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The Current Economic Environment in the United States

Speaker: Samuel J. Palmisano, Chairman, President and Chief Executive Officer, IBM Corporation
Presider: Robert E. Rubin, Chairman And Senior Counselor, Citigroup
November 6, 2008
Council on Foreign Relations


ROBERT RUBIN:  Good morning.  I'm Bob Rubin, and on behalf of the council we welcome all of you to the council's corporate meeting program.  We are honored to have today as our speaker the chairman of the board, chief executive officer of IBM, Sam Palmisano.  And as is the practice of the council I won't recite his resume.  It's in your materials.  Let me just say -- and all of you know this -- that he is widely respected, universally respected for having done an outstanding job at IBM, both in preparing IBM for what has turned out to be an extraordinarily difficult economic environment and also as a thought leader in the uses of technology in an ever more complicated world, and that is going to be the subject of his comments today.

The world that we live in has clearly become increasingly complicated and complex in all kinds of ways, and what Sam is going to talk about is the use of technology to infuse intelligence into decision-making, both in systems and in individual decision-making as a trader sits at a desk or a secretary of the Treasury sits in trying to deal with a Mexican financial crisis or whatever else might be involved.  And that takes us really to the forefront of decision-making, both in a systems sense and in an individual decision-maker sense in the world today.

With that, let me also say that as an example of the Council's own technological advancement, we are joined today not only by all of us in the room, but also by members of the council around the world -- around the nation and around the world -- by videoconference.  Let me remind you that this meeting is on the record.  Also let me please ask you to turn off your cell phones.  Sam and I just signed little forms, so we don't get residuals if this gets turned into a movie or some such thing.

In any event, with that let me introduce our truly distinguished speaker, Sam Palmisano, CEO and chairman of IBM.  Sam.  (Applause.)  Let me get my coffee out of your way.

SAMUEL PALMISANO:  Take your coffee.  I want to make sure you're awake before we get to our Q&A.  (Laughter.)

Well, good morning, everyone and, really, thank you for coming out and doing this this morning.  And, Richard, thank you again for hosting me.  It's really a pleasure and honor to be here today, and as Bob referenced, it is an extraordinary moment in time -- major political transition in the United States, economic turmoil, financial markets restructuring themselves.  Certainly there's a little bit going on, but there's also, I think you'll agree, a huge feeling of a need for leadership at this point in time.  That's a lot that I'll be talking about today; that's more the opportunities associated with the environment versus the negativism that could be construed from the environment we find ourselves in.  I mean, I think political leaders aren't the only ones who have been handed this mandate for change.  I mean, leaders of business institutions everywhere confront this unique opportunity to transform the world that we live in.

We have a chance, for reasons we might not like, but we certainly have the chance in this crisis that the financial markets have jolted us into and have awakened us to the realities of a world, a world of complex systems that are more integrated today, but this is only one of a series of events that, quite honestly, has occurred in the first decade of the 21st century, and I think it's been a series of wake-up in this world, and I'll refer to it as the reality of global integration.

Two years ago, as many of you might know, I published an essay in Foreign Affairs describing the changing structure of the corporation.  I just felt that it was a topic that hadn't been discussed in light of what was going on as the world globally integrated economically, and I described the emergence of a kind of a corporation, a globally integrated enterprise that would transform itself from the multinational that we all traditionally had growing up and were quite familiar with.

Today there's a growing consensus that this is real, that global integration does represent a different business model for the corporations of the world, but it also is more, I think, than just a movement of information and work and capital across the developing nations; it's also profound in that it constitutes really just one aspect of what we're seeing today, just one aspect of this world as it globally integrates.  In the last few years our eyes have been opened to global climate change, to the environmental and geopolitical issues surrounding energy.  We've been made aware of supply chains for food and medicine, and of course we entered the new century with the shock of our own personal security after 9/11.

These collective realizations have reminded us that we are now connected economically, technically and socially.  We're also learning that being connected is not sufficient.  Yes, the world is flatter.  Yes, it is connected.  Yes, it is getting smaller, but there's more taking hold than just that.  In a word, I think the world is becoming smarter today than it was historically.  And that just isn't a metaphor.  I mean, infusing intelligence into the way the world really works, the systems and processes that enable physical goods to be developed, manufacturing to be done, things to be bought and sold, services to be delivered, everything from people and money to oil and water, to electrons moving around and billions of people, the way they work and live, but it is much more than that, and the question that I might ask is, really, what is making all this possible?

First, our world is being instrumented.  The transistor, which was invented 60 years ago, is the basic building block of the digital age.  In two years there will be a billion transistors for every person on the planet, and you can get those transistors for the cost of a ten-millionth of a cent.  We'll have, next year, more than 4 billion mobile phone subscribers and there will 30 billion radio frequency identification tags produced globally within the next two years.  Sensors are being embedded across entire ecosystems, supply chains, healthcare networks, cities, even natural systems like rivers.

Second, our world is becoming interconnected.  Very soon there will be 2 billion people on the Internet.  But in an instrumented world, systems and objects can now speak to one another.  Think about the prospect of a trillion connected and intelligent things: cars, appliances, cameras, roadways, pipelines, pharmaceuticals, livestock.  The amount of information being produced by the interaction of all these things will be unprecedented.

