IBM claims replacement cycle 'dinosaurs' set for extinction

The technology replacement cycle - the frenzied buying spree that the tech industry has come to count on every few years - is being driven to extinction by on-demand computing, said IBM CEO Sam Palmisano.

Speaking at IBM's spring security analysts meeting in Boston, Palmisano postulated that large corporate customers are no longer interested in investing in PCs or the latest servers.

Instead, these companies want to obtain software, consulting services and back-end hardware in a holistic manner to help them automate business processes and make their overall operations more efficient - in other words, he predicts great success for his company.

Palmisano said: "It has been product-centric, gizmo-driven growth, but that is not going to happen again. This industry continues to be a growth industry, because it solves a very important problem: productivity."

Additionally, he said, large companies are once again funding internal technology projects.

"We really do see more (funding) now than a year ago, now that projects are going forward. Things have stabilised," he said.

Since taking over IBM last year, Palmisano has promoted a strategy called on-demand computing, under which large companies will provide encompassing solutions to existing business problems through technology.

How these solutions are implemented, he said, varies by the customer and industry in question. Some corporations are looking for complete technological retrofits, while others will merely want to rent extra computing capacity for peak periods.

As a consequence of these trends, consulting and software for weaving together these organic systems will become a larger part of the profit pool in the industry. By 2005, these categories will account for 65 per cent of the technology industry's profits, up from 46 per cent today. Servers, storage systems, PCs and components, meanwhile, will decline from 54 per cent of the profit pool to 35 per cent.

Palmisano asserted that IBM is one of the few, if only, companies that can provide all of those pieces. The company has an extensive services and consulting group, participates in all of the relevant product markets, and can boast more depth in its research department than almost anyone else, he said.

Research "is why we are gaining all the share. It shows up in our servers. It shows up in our software. It shows up in our storage systems," he said.

IBM has set up 17 separate practice groups to focus on solving business problems with technology in different industries. The life sciences group, for instance, focuses on using technology to make drug research more efficient. The group has gone from "zero to a half billion dollars," Palmisano said.

"The more business process insight we can bring to a problem, the more margin opportunity we have," he said.