IBM reboots for battle of the IT giants

Will Big Blue's boardroom shake-up will be enough to keep its rivals at bay?

Big Lou saved Big Blue". So the mantra goes on IBM. Now it's about to become "Big Sam, the man with the master plan".

Big Lou saved Big Blue". So the mantra goes on IBM. Now it's about to become "Big Sam, the man with the master plan".

Since his arrival at the computer leviathan, chairman and chief executive Lou Gerstner has transformed IBM from a loss-making, lost-the-plot company into the world's largest computer group. In seven years he's slashed costs, cut the company's reliance on the ailing mainframe sector and invested more than $5bn (£3.3bn) buying new businesses.

Last week he revealed what could potentially be a new chapter in the company's 76-year history. With two years left to run on his contract, Mr Gerstner, 58, announced a radical shake-up of IBM's board.

The most significant change was the promotion of Samuel Palmisano - an energetic and straight-talking senior vice president - to president and chief operating officer in September. Mr Palmisano, the youngest IBM senior executive at 48, is now widely tipped to become Mr Gerstner's successor, and his appointment was applauded by Wall Street.

Analysts argue that in the next two years competition between the big IT companies - Oracle, Microsoft, Sun Microsystems, Cisco Systems, Compaq and IBM - will reach boiling point. Survival in this ultra-competitive environment demands stamina and vision.

Don Young, analyst at stock- broker PaineWebber, says Mr Palmisano could be the right man for the job: "[He] is not your traditional IBM executive; he has more of an aggressive street-fighter personality and is a very hard charger. If one had to select the leading internal candidate [to] shake up things, it would be Palmisano."

Tom Bittman, an analyst at research firm Gartner Group, adds: "Gerstner has done an excellent job in taking the business back to basics. But he's not a visionary. Palmisano will help IBM take the next step."

In fact, IBM isn't in dire need of overhaul. Of the 24 Wall Street investment banks that produce research on IBM, 23 have advised clients that the stock is well worth buying. Earlier this month this advice was proved right when IBM revealed a sparking set of second-quarter results, with profits up 15 per cent.

Overall, IBM is expected to grow this year between 13 and 19 per cent against an industry average of 10 per cent. "IBM is very rare among old blue-chip companies: it has proven that it can adapt to change and it is now leading the pack," admits one senior executive at a rival software company.

But this doesn't mean that it's all blue skies for Big Blue. IBM, which began life making cash registers and typewriters, is today essentially four different companies in one. It develops software, makes computer hardware, provides consulting services and invests in new businesses. Thanks to this wide portfolio, IBM can juggle resources around as one area slows and another grows.

The one area analysts predict will become key to IBM in the next two years is Global Services. In its second-quarter results, these generated $8.2bn in revenue and 41 per cent of IBM's pre-tax profits. "Global Services is a monster," says Mr Bittman. "But it has grown so fast, it has become a little disjointed and needs to be sharpened up. At the moment it's a bit like a giant sledgehammer."

One problem is marketing. To the man on the street, IBM is still the company that created the modern-day PC and built mainframe computers - not the snazzy e-business specialist it wants to be seen as now.

Simon Pollard, a vice president at research group AMR, says that unless it gets this message across, IBM could miss out on big business. "IBM needs to really push itself as the e-business provider and not just as a technology services company.

"To break into companies' boardrooms IBM needs to bridge that gap or there is a danger that it will miss out to the management consultants."

The software division is IBM's other great white hope. Its results showed it contributed 31 per cent towards IBM's total revenues on a margin of 82.5 per cent. But, again, Mr Palmisano may also have a little work to do to ensure its focus remains sharp.

IBM has a bewildering array of software applications, ranging from the oddly named network management program Tivoli to the equally absurd- sounding WebSphere Everyplace, its server application. IBM's products are considered by industry analysts as "the best of breed".

When it wins a contract with a new customer, IBM essentially "knits together" a suite of its programs. But this takes time and can be more expensive than buying an off-the-peg solution from a rival vendor.

Oracle, for one, believes customers are more interested in speed of installation and simplicity over having the most technically superior software.

"IBM has taken an approach that will win business from the big companies, but the medium and smaller firms may not be as enthusiastic about the offering," says Mr Bittman.

But IBM can't be accused of resting on its laurels in software development. Just a fortnight ago it promised to invest $200m in Linux, a rival operating system to Microsoft's Windows developed by a Finnish computer nerd in his bedroom. "We are betting a lot on it as it's what customers want," says IBM's Euro-pean vice president for telecoms and media, Val Rahmani.

Another theory is that IBM revels in the thought of seeing Microsoft squirm. "If Linux takes off then it will hurt Microsoft. If it doesn't then $200m isn't the end of the world for IBM," says one observer.

IBM took a bigger gamble last week when it committed $1bn and 4,000 staff to developing internet products for mobile phones in Europe. This will help to strengthen existing alliances with telecoms companies BT Cellnet and Telecom Italia. "We are seeing a major shift in mobile internet use. A lot of customers are now looking to it to add value to their business - and are prepared to pay for it," says Ms Rahmani.

But all these alliances and joint ventures don't come cheap. Mr Bittman welcomes the move into emerging IT markets, but warns IBM to watch the bottom line. "IBM's cash reserves are the smallest I have ever seen. They have really drained their resources ... Spend on things like marketing and acquiring new businesses may be affected."

Big Blue's red-ink days seem over. But heir-apparent "Big Sam" Palmisano will have to keep an eye on profitability and marketing if he is to keep IBM on top in what will be a bitter battle of the computer giants.