IBM's 5-Year-Old Startup Holds the Lead in Services

Sam Palmisano can't stop moving. And how could he? As president and CEO of Integrated Systems Solutions Corp. (ISSC), IBM's five-year-old outsourcing startup, he oversees operations in 110 countries and 26,000 employees.

Although the services ISSC provides transform its clients' organization, Palmisano acknowledges that the group's strengths do not lie in the hot business process reengineering trend. Instead, it relies on IBM's almost century-long history in high-tech advancements.

WT: Are there certain infotech assets organizations are more willing to outsource than others?

Palmisano: It varies all over the place. Everyone has their definition of what's strategic, and I'm kind of indifferent to it. I really don't have a bias one way or the other. We have capabilities that we can map to what our clients' needs are. We don't have offerings; we're not a product company. We just have skills, capabilities, people and our intellectual property.

With networks, some people say, 'I don't care.' Other people say, 'I'm not giving up my network. That's my differentiator. That's my customer interface system.' So it's a management philosophy.

Data centers, in the old days, created a very emotional issue. People realize now that it's the commodity side of the business. Nobody wants big machines anymore. (I work for IBM; I guess that's a terrible thing to say.) They are necessary, but organizations don't view that as the great differentiator.

WT: What differences do you see between the domestic and foreign markets?

Palmisano: The Canadian and the U.S. markets are very similar as you would expect although there's more client/server work in Canada. Then again, there are smaller companies there than in the United States so they don't have the big history with these huge legacy systems.

Europe is where the United States was two years ago. They're moving very quickly. The U.S., a couple of years ago, strictly wanted someone to manage the facilities, do some application maintenance but not the pure type of reengineering. U.S. companies today really want the reengineering benefits.

Latin America? It's whatever help you can give us. Just like in Asian countries, they say 'we don't have enough skills. Do it for us.' And you have to work within the local culture. You have to have local relationships. You have to use the local people, whether Brazilians or Argentineans. They're not going to see a bunch of guys from the U.S. showing up.

The other thing you see in other countries, which you don't see too much here, is a lot of privatization. In the U.K. right now, social security systems are being given to companies to run them. We're doing all the pension fund work for Chile, Peru and Argentina.

WT: Is India different from other Asian countries because they have the skill base?

Palmisano: India has an incredibly knowledgeable population with excellent skills. But on infrastructure, again, they're looking for help. They want someone else to run the network and the facilities. A lot of these countries just don't have reliable telecommunications. And then there's the security issue.

WT: As an IBM subsidiary, how objective can you be in offering solutions that don't use IBM equipment?

Palmisano: I go with the economics of it. We are major customers of Hewlett-Packard and DEC. We're an Apple dealer. If you look just in terms of the numbers, our mix is the industry mix. If you look at the hardware and software we support, it's just like IBM's share of the market, and IBM doesn't have a dominant position in the market any longer.

WT: How do you differentiate ISSC from your key competitors, Electronic Data Systems Corp. and Computer Sciences Corp.?

Palmisano: EDS and CSC are completely different. They try to position themselves as similar, but they are different companies completely.

The biggest difference between us and EDS is cultural. We introduce flexibility into the relationship. EDS used to have 10-year fixed agreements, and that was that. We have the perspective that if you say you're going to be in a partnership agreement, then why do you want a hard-nosed contract for 10 years? That is not partnership.

The other thing is that we have vast access to technology. Our parent is still the technology leader in the world. As long as the customers realize we're serving their interest, they want access to that capability and skills. If they think we're serving IBM's interest, they don't want that.

We're a high-tech company so we have access to a deep bench. When McDonnell Douglas first looked at us and CSC, we had a huge bench strength. They knew that's what they were buying -- access to the bench.

As far as human resources policies, the outsourcing industry has a very bad reputation of how it dealt with people. We've introduced a much more professional approach to it, primarily because of the heritage where we've all come from. Even though we've had to downsize quite a bit, we've been pretty gentile about it. But the other thing is that we're growing so fast that we have to have the people.

