion that services could not boost short-term earnings and insisted that new contracts make money from the very start. He led by example; he was noted for hopping on an airplane at a moment's notice to meet a potential client in person. His employees caught his fire—whereas the parking lot at IBM's headquarters was nearly empty at night and on weekends, the lot in Tarrytown was filled seven days a week, long after five o' clock. In 1993 Integrated Systems Solutions Corporation grossed $14.9 billion; by 1996 it made $22.9 billion.
The flow of money generated by Palmisano's division helped Gerstner keep IBM intact while Palmisano's emphasis on service fit well with Gerstner's plans for the company's future. Gerstner consequently appointed Palmisano managing director of IBM's Personal Computer Company on April 1, 1996. The Personal Computer Company was a $10 billion per year business that allowed Palmisano to gain experience in running some of IBM's hardware units. That year, Gerstner combined Integrated Systems Solutions Corporation with other smaller service groups to form IBM Global Services, which accounted for 29 percent of IBM's total revenue.
Palmisano's responsibilities were expanded in 1997 when he became senior vice president of the Personal Systems Group, which put him in charge of IBM's personal computer business. He was a rigorously goal-oriented leader who expected his managers to meet their promised goals. In December 1997, however, he found himself falling behind his own goals for the fourth quarter. Beginning on December 26, he held conference calls with his sales representatives at 7 a.m. and 9 p.m. every day through December 31, pushing them hard but finally meeting his sales goal.
IBM's various businesses were booming, but Gerstner wanted to take IBM's services to a higher level. In January 1998 he made Palmisano a senior corporate vice president in charge of IBM Global Services, which was the world's largest provider of information technology with 135,000 employees. Palmisano was then put in charge of IBM's Enterprise Systems Group. There he began IBM's acceptance of the free open-source-code Linux operating system in late 1999. Open source code allowed anyone to read and modify the operating system code to work with other programs. Palmisano advocated open-source software standards rather than proprietary standards as a way to unify all of IBM's hardware and software offerings. Such unification would allow clients to pick and choose what they wanted with the assurance that every component would work with all others without any special proprietary programs that might be difficult to learn. In October 1999 Palmisano introduced "Project Pain," in which IBM's servers were offered to customers at discounts as high as 70 percent.
In 1999, IBM's computer business declined as part of a slump that affected high technology businesses worldwide, and the company's growth flattened. In spite of the downturn, IBM grossed $85.9 billion while netting $7.7 billion. IBM's services—particularly IBM Global Services—accounted for 41 percent of the company's revenues, and were largely responsible for IBM's business decreasing only slightly while competitors saw double-digit drops in income. Moreover, IBM had a market capitalization of $186 billion, providing it with enormous resources not only for weathering the downturn in business but also for readying itself for its next phase of development.
IBM'S NEW PRESIDENT
Palmisano maintained that he was completely surprised when he was informed that he was the new president of IBM. Nevertheless, he became the company's president and chief operating officer on September 1, 2000, responsible for its day-to-day operations as well as being Gerstner's heir apparent. Palmisano had acquired a nickname, "The Closer." The name was apt because he had, perhaps without realizing it, compiled the best sales record in IBM's history. His skills in closing deals with clients had sometimes made the difference between profit and loss on a division's bottom line. In addition to Palmisano's negotiating skills, he had also emphasized the importance of cultivating high-end clients and pressured his subordinates to pursue multimillion-dollar contracts.
As president, Palmisano quickly established weekly operations conferences—even though he disliked meetings—in place of monthly ones, and asked for weekly reports from his managers detailing what business plans they had for the coming week. That year, IBM Global Services hired 19,000 new employees and grossed $33.2 billion of IBM's total income of $88 billion. Global Services's nearest competitor earned only $19.2. In addition to increasing sales, Palmisano strove to improve cooperation among IBM's various units. In January 2001 he made public IBM's intention to invest $1 billion in Linux; he wanted to give IBM's units a unifying goal to create hardware, software, and services that worked together seamlessly.
CRISIS AND RESPONSE
Palmisano's resourcefulness was tested on September 11, 2001, when terrorists demolished the twin towers of the World Trade Center. The attack destroyed the offices of Fiduciary Trust's subsidiary Franklin-Templeton, one of IBM's clients. Palmisano saw to it that Fiduciary Trust received all the technological materials it needed to restart Franklin-Templeton—an IBM employee even checked local hospitals for a missing Franklin-Templeton worker. Palmisano's response to the emergency showed that he was reshaping IBM into a service company that cared about the well-being of its clients. He wanted to form a corporate culture in which employees could again say "I'm an IBMer," confident that they stood for something good. Further, he wanted his employees to understand that they were recognized by management for their good work. To do this, he took his personal touch to employees.
For instance, in the fourth quarter of 2001, the IBM factory in Poughkeepsie, New York, shipped its mainframe computers to customers two weeks early. Palmisano visited the factory's floor, chatting with workers and buying them coffee while telling them, "You guys saved the quarter. You're the heroes" (BusinessWeek Online, February 11, 2002). One of his goals was to foster a sense of commitment to IBM's standard of excellence on the part of every employee, regardless of position.
ON-DEMAND COMPUTER SERVICES
Palmisano became CEO of the IBM Corporation on March 1, 2002, the eighth in the company's history. He won few friends, however, when he laid off 15,000 employees, mostly in manufacturing, in an effort to eliminate operations he believed would be money losers for the present and future. He sold IBM's hard drive manufacturing unit to Hitachi in June 2002. In July he purchased PricewaterhouseCoopers' consulting business for $3.5 billion, making IBM the world's largest consulting firm. He wanted IBM to focus on selling solutions to clients—to show clients how the company could help them make money by fixing problems before the problems even arose. His new employees from Pricewaterhouse-Coopers were essential to reaching that goal. IBM then paid $2.1 billion for Rational Software Corporation, a manufacturer of software-development tools. The full significance of this purchase did not become clear until October 2002.