Third, things are becoming intelligent.  New computing models can handle the proliferation of end-user devices, sensors and actuators, and connect them back to end systems.  Combined with analytics in the software and massive super-computing capability, all this data can be mined now for intelligence, and this intelligence can be translated into action, making the systems and the processes and the infrastructures more efficient, more productive, and more responsive, and, yes, in a world that's becoming much smarter.  What this means is that the digital and physical infrastructures of the world are converging.  Computational power is being put into things that you wouldn't recognize as computers, indeed almost everything.  Any person, any object, any process, any service, any organization large or small can become digitally aware and network.

With so much technology and networking available at such a low cost, I mean, you say, well, geez, why wouldn't you enhance this?  Why wouldn't you take advantage of it?  Why wouldn't you provide services to a customer or to a citizen or to a patient?  Why wouldn't you get connected?  Why wouldn't you mine all this information if it's affordable and readily available?  Of course the answer is you will, and so will your competitors.  And your competitors might be companies, they could be cities, they could be nations, but of course people will, and they will because the technology is abundantly available and it's infinitely affordable.

But there is another reason why I think companies and institutions and industries are going to become smarter, and I would argue that it's because we must -- not just in moments of widespread shock like we're dealing with today, but integrated into the day-to-day operations, these mundane things that we all do in business, in government in life, which ultimately become the sources of surprise and create some of the crises because they weren't smart enough to sustain themselves.  I mean, consider for a moment how much energy we waste.  According to published reports, the losses of electrical energy because the grid systems aren't smart are somewhere between 40 and 70 percent of the capacity produced in the world.

Think about how gridlocked our cities are.  In fact, given the rain in New York City -- not a heavy rain, not a flood, just a mist -- we all understand this morning -- congested roadways in the United States cost $70 billion annually -- $70 billion annually in the form of lost hours of productivity of work, gallons of gasoline wasted, and that's not even sizing the impact to the environment as the exhaust pollutes the air.

Think about how inefficient our supply chains are.  Consumer products and retail industries lose about $40 billion annually -- about 3.5 percent of their sales -- due to just sheer inefficiencies in the supply chains.  Think about how adequate our healthcare system.  I mean, that's a stretch calling it a system.  In truth it really isn't a system at all, is it?  It doesn't link diagnoses to drug discovery to healthcare deliveries to insurers and employers.  In fact, kids playing video games have better interactions than we do in our health system today.  But meanwhile, these personal expenditures because of its inefficiency and cost are putting more than 100 million people worldwide below the poverty line because it's a issue that hasn't been addressed.

And how about our world's water supply?  Global water usage has increased six fold although the population growth has only been two times.  And according to the Asian Development Bank, one in five people living today lack access to safe drinking water and half of the world's population does not have adequate sanitation.

And of course, as Bob referenced this, the financial markets, and they're going to be analyzed and studied for years to come and there will be many books written about this.  But I think there is one thing we'd all agree on at this point in time is that the financial institutions understood how to spread risk, but they weren't able to track risk, and that uncertainty, that lack of knowing lack of precision undermined confidence because we couldn't track the risk; we were only spreading the risk.

It's obvious when you consider the trajectories developing in driving this planet that we're going to have to run a lot smarter and a lot more efficiently, especially as we seek new areas of investment to solve some of these problems and to drive economic growth and to help lift the economy out of the demise we find itself in today.  But the good news is that we can.  We can see this in how companies and institutions are rethinking their systems and applying their technology in many new ways, and I'll just cite a few examples of that.

Stockholm's smart traffic system has resulted in 22 percent less traffic.  There's also a 40-percent drop in emissions and more than 40,000 additional daily uses of the public transportation system.  Smart traffic systems are stressing the competitive positions not only in Stockholm but in cities like London and Brisbane and Singapore, with many more being planned.  Intelligent oilfield technology can increase both pump performance and well productivity in a business where only 20 to 30 percent of the reservoir is actually extracted and produced into some form of energy.

Smart feed systems, such as the one now running in the Nordics, where RFID tags are tracing meat and poultry from the farm through the supply chain to the supermarket shelf.  Smart healthcare systems can lower the cost of therapy by as much as 90 percent, and ActiveCare Network is doing this today with more than 2 million patients in 38 states, and it monitors the delivery of their injections and their vaccines.

I mean, there are many, many more examples that I can cite here and around the world, but smart systems are transforming energy grid supply chains, water management; they're ensuring the authenticity of pharmaceuticals and the security of currency exchanges.  And they're changing almost everything in organizations, from their business models and how they enable their employees to collaborate and to innovate.  And remember, the opportunity to become smarter not only applies to large enterprises; it actually applies more so to small and mid-size.  And we all know that that is the engine of economic growth and employment here and throughout the world, and if you think about a supply chain or a healthcare system, what have you, it's hundreds and thousands of small businesses today that are participating in that ecosystem that makes all that work.

But this is not really about just large enterprises because most of the people participating tend to be small and mid-size businesses.  But the opportunity obviously is there for business.  It's obviously there beyond business.  Smart infrastructure is becoming the basis of competition between nations in the regions and cities.  In a globally integrated economy, investment and work are going to flow to places, as I've said before, where the cost advantages and skill and expertise exist.  But they're also going to flow to countries and regions and cities that have smart infrastructures -- everything from effective transportation systems to modern airports, secure trade lanes, reliable energy grids, yes, and transparent and trusted financial markets and the enhanced quality of life because people today who have the intelligence and the capability will migrate to where those opportunities are where they can get balance in their lives, not just economic prosperity.

