There's a New Way to Think Big Blue

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In the past couple of years, IBM has rounded out its software portfolio, leaving the applications side of the business to specialists like J.D. Edwards, PeopleSoft, SAP and Siebel and focusing instead on the "middleware" market that glues those business applications together. With the savvy leadership of software chief Steve Mills, IBM's database and application server product WebSphere has gained market share, even winning a key, much contested contract with eBay. J.D. Edwards, an enterprise software company focused on the fast-growing market among medium-size businesses (those with 100 to 1,000 employees), recently decided to standardize all its applications on IBM's middleware. "It's about ongoing viability, who's going to be able to compete with Microsoft," says Lenley Hensarling, a vice president of product management at J.D. Edwards. "We're going to see a choosing up of sides."

Meanwhile, Big Blue has more tightly embraced Linux, the grass-roots operating system that Palmisano originally championed inside the company and that is becoming a legitimate threat to both Unix and Microsoft's Windows. IBM's research division, in which the company invests $5 billion a year, is also trying to come up with an "autonomic" technology, so that complex systems can fix themselves, and IBM can serve up technology without spending so much on labor.

But the linchpin of Palmisano's strategy is Big Blue's services business, which already accounts for about half the company's revenue. By shrewdly purchasing PWC's consulting business on the cheap at the bottom of the market only a couple of years after HP had considered buying it for five times the price Palmisano acquired a wealth of industry-and-process expertise, as well as a valuable Rolodex of high-level CEOs and CFOs who increasingly make big IT purchasing decisions.

He may have learned a lot of what he knows from Gerstner, but early in his career Palmisano gleaned valuable insights from another business legend, Sam Walton, founder of Wal-Mart. At the time, Palmisano had been tapped as a "high potential" leader at IBM and was serving a stint as an executive assistant to Gerstner's predecessor, John Akers, learning the ropes by shadowing the CEO. It was 1989, a few years before Gerstner arrived to tear apart IBM's insular culture, and Big Blue was still plagued by rigid hierarchies, endless meetings and wasteful trappings of executive life.

Walton had asked Akers to give a speech at a university near Wal-Mart's headquarters in Bentonville, Ark., and he invited both Akers and his young assistant to come by the next day to sit in on a staff meeting. That morning Palmisano was shocked to see Walton, one of the richest men in America, pull up to the hotel in his battered pickup truck and drive the two IBM suits over to his company's bare-bones headquarters. As Walton's top lieutenants spoke, the chairman took copious notes. Then, after about 90 minutes, Walton abruptly excused himself, telling all assembled that he had to go check out what was going on at his stores. "It made a big impression on me," says Palmisano. "He had a complete focus on the customer and on what generated shareholder value."

As Palmisano climbed the ladder at IBM, he became known as a penny-pinching tactician who loves to court developers or customers but doesn't have much patience for sales-award cruises or team-building retreats. Palmisano "doesn't talk down to anybody, and he doesn't put on airs," says technology consultant Sam Albert, a former executive at IBM. Palmisano doesn't travel with an entourage, nor does he have an executive assistant or personal spokesman. On at least one occasion, he arrived at a meeting and lit into underlings for spending money on an elaborate floral centerpiece. They may be little things, Palmisano says, "but they set the tone for the whole organization."

Raised in Baltimore, the son of an auto body-shop owner, Palmisano grew up in a big, solidly middle-class, Catholic family, learning the ways of the world at an early age from his grade-school classmates, some of whose fathers in the rough, corruption-rife port city were being indicted for various crimes.

As an offensive lineman on his high school football team, Palmisano displayed a knack for preparation, devouring the scouting reports before games and almost never blowing a blocking assignment, according to assistant coach Augie Miceli. (Palmisano went on to play for Johns Hopkins University, where he earned a degree in history.) Off the field, he also showed an early entrepreneurial streak, once earning $1,000 as a fill-in saxophonist when the Temptations were in town.