IBM rides 'third supercycle of growth'

IBM banks on the bourgeoise

Palmisano said that the world is experiencing what some people are calling "the third supercycle of growth." The first, of course, was the Industrial Revolution, and the second supercycle was the period running from the first World War to the period just after the second World War. And what is driving this supercycle "is not all of the things you read" but rather the "emergence of the middle class" in the rest of the world, according to IBM's leader.

Of the four pillars of IBM's future (and presumably modest) revenue growth and its rather more steep EPS growth, moving people and processes into these emerging markets to capture that opportunity is perhaps the most important one. Since 2003, IBM has been globalizing and standardizing its own systems, processes, and supply chain so there are not Baby Blue IBMs all over the world, each with their own stuff and cost centers, but one IBM, deployed like an army and backed by central command. The globalization of IBM's back office was timed, and not coincidentally, with its expansion into growth markets.

These efforts to consolidate back-end systems across the company pulled out $6.2bn in costs from 2005 through 2010 (inclusive), with about $4.8bn coming from what IBM calls shared services. This is the back end systems needed by branches and divisions to run themselves, including human resources, global sales, supply chain, real estate, finance, legal, IT, marketing and communications, and sales transaction software. In 2009, IBM started looking at how work is done in the company, and started ripping out costs - $1.1bn so far, and yes, those costs are people. Another effort to integrate operations across different units, started in 2010, yielded another $300m in savings.

Looking ahead to 2011 through 2015, Linda Sanford, the executive in charge of enterprise transformation within Big Blue, says that the company can do another $8bn in cost reductions by taking the shared services further and doing end-to-end process transformation and integrating operations. About $2.3bn in savings comes from shares services, $2.6bn will come from process transformation, and $3.1bn will come for better integration of operations across divisions.

Perhaps most importantly, IBM is only counting $3bn of that $8bn in savings in its model to get to the $20 EPS figure because it wants to leave a circuit breaker in there in case the economy takes a dip somewhere and revenue (heaven forbid) slows. IBM had an expense base of $80bn in 2010, and shared services was $11.4bn of that. Just to give you a sense of what the cost side of IT and back-office functions still is within IBM.

Loughridge said that the ease with which IBM can open branch offices around the world, thanks to these shared services, that will allow IBM to move from $30bn in revenues from its key four growth initiative - growth markets, cloud computing, business analytics, and smarter planet - to $50bn by 2015.

IBM's CFO put some numbers on these areas, as you would expect him to. IBM expects for business analytics to hit around $16bn in sales for Big Blue by 2015, and would contribute about 20 per cent of the company's growth. Cloud computing, while bringing in another $7bn by 2015, will also net only about $3bn in net-new revenue as IBM expects customers with strategic outsourcing contracts to shift to cloudy infrastructure. Smart planet, the hodge-podge of deals that mix IBM hardware, software, and services to help run transportation, water, electrical, and other governmental-scale systems, will hit around $10bn by 2015. That leaves the growth markets contributing around $17bn, if you do the math, and they will outpace the developed markets by about 8 points of growth, as they did before, during, and after the Great Recession.

This is where IBM is obviously very excited. Last year, it opened its first two research labs in the southern hemisphere - one in Brazil and the other in Australia - and moved into three new countries and added 42 branch offices, according to Bruno Di Leo, general manager of growth markets at IBM's Sales and Distribution unit. IBM had operations in 42 countries markets outside of North America, Western Europe, and Japan in 2000, with 95 branch offices. In 2010, IBM was in 53 growth market countries and had 218 branch offices, and by 2015, it wants to be in 78 countries with 451 branches. And not in the major cities, either. Di Leo says that 80 per cent of the IT sales opportunity in China, 63 per cent in India, and 72 per cent in the ASEAN countries is outside of the major cities. So IBM will need these branches to grow.

It's no wonder that IBM's top brass were talking all day about how they were "looping the world" and spending so much time in Asia, South America, and other fast-growing regions. If you could, you would too.

"There is a lot of confidence in Asia," Palmisano explained in a question and answer session follow the day of presentations. "If you ever want to feel really, really good about life, go to Asia. I mean, you can really feel good. Young people are inspired, there's a can-do attitude, governments want to work with you, businesses want to invest. You wouldn't recognize that you are on this planet."

That said, Palmisano said the developed countries (he singled out Germany because he was visiting the Chancellor, Angela Merkel, last week) were a lot more optimistic than two years ago, and that the outlook was a little more optimistic than it was even a few months ago in many countries.

Palmisano said IBM was sorting through all of the IT spending projections for the enterprise markets where it plays, and that things were looking better, quarter to quarter and year to year, with IT spending for 2011 being up maybe 3 or 4 points in the areas where Big Blue peddles products. "But people are cautious still. They're watching." But no one, said Palmisano, is just trying to "hunker down" to just cut costs anymore; everyone is trying to boost sales as well as cut costs. Just like IBM itself. ®