Can This IBMer Keep Big Blue's Edge?

On Oct. 25, directors of IBM reached within the company’s ranks and named 30-year veteran Virginia “Ginni” Rometty chief executive officer. The choice was vintage IBM, which has had only nine CEOs in its 100-year history; all but one were longtime insiders. Yet in an era when the technology industry’s pecking order is often upended by companies only a few months old, IBM has managed to survive by remembering it is only one mistake away from irrelevance.

That has required discarding businesses it once dominated—think personal computers—and even transforming itself from a hardware maker into the No. 1 technology services company. Rometty says that despite IBM’s deep pockets and $100 billion in 2010 sales, she plans to keep pressing her management team to take more risks and embrace change. “I don’t believe in the inevitable, or in thinking that things have to and will turn out in a certain way,” she says. “Whatever business you’re in, it’s going to commoditize over time, so you have to keep moving it to a higher value and change.”

Rometty’s biggest immediate challenge is to boost IBM’s growth. Revenue, which climbed 4 percent last year, essentially has been flat for six years. She and plenty of other IBM executives remember the company’s near-death experience in the 1990s, says Nicholas Donofrio, former executive vice-president for innovation and technology who was running the mainframe business at the time. “We were making great things but they weren’t things that people wanted. We’d rendered ourselves irrelevant.” As losses of $16 billion piled up between 1991 and 1993, former American Express and RJR Nabisco executive Lou Gerstner was recruited to implement dramatic changes, including firing 35,000 workers to cut costs.

The old IBM, which sold large and costly mainframes, gave way to a new services-oriented business that aims to help customers manage their technology. The company’s services business now includes PwC, the technology consulting business IBM acquired in 2002 for $3.9 billion. Rometty made her name integrating PwC’s fractious consultants into the IBM fold. Today that unit and its fellow services businesses employ more than half IBM’s 427,000 employees.

A similarly difficult transformation has taken place in hardware. IBM sold its huge PC business almost seven years ago. Hewlett-Packard, by contrast, is just now mulling its future in that increasingly low-margin business. Today Big Blue emphasizes services, where it logged 32 percent gross margins last year. The company’s software business, which accounts for 20 percent of revenue, had margins of 88 percent in the third quarter of 2011.

IBM in the past decade has become less hierarchical, allowing tech ideas to rise up within the huge operation. The company’s successful Smarter Planet initiative, intended to introduce more intelligence into systems such as power grids, is said to have originated in one of IBM’s “jams.” Those are the company’s online brainstorming sessions, where all employees are welcome. And despite being almost 3,000 miles from Silicon Valley, IBM pumps out more patents than any other technology company. It invested $6 billion in research and development last year, 6 percent of revenue, compared with $3 billion, or 2.4 percent, at Hewlett-Packard.

“They encourage people to be experimenting,” says Rosabeth Kanter, a Harvard Business School professor who has written about the company. “Their size could be a disadvantage if it means bureaucracy, but it’s an advantage because they have lots of people looking outside to see what’s the best and latest and bringing it in to IBM.”

Every December top executives gather in the company’s oak-paneled boardroom for the Global Technology Outlook. They debate what ideas to chase, what projects to fund, and what companies to consider buying. The areas IBM is focusing on now—analytics, cloud computing, and emerging markets (from which it expects to derive 30 percent of revenues by 2015)—are the result of strategies mapped out years ago.

In the meantime, IBM has propped up its earnings per share by buying back stock and reducing its number of outstanding shares. To trim costs, it has moved tens of thousands of U.S. jobs to developing countries, especially India. Eventually, however, Rometty will have to find ways to reenergize the top line, something that will likely push IBM outside its comfort zone. Such challenges are hallmarks of Rometty’s career at IBM; she’s done everything from systems engineering to leading Big Blue’s global sales force. Still, she says she knows it won’t be easy. “I learned to always take on things I’ve never done before,” says Rometty. “Growth and comfort do not coexist.”

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