Services are the future of IT, says IBM boss

The future of the IT industry is in services and consulting, and the services leader is Big Blue, IBM chairman and CEO Lou...

The future of the IT industry is in services and consulting, and the services leader is Big Blue, IBM chairman and CEO Lou Gerstner said at his annual meeting with Wall Street analysts.

IBM's focus on services was a central theme of Gerstner's remarks. "Four years ago we bet the company on e-business," he said. "E-business is for real, and it will prescribe customer IT spending for the next decade. You are headed for commoditisation hell if you don't have services."

Several analysts had predicted that this meeting could be Gerstner's swan song. His contract with IBM expires in March 2002, and the 59-year-old is not expected to renew. President and chief operating officer (COO) Sam Palmisano has been Gerstner's heir apparent since he was promoted to his present role in July 2000.

Gerstner denied those rumours and deflected questions about whether he'll be attending next year's analysts meeting, quipping that IBM "doesn't plan that far in advance".

He said the lucrative services market was driven by the IT skills shortage, the speed at which the tech industry moves, and the complex integration tasks customers face. He touted the sector as an attractive one to be in because service companies never become obsolete, they adapt to new technologies and business models.

Even better from a supplier's standpoint, the services market is recession-proof, according to Gerstner. As evidence, he pointed to IBM's recent track record in Japan: Last year, when the stagnant Japanese economy grew by only 1%, IBM's outsourcing business in the country grew by 24%, he said.

IBM's services focus will usher in a new golden age for the company akin to the one it enjoyed in the 1960s and 1970s, when it ruled the then-dominant mainframe market, Gerstner said. He also cited examples of IBM's own heeding of its e-business mantra. The company e-procured 94% of everything it purchased last year, saving $375m (£264m), Gerstner said. Online employee education saved another $350m.

Gerstner took swipes at several of IBM's rivals, noting that corporate investment in hardware and software grew by 11.3% in the US in the first quarter of 2001. The only companies having trouble with sales and growth, Gerstner suggested, are those who "were accomplices in this New Economy mumbo-jumbo".

"I never fail to be amazed by the binary, in or out, feast or famine mentality in this industry. You know the pattern: mainframes rule, then mainframes are dinosaurs. PCs are king, PCs are dodo birds," Gerstner said.

"Most recently, December was 'like somebody turned out the lights.' And now there is a '100-year flood' in this industry," Gerstner said, satirising Cisco Systems. chief John Chambers' recent metaphor for the downturn. "There's no blackout and there's certainly no washout, said Gerstner. "What's really going on here is that a bubble has burst. The dotcom bubble has burst."

Gerstner also said the PC market is no longer a fertile ground for innovation. Instead, he views it as a mature sector on the verge of self-decimation through price warfare. "Thank god we got out of the retail business a year or so ago," he said.

Addressing a question about Dell Computer's renewed commitment to aggressively regaining lost sales momentum, he commented, "If you have no technology of your own, and your market goes mature, price is unfortunately one of the few weapons you've got. The problem with a price war is that the guy who starts it thinks he's in control. He's not in control. Price wars in commodity businesses are really dumb."

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