Certainly as you travel the world, you see countries everywhere leapfrogging, not only to the latest technology and digital infrastructures, to the most modern business designs, processes, models, and ultimately it really is all about competitiveness in this globally integrated economy.  So the importance of this moment I believe is that we have something we haven't had for a very, very long time, and I refer to that as the precondition of change.  People want it.  And we shouldn't lose this moment; we might never have it again.  I mean, isn't it true, when you think about all of us who try to drive change to the organization, that if we can't get the citizen or the employee or the constituency to buy in or feel it personally, that it's very, very difficult to get the organization to change until it's felt at a personal level?

I think in hindsight, you know, when you see these moments, we always think afterwards when things get back to normal, were we bold enough?  Did we do enough?  Did we change enough?  In fact, I referenced -- does anybody ever retire from whatever they were doing as a profession and said, boy, I wish I would have done less?  That would have been great to have done less, right, Bob?  I mean, that would be a significant -- at least not in this audience.  I doubt people are thinking they'd rather do less than more.

So we have that.  I mean, in this period of discontinuity, yes, as harsh and difficult as it is, those with courage and vision will take advantage of this as a period of opportunity.  Over the next couple of years there are going to be some winners and there are going to be losers, and it may not be easy to see at this point in time, but I believe that the new leaders are going to emerge, and they'll win not by surviving the storm but by changing the game.  To do that I think we need to practice a new form of leadership.  Think about these systems.  Nobody owns the system -- no individual, no entity -- which is part of the complexity associated with timing the change to make it more effective.

So to make this happen, you need collaboration.  Everyone has to come out of their lanes.  That's true for business, that's true for the policymakers and governments, that's true for the academic organizations.  People have to come together and form these partnerships of collaboration to work together to solve these problems.  And, yes, they're going to have to move out of their comfort zones because there's not one thing, individual, or entity that owns the nature of the problems that we face today.  I mean, this is something that the council has been doing for many, many years, as you all know and as Richard knows.  You take people out of their comfort zone and you make them think in a broader context.

And this is serious work and it's ahead of us, but I think it's important both as leaders and citizens that we understand it and we step up to it, and that we infuse intelligence into these systems, into this decision-making, not just infuse more capacity and speed because we've seen what speed does if you look at the financial crisis.  Capacity and speed certainly, if anything, made it more difficult to control once it began.

So, yeah, the world's becoming smaller, yeah, the world is becoming flatter, and of course it's becoming smarter, but as we move to this globally integrated intelligent economy and society, I think the question really for all of us that we should reflect upon is what do we do with that?   I mean, this world is beckoning us to take advantage of this as an enormous opportunity, and I believe it's one we can do and it's one we can build on if we open our minds and we come together and get committed to lead some of the change that's required to make this planet a smarter place.

Thank you for your patience.  (Applause.)

RUBIN:  Sam, that was both interesting and deeply thought-provoking.  Why don't we do this?  We will turn to the audience and we'll take questions, and then at some point I also have a question or two from our far-flung audience.  Who would like to start?   Yes, sir.  Let me remind you this is on the record -- also if you'll state your name and affiliation.  And the briefer we keep the questions, the more questions we can have in the time that we have with Sam.

PALMISANO:  And the briefer I keep the answers the more time you'll have for questions.

RUBIN:  I wouldn't have said that.  (Laughter.)

QUESTIONER:  Thank you.  Bal Das from InsCap Partners.  On the concept of the smarter planet, I'd appreciate your thoughts on as these intelligence and systems are getting more integrated, what is the fundamental vulnerability of a smarter planet to physically catastrophic events that could, in an instant, paralyze it, so a greater dependency moving away from physical into this smarter world and the vulnerability of the smarter world to a catastrophic event.  I would appreciate your thoughts on that.

PALMISANO:  Well, I think it depends on how you define the catastrophic event.  And let's assume we'll take something as a natural disaster.  Things like natural disasters, or the support of the infrastructure itself, can be planned and dealt with.  I mean -- by that I mean it's the ability -- as we do today in many of these systems that create the redundancy, and the backup in the power supplies and all the things that are necessary.

I mean, at IBM we operate one of the largest currency trading systems in the world, about $1 trillion a day.  It's completely redundant.  It doesn't fail -- it should not fail, I'm saying that it will never fail.  I mean, I wouldn't go that -- I wouldn't be that bold.  But it hasn't failed -- (laughs) -- you know, right, because you could design that into the system, and you can do that in a way that you can protect the energy support to it, you can protect the systems technologies itself.

There's the other threat -- beyond natural disasters, which is more of the cyber threat.  You know, therefore, people who would like to -- for whatever sets of reasons, for whatever agendas they might have -- get in there and cause mischief; cause traffic jams, take something as simple as that; or steal medical records, for whatever purpose, that's maybe misintended .

Again, the technologies exist today that allow these things to be protected, encrypted; to become anonymous; and allow all this to be dealt with.  So, as I think about it, it's not an inhibitor, it's something that you have to work through -- no different than it was worked through before when people created the airline industry and transportation by air, I mean, relative to ship.  I mean, all those things were thought through.

So, in this vision, all that stuff has to be thought through.  My only point is that there are solutions to it and it can be solved.  And if we're thoughtful in the design and its architecture, I think we can create these robust systems that we find acceptable.