Business journalists had been abuzz for months about Palmisano's new strategy for IBM, but his speech at the American Museum of Natural History in New York City on October 30, 2002 still took them by surprise in terms of the grand scope of IBM's new plans. Palmisano announced his intention to make IBM a computer services-on-demand company; that is, the company would function like a utility, charging its customers for the use of data-centered web sites. IBM would create software capable of fixing clients' software problems automatically online. The clients would pay only for the amount of services they used, in the same way they presently paid for water or electricity. The image of a drop of water became the symbol of Palmisano's goal for IBM.
According to Palmisano's announcement, IBM planned to commit $5 billion to create a single integrated system of computers, software, and other electronic devices that would allow anyone to purchase any part of IBM's services and use it with any other part. One of Palmisano's goals was already partly achieved when IBM created open-source software that altered a company's need for servers dedicated to only one task. For example, a server dedicated to computing accounts might become overloaded, causing delays of hours or even days. IBM's new software was designed to recognize when a server had reached its capacity and automatically redirect the excess work to other servers with available space. A key part of this strategy was that if the servers at the client's company had no excess space, the overflow workload would be sent to IBM's own computers, which would recognize any program that accessed them and silently perform the client's work. Palmisano hoped to take this service to the next level, which would allow IBM's computers to check the client's computers for flaws automatically and fix them before anyone could notice them.
This level of service was part of a grand strategy that Palmisano believed would keep American jobs from continuing to flow to other countries—a phenomenon called "off-shoring." Most off-shoring involved electronic services, especially "outsourcing," a practice in which a company referred some of its work to another company. Palmisano argued that IBM's ideas for future services would encourage companies to outsource to an American company like IBM rather than to foreign businesses. By using Linux, an operating system that was free to the public, American firms could then make it easy for anyone to write software programs that would work with their systems.
Some observers in the business community expressed doubts about the sheer scale of Palmisano's objective. His concept seemed straight out of science fiction, a dream that would take hundreds of years to fulfill. The technical difficulties were indeed daunting. IBM's researchers said that they had only 10 percent of the technology necessary to turn the company into a technology utility. Palmisano, however, committed $5 billion to research and development for "e-business on demand" and launched an $800 million advertising campaign in 2003. He hoped to convince other corporate leaders that by buying into IBM's idea, they would save themselves money by not having to invest in different proprietary technologies or train personnel to understand those technologies. They would also save by paying only for what they needed instead of an entire system. They could focus on what made them money while IBM handled their computational needs. Palmisano estimated that IBM's new strategy would take five to seven years to implement. In the meantime, he had a vast company in which every employee had a common goal—an inspiring one worthy of the company's proud tradition.
In spite of the grand scale of Palmisano's strategy, he kept his staff small, preferring to do without the executive assistant that other CEOs had employed. He surprised many in his company when he disbanded the 12-member Executive Management Committee on January 23, 2003. The committee had been in existence for 92 years and had served as a filter for high-level planning, but was much too slow for the new century. Palmisano replaced the committee with a new system of three teams, one focusing on operations, the second on strategy, and the third on technology. Instead of filling each team with top-level executives, he drew members from all divisions of the company and all levels of employment. One immediate effect of this restructuring was to draw a new generation of young men and women into the heart of IBM's operations. Just as Gerstner had been careful to groom a generation of leaders to follow his time, Palmisano seemed to be doing the same. Besides, he was still a maverick at heart who thrived on fresh ideas.
Palmisano became IBM's chairman of the board on January 1, 2003, when Gerstner retired after helping smooth the transition in leadership. That month, IBM's plans for the future received a significant boost when the large investment bank J.P. Morgan Chase contracted to pay the company $5 billion dollars to handle its information technology needs for seven years. In January 2003 Palmisano asked the board of directors to take about half his annual bonus—$3 to $5 million—and use it to reward IBM's top 20 managers for teamwork. He said that he wanted the entire company to behave as a team, and that he should therefore set the example.
See also entry on International Business Machines Corporation in International Directory of Company Histories.
sources for further information
Ante, Spencer E., "The New Blue: Lou Gerstner Saved Big Blue: Now It's Up to New CEO Sam Palmisano to Restore It to Greatness," BusinessWeek, March 17, 2003, pp. 80–88.
Ante, Spencer E., and Ira Sager, "IBM's New Boss," BusinessWeek Online, February 11, 2002, http://www.businessweek.com/magazine/content/02_06/b3769001.htm.
Kirkpatrick, David, "IBM: Inside Sam's $100 Billion Growth Machine Sam Palmisano Has Two Huge Goals: To Get This Giant Growing Again—and Return IBM to Greatness," Fortune.com, June 14, 2002, http://www.fortune.com/fortune/subs/article/0,15114,644257,00.html.
Koudsi, Suzanne, "Sam's Big Blue Challenge: Sam Palmisano Helped Build IBM Global Services into the Company's Growth Engine: Now, As He Prepares to Succeed Lou Gerstner, Can He Keep It Revving?" Fortune August 13, 2001, pp. 144–148.
Strout, Erin, "Blue Skies Ahead?: IBM Is Transforming the Way Its Sales Force Does Business: Can New Management Strategies Catapult this Notoriously Bureaucratic Organization to the Top of a Fiercely Competitive Industry?" Sales & Marketing Management, March 2003, pp. 24–29.
—Kirk H. Beetz