WT: What about IBM's global network? How does that help you?

Palmisano: The global network is becoming the key to all these reengineering efforts and transformation of companies. Everybody reads about the Internet everyday, but in the corporate world, it's got to be a lot different. The fact is we have a global network in 100 countries, that no one else can claim. IBM's up and running in 140 countries. We have outsourcing operations in about 110 of those 140 countries. EDS has about 40 with the acquisition of A.T. Kearney. I think CSC's claiming 35 or so. So we've got three times the global reach of either one.

The difference between EDS and IBM versus CSC is that we push the hell out of technology. Both of us do. CSC has always sold itself as low cost because of their government work, but in this world, we are pushing the hell out of technology constantly. We find that's what our clients really want. They want us to help them exploit it -- not be in the background.

The other differentiation is that we have not intentionally tried to acquire consulting companies such as Index or A.T. Kearney. We want to be able to work with all kinds of players. We team with everyone. We really don't want to get into a situation where our client's suspicious that our guy doing the reengineering work is going to give us the integration project downstream. We feel we are better served working with all the major players.

WT: But IBM's got its own consulting operation?

Palmisano: There is a small industry group. We have our own consulting group for infotech but not for reengineering. So at ISSC, we have 2,000 people doing IT consulting, but we don't do the high-level strategy, reengineering work. IBM does some of that business transformation services in the industry group, but it's a small portion of what we do. A lot of our consulting isn't the McKinsey boardroom stuff. Once you do that, then figuring out the best system architecture required is where we tend to focus. We've just chosen that as our model; the competition's chosen a different model.

It's hard to merge the cultures. We've had many companies ask us to acquire them as consulting companies, but the cultures are so vastly different between what we do and what a consulting company does. It's just hard. I know it's hard for both CSC/Index and EDS/Kearney. They're having problems making the thing work.

WT: As the government moves to privatize some functions such as social security processing, will it be ISSC that goes after that business or IBM's Government Industry group?

Palmisano: Well, IBM Government isn't any different from all the other IBM industry groups. They don't do these services; they use us. We're the deliverer. We don't have a sales force per se so they use us to do all the technical work and do all the delivery. The government group has the relationship with the government but if they need someone to run facilities or do massive development work, we would deliver. In the manufacturing sense, we're the laboratory and the factory.

WT: Both EDS and CSC have placed a lot of emphasis on their outsourcing services. How do you intend to stay ahead of them?

Palmisano: The way I think we can stay ahead, quite honestly, is if we can continue to expand our capability and our customer satisfaction, we'll continue to grow two to three times the pace. People want us to take them in other markets -- beyond the U.S. -- and apply technology at an incredible pace and not just do it for less money.

We're already larger than EDS if you look at our numbers. If we get distracted from that mission, which is customer-driven and applying technology at a faster pace and mapping our capabilities to their business needs, that would make it harder for us to continue the success. Everyone will tell you what our customer satisfaction is. And right now, we're 10 points better than the competition.

WT: What kind of growth are you looking for?

Palmisano: So far, for the first half this year, we grew 46 percent worldwide. We've signed $30 billion in contracts in almost five years. EDS talks about $32 billion to $33 billion after 25 years. We just had a $1 billion month -- not bad for a start-up company.

We went from zero to 26,000 people in almost five years. At the pace we're growing, we can't hire enough people. So we need the people. We go in the recruit mode as we enter a relationship versus saying 'gee, I'm going to get rid of half of you, so I'm going to treat you a little differently.' We don't want to just get rid of them because we need them to grow.

They may not stay where they were, but we can use their skills. If they're good people, we want to invest in them. Some of our best people came through our contracts. We got great people from McDonnell Douglas and Kodak. All our non-IBM skills, in DEC and HP for example, have come from McDonnell Douglas and Kodak.

WT: Any concerns that you might be growing too fast? Will you control the growth?

Palmisano: Not so far. We stick to our knitting. We run large data centers extremely well, transition customers from a legacy to a client/server environment, run massive, distributed infrastructures, run a large global network and have incredible development and application maintenance skills.