Speaking Out: IBM's Sam Palmisano

Note: This is an extended, online-only version of the Q&A that appears in the August 18-25 issue of BusinessWeek.

Q: What are the lessons learned from the bust that will be applied to the recovery and any future boom?


The biggest lesson from the bust is that the customer is now in charge. We're witnessing a major power shift between information technology and the rest of business. From now on, the technology companies that succeed will be those that have developed skills at listening and a sophisticated understanding of their customers' industries.

Don't get me wrong: Technology is still important. IBM (IBM ) isn't investing billions of dollars every year into research and development -- and winning more patents than our top 10 competitors combined for more than a decade -- as an academic exercise. But research is now being driven much more by what people need, rather than just by what is possible.

Q: What impact will consolidation have on startups and innovation?


I do have one concern -- not about industry consolidation, but about possible overreaction to recent corporate excesses. Please understand, I think it's entirely fair for society to impose appropriate oversight and to insist on appropriate corporate governance, particularly for companies of IBM's size and reach. But when you're a 30-person startup, you may not have the resources to handle everything that is being contemplated in some circles. You may not be able to get the right kinds of people to serve on your board, or provide compelling incentives to attract top talent. You may be suffocated by all of the controls and checks and certifications.

If we overregulate, overcontrol, impose too many burdens and too much bureaucracy -- or if we do it across the board, without taking into account the differences among businesses and their relative impact on society -- that could make people risk-averse and dampen the entrepreneurial spirit.

And it could also knock out of whack a very delicate ecosystem -- among venture capitalists, entrepreneurs, academia and industry -- that has for decades created enormous innovation and economic growth. We understand the importance of improving controls and governance, but we need to find the right balance.

Q: How does IBM apply its vast research capabilities to new innovation in services?


For one thing, IBM Research is focusing an increasing amount of its investment on services-specific research. But even more directly, we're putting our world-class scientists in the field. These teams work right in the marketplace on our customers' biggest business problems, and at the same time they create long-term, exploratory research programs for services.

Because of IBM Research, in 5 to 10 years, we'll have a number of services practices and methodologies that our competitors couldn't dream of matching. And over time, this is going to be a primary channel for bringing our investments in research directly to our customers.

Q: Which tech trends are you most excited about for this next period, and which ones are you most worried about?


It's going to be increasingly difficult to provide value and competitive advantage in basic hardware -- PCs, servers, storage systems. There is overcapacity in the industry, and a few well-known players are extracting virtually all of the profits. However, value is migrating up the stack. We see continued growth prospects for enterprise software that sits above the operating system -- middleware -- particularly software that enables integration of business processes.

Services will continue to be a growth engine, but even there we see differentiation. Plain-vanilla product maintenance or commodity-like outsourcing -- which are easy enough to get into if you don't have extensive experience and skills and if you're willing to accept razor-thin margins -- have little appeal. Business insight, business-transformation outsourcing, and virtualization of the IT infrastructure are all exciting growth segments, and we're making significant investments in those areas.

Q: What is the temperature of corporate customers?


It's still a tight environment. And there's still a healthy level of skepticism about extravagant tech promises, which is a good thing, in my opinion. Having said that, many of the CEOs I talk to are seizing upon these times as an opportunity to reposition their companies. They're making investments and acquisitions, and they'll emerge from this downturn in very advantageous positions, relative to the more conservative "hunker down" types.

Customers' biggest worry is not being able to react fast enough in a volatile, uncertain economic and geopolitical environment. Responsiveness and flexibility are the name of the game.

Q: Will the next stage of the Internet be led by the U.S.?


The U.S. still has an unmatched IT ecosystem of industry, academia, and early adopters of technology, not to mention a national propensity to innovate. There's a strong commitment to continued technical leadership by the U.S. government. That said, innovation is not an American birthright, and to try and define it that way ignores the realities of the global competition for everything from customers to ideas.

We're moving beyond "international" business to something that is more like "transnational." For instance, IBM has 30 software labs around the world. We have research labs in six countries, including China and India. We're global by definition and have been for a long time, which creates tremendous advantages for our customers and shareholders, and tremendous opportunities for the top talent in markets all over the world.

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