RUBIN:  Yes, ma'am?

QUESTIONER:  Hi, Pat Rosenfield, Carnegie Corporation.

Your speech was actually pre-envisioned by Peter Drucker.  In 1994 he wrote that, in the 21 century, there are only going -- there are not going to be poor countries, there are only going to be ignorant countries.

PALMISANO:  (Laughs.)

QUESTIONER:  And I think it's very important to talk about those countries that you implied might be the losers.  Could you tell us what systems we can put in place now to prevent that catastrophe?

PALMISANO:  Actually, it's an excellent -- it's an excellent question.  I mean, the losers are going to be the poorer countries, or the -- you know, it's called the emerging countries of the world.  You know, I'm sure that -- and I had not read Peter's work in 1994, but I'm sure he wouldn't have imagined that, at this point in time, the emerging markets would have a better balance sheet than the developed world.

You know, the world's changed.  There are more financial assets and financial wherewithal today in many of these emerging markets than we have here.  I know it's a -- I know it's a stunning fact, but this is what it's become.

As I travel around the world, I find that, in many of these developing worlds -- I was in Sub-Saharan Africa about three weeks ago; I've been all throughout Eastern Europe, Latin America; spent a lot of time in Asia -- and you find that, you know, in many of these situations, that they are putting together some very innovative plans, very innovative plans to deal with some of the problems that they have.

Most recently, when I was in Egypt, when I was with President Mubarak and the current prime minister, Nirvez (sic), we went through a whole conversation on how to modernize the health system.  And, you know, quite honestly they're doing quite well economically.  They have the wherewithal and the flexibility to deal with it.  And the whole conversation was, how do you skip the problems that other people have in their health systems?

When you go to places like India and you talk about what they need to do in the rural areas to create economic development based on a wireless telecommunications infrastructure -- I mean, (John ?) was with me, and we were with the former president, at that point in time.  And again, the conversations and the wherewithal is what you need to do to enable that environment through this wireless infrastructure.  You would have some technologies -- not to make this an IBM commercial, it's language-enabled search, because with people who are literate.  So, it's like Google that's voice activated in -- you know, in the Indian languages, and those sorts of things, that allow this to occur.

So, the first thing I would challenge is the premise is that there isn't the opportunity.  There is the opportunity.  Now, not all of these emerging markets are created equal -- and I certainly agree with you, and some are quite impoverished -- but at the same time I do think that the way to bring them into the opportunity is to participate with them if they try to drive change, not to leave them out of the dialogue.

And I've found that there's a very willing audience to get into this kind of information, this exchange.  And they want help beyond economic and financial.  I mean, they understand that they need some financial help; they understand they need foreign investment -- and it's very, very important to them, the ones that don't have the assets, in China and India, but at the same -- or Russia, but at the same time, you know, right, they need the expertise.  They need the knowledge.  They need the education systems.  They need the water supplies.  They need all those basic things that we sort of take for granted.

So, I think by combining these two factors, we don't have to -- there's no reason to leave them out.  In fact, many businesses would view this as a great opportunity.

RUBIN:  Bob?

QUESTIONER:  Bob Lifton, Medis Technologies.

I think we would also acknowledge that a large part of the innovative technology that's developed is developed by smaller companies.  In today's environment, those smaller companies are finding it harder and harder to find the wherewithal, the resources to continue, and yet the government focuses on bailing out the larger companies.

Do you envision any kind of plan where a company like IBM would support a program for the government, or someone else, to provide funding for smaller companies to be able to keep developing these technological advances?

PALMISANO:  Well, first of all, I completely agree with you, that if you look at the -- a lot of the technology breakthroughs, they do occur in small companies.  IBM is not small in this.  You know, we get a -- you know, about 4,000 patents a year.  We're the -- you know, we're the leader.  We get more patents than the entire industry combined.  So, we're not a -- you know, we're not a minor player in the field.  We've spent 6 billion (dollars) a year in R&D, so it's not huge.  I guess people argue it could be bigger, but it's not modest, it's not small.

But, my only point out of this, I completely agree with your premise.  And then the question becomes is, how do you work with the smaller companies, because we work with them all the time.  The reason I went to the size, because why would we work with them if we have 207,000 scientists and engineers and mathematicians at IBM?  Because we can't do it all ourselves.

So then the question becomes, so we have to work with them -- with the universities and small businesses both.  And you say, okay, so if you have to work with them, then how do you work with them?  Our finding is, in many of these situations it's not financial.  They really are not looking for money.

We do have the wherewithal to invest, but that's not what they really need.  There's private equity, as you know; and there's venture capital funds -- and maybe they're constrained in the short-term but, over time, they'll be back, you know, right.

You know, in the long-term what they're really looking for is expertise, ecosystem, infrastructure, taking it to market, you know, all those sorts of things.  I mean, we have a group out in Silicon Valley, it's full-time out there, and in all the conversations they're really not looking for a big cash infusion from IBM, they're really looking for expertise.  And then if they do come up with something, how do you scale it -- because they can't scale things?

So, that is, I would say, the balance in this whole thing.  So if we were going to think about, you know, now we're going to solve the problem, right -- might go through the -- what is the environment?  How would you then -- to your question, solve this problem?

