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IBM puts future profits in the bag

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IBM is hosting its annual investor conference today, and the top brass of Big Blue's numerous business groups spent many hours walking the assembled Wall Street analysts through the models that show the company did the right things over the past few years.

Those smart moves, according to IBM, included divesting commodity IT businesses and positioning itself for bigtime profits in services, software, and massive infrastructure projects.

You'd almost think that IBM was happy about the economic downturn, given its ability to re-balance its workforce - a euphemism for firing employees in the United States and Europe and replacing them with employees in cheaper labor markets - and then chase deals around the globe. IBM can do this because it has built a single accounting system, a single supply chain, and a single customer support and management system that can be fired up and shut down in any geography where IBM wants a business unit to play.

The only part of IBM that is local anymore is sales. And in a lot of cases - particularly with servers and storage excepting the largest 2,500 accounts - that function is performed by the company's reseller channel.

But IBM didn't want to appear too cocky, because an economic downturn is a time for stern contemplation and tough decisions. "It was not an easy environment for us to operate in," said Sam Palmisano, IBM's chairman, president, and CEO, in his opening presentation. "We had a good year in a difficult environment."

IBM's 2008 went like this: $103.6bn (£68.3bn) in sales, up 5 per cent; $16.7bn (£11bn) in pre-tax income, up 15 per cent; $14.3bn (£9.4bn) in free cash flow, up $1.9bn (£1.3bn) over 2007. And $8.89 (£5.86) in earnings per share, up 24 per cent.

Those numbers, said Palmisano, were the result of decisions his team made to live up to the International part of the company's name and to start thinking globally and delivering its own internal systems that are truly international, not regional or national. Palmisano said that this kind of globalization of businesses was "obvious," and did not give Big Blue much credit for catching that wave.

He did give IBM credit for its decisions to ditch disk drives, PCs, printers, and other commodity businesses as the company predicted the future of IT and consolidation in that part of the business.

"We divested commodity businesses that do not recover capital no matter how well you execute," Palmisano explained, and said that one epiphany that IBM had is that the integration of these components was not where the profits would be, and that the company had to focus less on hardware and software sales and more on helping companies - not just IT shops - achieve particular outcomes.

That meant focusing less on hardware sales - something that has taken IBM some years to get used to - because IT hardware is, according to Palmisano, the first thing to get cut after the advertising budget.

"Obviously, the world is different from what it was in 2006, but I would argue that because we have done all of these things, we're not in bad shape," Palmisano said, adding that IBM was able to get ahead of the downturn and start preparing for it. "Call it insight. We did it. It is done," he bragged.

The smart choice: opportunity from uncertainty

Next page: Perfect timing

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