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Big Blue's Take on Tech Trends (4/23/08)

Pat Dorsey, CFA

Pat Dorsey: Hi. I'm Pat Dorsey, Director of Equity Research at Morningstar. I'm delighted to have with me today Jesse Greene, Vice President Financial Management of  IBM IBM, to talk about some of the big picture issues facing such a huge corporation right now. Thanks for joining me, Jesse.

Jesse Greene: My pleasure to be here.

Pat Dorsey: So, tell me in your words, how would you describe IBM's competitive advantage or economic move? What is it you guys can do to keep the competition at bay?

Jesse Greene: We are focused on the customer's needs and providing high value to our customers. It's our technology, it's the quality of our services organization, our ability to identify the clients' needs and provide complete solutions to their business problems. It goes back to where the company -- decisions the company's made over a number of years to invest in software, to invest in technology, to invest in high value products and services that can serve the customer better and make us valuable to the customer. That's the competitive advantage of the IBM Company.

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Pat Dorsey: It's interesting and you know when I think about IBM, you do so many things, you do a lot of them very well and history shows us that most companies have tried to do a lot of things well, often get beaten by more focused competitors. That you have held your own against people like EMC or Accenture who're just focused on one part of the business, tell me a little bit about how you keep that focus and diversity at the same time?

Jesse Greene: Well, first of all, we are focused. I think that if you look at the way we've handled the business over the last five years, we've moved away from commodity businesses, we focused down on areas where we can create value for our customers. We've invested heavily in areas of software and services and in parts of hardware to maintain our leadership products and services. So, we actually are not attacking every problem in the world, we're attacking a very select set of problems. And it's the quality of our people. With 380,000 people, in the end it comes down to solid employees, leadership and management, and good processes.

Pat Dorsey: So, how do you ensure that promising new technologies are surfaced? You know, in such a large organization, you have lots of smart people doing R&D and lots of promising stuff and you know -- how do you ensure that those things bubble up to the top and get the attention of senior management when they deserve it?

Jesse Greene: It goes back again to our leadership and our employees and good information about our customer's needs, the technology is developed. You know, our business is divided into three pieces -- hardware, software and services. That allows us to have targeted development around each of those pieces, which are different, very different. And so the management in each organization can be focused, they can understand their industry, they can understand the other players in the industry, understand where they're taking their businesses and position us well for the future and just deal with our customers and service our customers.

So, it is focused. It is narrowing the field of opportunities and making sure that the opportunities rise up to the organization and get to the marketplace in the appropriate time. And we have a rigorous financial process where we look at market opportunities, figure out what the profitability and cash flow can be from these, we have hurdle rates that do this, long established financial processes that filters out the unsuccessful from the successful projects. So, we believe we have the tools necessary to sustain our performance in this regard.

Pat Dorsey: So, looking forward a little bit, you know, IBM plays in probably more technology ponds, fishes in more ponds than almost any other company in the world. So, putting on your pundit hat, what trends should a technology investor be looking at going forward. You know themes that you think might surprise on the upside or downside. You guess you are uniquely positioned to think about this I think.

Jesse Greene: I think customers are going to continue to demand that we produce value for them, not just a product or service, but help me make my business better. OK, high values are what they're looking for. I think companies are going to have to remain focused on that issue, we certainly are focused on that issue. I think the major themes that underlie that are globalization, the fact that the networks now enable you to work from anywhere to anywhere and you have to be able to operate cross borders. Many companies are global, so you should need to be able to operate on a global basis. Those are all part of the globalization, integration around the globe.

We talked about virtualization which really plays to us where, servers are going to become more efficient over time and run much higher utilization rates than they are, but our mainframe has always been there. We've been in virtualization for decades, right. And so it's really coming to us and our high-end servers and our high-end servers and mid-high and mid-range servers are exactly where people want to take their applications to accomplish that.

So, we see globalization, integration, the virtualization things being major themes. I think the other thing is efficiency, greenization, if you want to call it that is another area of major opportunity and a major trend that we see. You know, we have the green data center which allows us to reduce customers' energy costs and still provide all the computing power that they need and I think you're going to see more of that from IBM or more from others as well, but more from IBM in that regard. So those are major opportunities that we're all going to face -- and opportunities and challenges that we're all going to face going forward.

Pat Dorsey: It's exciting stuff, Jesse. Thanks so much for spending the time.

Jesse Greene: My pleasure, thank you.