I think the way you solve the problem is similar to what I was saying -- you form the collaborative groups, and this -- pick some key area that's important, say, energy -- I mean, it seems to be a topic of interest these days.  Let's take energy -- a realistic view of alternatives to energy, not just ones where people can monetize their investments; and then get thoughtful people together.  Let's get the corporations.  In IBM we do a ton of working solar panels.  In fact, we opened a nanotechnology center in Egypt, with Mubarak, when I was there, right.

So, get -- so, you don't think of an IBM as having this sort of stuff, I understand, because we're not in the energy business, but we have a lot of stuff.  Get, obviously, the energy people; get the small venture-backed groups together; get the universities together, and then come up with a thoughtful way to address the issue.

I think if we did that we would make progress than just, quite honestly, putting money at it, because the money today, it is a short-term issue.  I mean, clearly, there's guys that are -- they don't have the credit capacity they've had in the past.  And I assume that Bob and his colleagues will fix that.  I mean, I really have -- (laughter) -- a lot of confidence.  I really do.

RUBIN:  Which set of colleagues -- (laughs) -- are you --

PALMISANO:  (Laughs.)  I think they'll fix it.  And I think then we're going to get back to the real issues again.

Yes, sir?

QUESTIONER:  John Beatty, from UBS.

A lot of the technologies that have made fundamental changes to our lives, such as the internet, nuclear technology, and so on, were developed primarily for military use and have since been converted into -- for civilian purposes.  I take the point about the role of small businesses and the private sector being involved in research and development, but given the high likelihood that governments will continue to be actively involved in research and development of these technologies, and the related issue of proliferation of technology, how do we ensure that there will be an inclusive process of dialogue with different participants around the world, but at the same time ensure that you don't have proliferation of technologies into the wrong hands?

PALMISANO:  That's an excellent question.  And, you're right, and historically -- even if you go back to the internet, which was DARPA, you know, a defense-related agency, University of Michigan, MCI, IBM and some other participants have all been forgotten -- you know, that's back in the '70s, for research purposes, and that actually connected laboratories around the world, not just in the United States.  And so the browser was formed out of the University of Illinois', if I'm not mistaken -- Mosaic, right.

Then it became the consumable internet, versus just scientists working on various projects.  And, yes, they were related to nuclear weapons programs.  So that was the origin of it.  And so what's happened since then, right -- today the government has lowered -- and this is the U.S. statement, that's not true around the world, by the way.  But, if you look at the percentage of money that the government's participated in in research and development it's actually come down over the past decade or so -- in 20 years, and go back in time.

And not only has it been lowered, it's been rebalanced to the biological sciences, not the physical sciences.  So is that a problem?  Well, the issue, quite honestly, is a lot of the future jobs that are going to be created are not only going to be in the biological sciences -- the health system, per se, but it's the physical sciences that are going to -- the next 100 million jobs -- why do I jump to the physical sciences.  Well, that is the wireless infrastructure; that is hybrid cars; it is alternative energy sources.  It is, it is, it is -- you know, it's not just the biology side of the house.

So, the first thing is that the funding is way down -- relative to even countries like Finland, you know, it's way down.  And there's a lot that can be done just in --  If you kept it the same -- that, you know, where there's not a lot of money going around these days at the either federal or state level, so let's just keep it flat and rebalance it based on where the economic opportunities happen to be.

I mean, there was a study done a few years ago that I was part of by the National Innovation Initiative, and the Competitive -- of the Council on Competitiveness, and the universities that participated in the study estimated there is 100 million jobs that are going to be created in the next 10 years.  They tend to be dependent upon these other technologies, and a core element of math and science.

And so, you know, if we rebalanced, from just the funding perspective -- and there's a lot of other recommendations in the report, not just funding.  There's lots of recommendations that you'd expect -- education, preparing the citizens of the future, et cetera, et cetera -- and financial structures.  But, anyway, the point that I'm on -- in fact, Bob's colleague, -- (inaudible) -- represented the financial community in the work -- but the point that I'm on is that there's a ton that can be done.

I don't think it needs to be relied on the military to do those sorts of things.  I mean, it really doesn't have to be the case today.  However, you know, right, it needs to be a focus.  And research and development in these areas, I think, needs to be put back onto the -- a balanced agenda.  I'm not -- I'm not lobbying for tax policy; I'm not -- really -- and tax credits.  Extend them, don't extend them.  I mean, that's all -- ought to be a political debate, and smarter people than I will conclude whatever they can conclude.

I'm just arguing the need.  And if you're going to address these issues of future employment and jobs, you need to rebalance the investment in the physical sciences.

RUBIN:  Matt?

QUESTIONER:  (Off mike) -- General Atlantic.

Along with this globalism that you talked about, in technology, there's also a counter-movement of protectionism and nationalism and, in the last few months, increased national interest in regulation on a local basis, rather than on a global basis.  And do you see that as an impediment to what you're talking about, or do you think that can be resolved in a way that's consistent with continued global growth?

PALMISANO:  Well, I think the thing that -- there's two ways to look at the environment today.  It's easy for me to talk about the private sector because I'm an element -- I'm a participant of the private sector, and I think we can extrapolate to the public sector.  In the private sector, there's two ways to play.  Now, let's assume you have a solid business model and a balance sheet -- because if you don't, you know, you can't play.  So, if you don't have a business model, and you don't have a balance sheet, you don't play, right.  Okay, so let's put that aside.

