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Grey beards seize power at Big Blue

Software and systems get merged

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In the wake of reporting IBM's second quarter financial results yesterday afternoon, Sam Palmisano, the company's president, chief executive officer, and chairman sent an email to all the employees saying that Big Blue was reorganizing its operations to better reflect the modern IT world.

In the moves announced yesterday, a number of independent IBM groups were consolidated, giving certain IBM executives more power and others less. Most of the executives who have increased power at Big Blue are not much younger than Palmisano, who turns 59 in July and is approaching the traditional 60 retirement age for IBM chairmen, so the reorganization is not meant to anoint a successor to Palmisano. If anything, it makes it pretty clear that there really isn't a successor to Palmisano and that the whole team may just stay together and keep working past retirement age.

The most significant shift announced in the reorganization is putting IBM's formerly independent Systems and Technology Group inside its Software Group. The Software Group was spun out of IBM's hardware business nearly two decades ago as a free-standing unit when the company started positioning itself as a provider of middleware, groupware, databases and development tools that spanned many platforms, not just its own.

Now Software Group is considerably larger than Systems and Technology Group. In the second quarter, Software Group had $5.28bn in sales and 87.1 per cent gross margins, while Systems and Technology Group had just under $4bn in sales and only 36.1 per cent gross margins. Steve Mills, 58, takes control of both software and hardware units as senior vice president and group executive. Rod Adkins, who took the helm of STG last October after Robert Moffat was caught in the Galleon insider trading scam, reports to Mills. Moffat was widely believed to be in the hunt for the top job at Big Blue, and in his wake so was Adkins. It is hard to say now. Presumably IBM will rename the merged unit something like Software and Systems Group or, in a blast from the past, Systems Group, to reflect the merger of the businesses.

The reorganization also sees the two parts of Global Services - Global Technology Services and Global Business Services, which raked in $9.23bn and $4.48bn in the most recent quarter respectively - brought back together. Mike Daniels, 56, who has been running the larger unit, has control of the whole Global Services enchilada now. Frank Kern, who was in charge of Global Business Services is still a senior vice president, but reports to Daniels.

"We know that IT infrastructure performance is greatly enhanced when every element - from microprocessors and storage through operating systems and middleware - is designed and brought to market as tightly integrated, optimized systems," Palmisano wrote in the email to IBM employees.

"There are logical synergies across our services units, including the increasing value of leveraging our intellectual property in business process management and transformation projects for our clients. In this way we can help them achieve quantifiable value sooner. And we know that in order to achieve the productivity goals of our 2015 EPS roadmap we need to drive both efficiency and process transformation throughout the company."

So IBM is taking its own medicine. And guess who is now holding the spoon? Mark Loughridge, IBM's chief financial officer. Loughridge is getting some more control over IBM itself, expanding from controlling the finances out to the "enterprise transformation" efforts the company has used to wring profits out of itself, by which Big Blue means cutting costs through partnering, outsourcing, offshoring and otherwise "rebalancing" its workforce and working its supply chain. Linda Sanford, who had been reporting to Palmisano as senior vice president of enterprise transformation, and Bob Zapfel, general manager of IBM's Global Financing arm who also reported to Palmisano, now report to Loughridge. IBM's CFO is 57, by the way, and not a likely contender to run Big Blue - even if he was younger.

That leaves Ginni Rometty, a former General Motors exec who ran Global Business Services for a while and who has been running its sales and distribution business. She is now senior vice president and group executive in charge of sales, marketing and strategy. Erich Clementi, who has run many IBM divisions over the years, is still vice president of strategy and general manager of enterprise initiatives, but he reports to Rometty, not Palmisano. Ditto for Jon Iwata, who is senior vice president of marketing and communications. Rometty, 52, now seems a likely contender for the top job, but only if Palmisano decides to retire next year.

When Palmisano took over IBM's Server Group in 1999 and spearheaded the company's move into open source and Linux, he was 48. Within a year, Lou Gerstner, who back then held the same three titles that Palmisano does now, tapped Palmisano to be president - the formal way that IBM has of anointing a successor. Palmisano had run IBM's PC, services, and systems business prior to this, and had the deepest experience of any of the other executives on the bench at the time - and was young enough to be groomed for succession. It is important to note that Palmisano did not name a president today. But this time next year, it could happen, and he could stay on a few years, eventually relinquishing the CEO and then the chairman roles, as Gerstner did over a number of years. But it is still not obvious who that future IBM president might be. If Rometty had experience in software or hardware divisions prior to her services and sales experience, at this point she would be the likely heir.

Perhaps one of the new traditions Palmisano will start at IBM will be that everyone can work longer, including himself, as the executive bench gets some depth. ®

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