Let's assume you really have managed yourself reasonably well.  Now, you could look at the economic data, right -- (inaudible) -- we all see it, and you could hunker down.  And I'm not saying everybody's not going to go on a little bit of a diet.  Of course we will, because you have to protect your balance sheet; you have to get your costs competitive.  That what's going to happen.  That's one way to play it.

But the other way to play it is say, "You know what, there are these huge opportunities, because these problems still need to be solved; they have not been solved."  And I referenced some in the speech, and you can go on in lots of other areas, I just picked ones that are contemporary today.  And so that just creates tremendous opportunity.

And so you could take the perspective, "Well, gosh, you know, let's go after that opportunity."  I would argue that if I was in public policy -- I never will be involved (laughs), I mean, you know, I'm not that kind of personality -- (laughter) --

RUBIN:  This is a digression -- (inaudible) -- you describe that kind of personality?  (Laughter.)

PALMISANO:  (Laughs.)  More patient.  I don't have the -- I mean, I'm not, I'm not -- you need the, you need the patience, you need the resilience.  I just am a working guy, you know -- (laughs) -- four kids; very stable; two dogs, you know, you know, kind of basic stuff.  (Laughter.)  So, but my point is that if you would look at it from that perspective.

You know, you can go back in times in history when we faced this kind of a challenge -- go to the Great Depression and the New Deal; go to post-World War II and the building of the -- you know, where the energy that was expended throughout the country, or the New Deal; I mean, or Eisenhower, after the war and the interstate road systems were put in place.  We built that infrastructure.  Infrastructure at its time.

Now, at that time it was stimulative, which was necessary, but it also created an economic infrastructure that led to the most competitive, resilient economy in the world and the highest standard of living -- to end those very, very difficult periods of time.  That was the outcome of those investments.

Now were those people that insightful, that they realized this was going to occur?  Not sure.  I mean, I wasn't alive then, it's hard from me to pass judgment.  I mean, history -- you guys might know better than I.  But, let's draw the analogy to today.  And what is the analogy today?  Yes, there's going to be economic stimulus.  There has to be economic stimulus.  But are we better off putting it into the future or the past?

I mean, we could always go to the past.  What does that mean?  Well, let's go build some bridges; let's go put up protectionist walls; let's not trade -- let's not trade, am I right, because we're worried about, oh, my god, employment could hit 7 percent, maybe 8, and so we shouldn't trade.  You know, I mean, this is a real concern.  Let's let -- you know, that's a very valid argument, and you can hear -- that could resonate, and it will resonate in a lot of walks of life.

But, will someone stand up and say, look, the future is about building out this infrastructure that's going to support the long-term competitiveness of the United States -- that is these digital infrastructures.  Oh, by the way, it solves big problems.  I mean, you not only -- you know, we talk about affordability of care, how about the effectiveness of care?  I mean, this balance sheet is broken.  You know, that's the issue.  So, you got to do both.  Not just redistribute income so more people can participate -- which should be done, but if you don't deal with the effectiveness, to quality and the costs associated with that, it's a never-ending cycle.

Energy.  I mean it's great to talk about solutions that might yield benefit in 50 years, but the problems are here today.  So, you have to address -- using what you have, consumption of what you have, not just incentives for something that might yield benefit in 30 or 40 years.  So, my only point that I'm trying to make it that there's two ways to play the game.  And I would think that the best way to play the game -- this is a biased point of view, it has nothing to do with IBM, but I'd much rather be part of an environment that's going to the future than defending the past.

I mean, think about your own companies or your own organizations.  How good do your people feel when you say, I'm going to defend the past?  (Laughter.)  I know -- Bob, I know that the mainframe was the only way to compute.  IBM went from 407,000 people to 212,000 people based on defending the past.  Now we're back to 400,000 people because we went to the future.  How motivational -- listen to this -- there's 200,000 people that lost their jobs because we were intellectually correct?

And we were.  Today, the mainframe is one of the fastest growing platforms -- you know, how many years later?  We went through the trough -- 200,000 people, closed cities, right.  We survived.  But, my point is that it's not very inspirational to defend the past.  It is hopeful to go to the future.

So, I just think -- and beyond just expressing hope, you got to do real things.  As I like to say, you know, to my colleagues in IBM, you know, we have to be somewhat right.  We just keep -- (laughter) -- right, Bob?  You know, we have shareholders, right.  I just can't talk about the future, I need to be correct about the future.  I mean, research geniuses say, well, I only can think about the future.  I say, yeah, I know, I know, but I need you to be correct, not just thinking all the time -- you know, in getting your patents and your Nobel Prizes down there.

So, I think that's the way -- I really do think it's the best way to look at it.  And it is a constructive way to look at it.  So, I would encourage all of us to think about what does it take to go to the future; from a company perspective what is your business model that takes you to the future?  From the nation you could argue it's your business model, it's your competitiveness.

And ultimately, at the end of the day, if you want standards of living to go up, you have to improve your competitiveness.  You cannot do it if as a nation you are not economically competitive.  It's never been done!  And you don't have population growth, and these things have to occur.

So if you have no population growth and you aren't competitive from an economic perspective, there's only one way you're headed.  You know, it might not be in your tenure, but it's going to be in somebody's and it's not a good place to go.

RUBIN:  Let me -- we have questions from around the world.  Let me take two of them and try to conflate them.  And they sort of relate to Matt's question, I think, and see if I can bring them together a little bit.

One is from Tokyo -- Kenneth Cukier, The Economist, Tokyo, Japan -- and it sort of relates to what Matt just asked, I think.  It says, "What specifically can government do to promote this vision, considering that when states tried to promote computing in the '70s and '80s, they did a poor job of it."

A related question from Lewis Branscomb, the University of California in -- well, the University of California in California.

PALMISANO:  (Inaudible.)

RUBIN:  Oh, he is?



PALMISANO:  He's done research at IBM.

RUBIN:  Well, I'll put his in more polite terms -- (laughter).

PALMISANO:  Well, no!  I know him, so I'm sure it's not very polite.  (Laughter.)

RUBIN:  He referred to your Foreign Affairs article in 2006 as visionary in advocating change from multinational to global network enterprise.  And it seems to me, what he's basically saying here is:  What are the impediments that we have in the way that our country functions to prevent your vision from being realized?  And he refers specifically to our love for lawyers and our penchant for written contracts.

Two things:  What can government do and what are the impediments in the way our society functions to realizing the vision that you've laid out?

PALMISANO:  See, I'm going to propose something -- and this probably -- would never be claimed by my public policy adviser -- (inaudible) -- who's in Washington everyday.  But I'm going to propose something that, first of all, we sincerely want to address the problem.  I'm going to make an assumption set.

The assumption set is that we really do want to address the problem -- not for our own vested interests.  I'm not going to go lobby for R&D tax credits, because it helps IBM's tax rate.  That's a very good example of vested interest, right?  Or the uptick-downtick roll in financial services and someone's vested to change the uptick to the downtick, whatever.  I don't even know what it is.

You know, it's somebody's vested interest -- (laughter) -- I really don't!  You know, it's always someone's vested interest, right?  Let's put that aside.

So we are serious about solving this problem, because we decide that for whatever sets of reasons, the employees or the citizens don't want change.  What would you do?  If you really wanted to do this -- I'm going to throw this out there, guys.  And it might be -- I don't think it's controversial it's so basic.

What you would really do is you would say, okay, here's what we're going to do:  We're going to bring the people together that have the knowledge.  Got to pick a priority -- make it health care, make it energy, make whatever one of these things; it doesn't much matter -- we're going to bring the people together that have the expertise.

They are going to be in business, they're going to be in academia, they're going to be in government, they're going to be around the world.  That's just the facts.  I mean these are issues -- they're not U.S. issues alone.

So say nuclear energy, if you want to get on that path.  Let's bring them all together and we're going to get them in a room.  We're going to say, leave all your public advisers -- public policy advisers behind.  Can't come!  With all due respect, Chris.  You can't brief me.  You can't come, all right?  Because there's not going to be a company agenda or a university agenda or a political -- or a, or a, or a agenda.

You know, right -- we're going to sit in this room and we're going to get the smartest people.  This is the way you'd do it in business.  You get the smartest people around the table and we're going to put together something that actually solves the problem.

Novel, I mean, it's so basic.  It's what goes on every day in the world -- in the private-sector world.  Isn't this what happens?  You get the smartest people you can find.  If they're banks, you hire an adviser.  If you have -- that's fine.

RUBIN:  Well, you might have them on the premises.

PALMISANO:  Have them on premises -- like some of your guys and some of his guys, which quite often is the norm.  You can't beat them out with a stick.  But anyway -- (laughter) -- all right?  Especially when business is slow and they all live in Greenwich, but no -- (laughter) -- they've got to drive all the way home.  Early in the morning, late at night you can't get rid of them!

RUBIN:  No, seriously.  (Laughter.)

PALMISANO:  But seriously, stepping back from the humor, you know I think when you stand back from it, you know, you could really -- you could address some of these issues.  You could seriously address some of these issues.

And then you have to ask yourself, I think:  What would make that happen?  You know, what would make it happen?

Has there been a mandate in Japan or here for change?  I mean, Japan's challenges are great in the sense that the economy hasn't grown since the bubble burst -- oh, by the way, it was housing and financial-markets related; I used to live there then.  But fundamentally, housing would grow unsustainably -- (inaudible).  Their population is shrinking and they don't allow immigration.  It's a tough equation to close, all right?

So how do you get that resolved?  I mean, is there a sense in this a need for change?  Well, let's go here -- where I think we all witnessed this week.  There, you know, regardless of political party, I think you have to agree that there is someone who decided it's time to change, right?  I mean, somebody out there decided.

I mean, I've never stood in a line to vote, you know, in years.  And I stood in line!  And you know, we're all pretty busy and for me to stand in line -- it was not the best day in life.  But anyway, I did, all right.  I won't get into the political side of things, I just did.

And because I think -- not talking about myself or the people in this room -- we talk about everybody out there.  There's this acceptance that there's a need for change.  So if you're going to really change, I think you have to pick certain things that are priorities.  Yeah, we have an economic short-term crisis, but why can't we just do something that basic that's done every day?  Why do we have to make it complicated and why do we have to make it self-serving?

And look -- picking on myself -- I'll go down for R&D tax credits.  I'm going to argue for bilateral trade agreements.  I've got my whole script, you know, that I need for IBM to be successful.  And I need trade!  You know, we're in 170 countries.  I can't shut down 100 of them and feel good about it, because the political winds have changed.

So, you know, you stand back and say, why can't we do that?  And I just -- I'll leave that to you all to think about it.

RUBIN:  But what is the -- (inaudible).

PALMISANO:  Let's pick one -- if we could use this example.  Let's take anyone -- take health care.

I've sat in the health care rooms.  I know more about that than energy.  I sat there.  I sat in the president's conference rooms.  You know, you get in there.  Chris has been with me.  You hammer out all these details.  And people are not willing to put on the table what's necessary to fix the system.

Some of it is because of the economic impact to the participants in the system.  That's a fact and there is economic impact.  Some of it's the concern about litigation, because if you actually had standards that you measured quality of care against, you could create at trial record, you know, right?  So there's that very real concern.

And some of it, quite honestly, in private meetings with all these people is political will.  It's the political will to stand up and say, no, we're going to change the system.  We're going to have common definitions for this type of care, your disease and the procedure -- a definition.  We're going to use basic Internet technologies that exist today -- no big investment, just use what's out there.  Take Google or anything else that you want and just take the information, set up a quality database.  Benchmark costs versus quality delivered -- something we do every day in business -- and then use the biggest payer in the system, the federal government and the states, take the biggest payers in the system and say, if you don't comply, you don't get reimbursed.

You change!  It would change that simply.  You want the money?  We spend whatever it is -- 700 billion (dollars), $1 trillion a year the U.S. government spends; we spend as the private sector a third on top of that.  Say, no -- you want to get reimbursed?  You want our insurance plans?  If you're a company like IBM, you've got to do it this way.  You're the federal government -- you've got to do it this way.  It would change!

But you know, what were the inhibitors?  Well, they're very real concerns.  I'm not dismissing the concerns, but are people willing to change today?  The concerns are obviously political will.  Do you want all that quality data out?  The government has it.  Do you want it out there?  Fear of litigation, so therefore you have to deal with tort reform.  Do you want to deal with that?  Do you want to deal with this; do you want to deal with that?

You know, if we don't deal with these things, nothing's going to change!

At some point -- and I don't want to be impassioned here -- if you want to solve some of these problems, somebody has to rise above their own personal interests -- I'll speak for myself.  Stop arguing for R&D tax credits -- I think we should have a free trade system, but I'll set that aside.  Give up the R&D tax credits, stop arguing about foreign tax deferrals and all those sorts of things, because we need the cash to invest in our R&D and we can't generate enough here, because of the size of the business.

So forget all those agendas and say, okay, let's get the smartest people we know in the room.  I think it's not just the federal level, it's also the state level -- as you know, Bob -- because these things in the U.S., you have to touch the states as well.  Health care -- in a lot of these areas -- smart (congestion ?) systems, states and federal level.  And say, okay, we're going to hammer it out and we're going to come out with things that solve the problem and we're going to bet on the best salesman in the world.

And I think we've found a very good salesman.  I mean, again, I'm not arguing political persuasion, but we do have a salesperson today that could lead -- could sell this case.  Maybe we haven't had a salesperson in the past that could sell the case, but I would argue that we have one today and that if we just rise above all this and say, we need to be serious about solving these problems, I think they could be solved.

I mean, I'm naive.  Of course, I never worked in government.  I don't have the disposition -- they'd throw me out!  (Laughter.)

RUBIN:  I think we have time for one more question -- the question of how we decide who asks the one more question!  (Laughter.)

Yes, ma'am.

QUESTIONER:  Thank you, Bob.  Paula DiPerna, Chicago Climate Exchange.

And congratulations on your climate leadership; but I have another type of question, following on your comment.

To do less with more information requires a very high standard of prioritization.  And how -- what would be your recommendation for training the next generation of leaders to really manage a lot more systemic availability of information with the very real need to do less?

PALMISANO:  Okay, yeah.  I think the key is -- well, just -- I'm not going to turn this into an IBM commercial, but this is sort of what we do.

First of all, you have to train people to think multi-disciplinarian and end-to-end.  And we have a lot of engineers and scientists.  They don't come out of school thinking multi-disciplinary.  I mean, they're deep physics or deep mathematicians.  I mean, they're work with Citibank to solve some of these issues.  Big clients -- they'll do a massive supercomputer for genomic research and things like that, but they're not multidisciplinary, right?  I mean, they're very, very narrow in what they're thinking.  And they don't think end-to-end.  They don't think, how does this system connect end-to-end?

You know, we go through the impact of climate change or whatever -- take the river systems of the world, let's say.  How do all these things interconnect?  These systems all interconnect.  They don't think end-to-end.  They define in a narrow way the scope of the problem.

So you need to be able to train people.  And we've been lobbying with the university systems to have graduates coming out of school with this type of what we call services as a science, because most of the economy now in the U.S. is services based, it's not industrial based.  So how do you train people?

So it's a combination of multidisciplinary education -- liberal arts and the physical sciences, whatever -- all those things that kind of create a combination of factors where people could think more broadly.

The other area is you have to train people how to work collaboratively, in a multicultural environment.  Because it's not just -- we think multiculture we think gender and we think race or we think nation, you know, but it's also -- it's different backgrounds even within one.  So what is the multicultural environment?  Because, again, to get these problems addressed, all different factions have to come together and we can't dismiss the other person's point of view, because if they're Asian they're shy and not as expressive as American, you know, what have -- or Latin American, even more passion.  You can't dismiss that behavioral, cultural thing as something we shouldn't listen to.

So it's end-to-end, it's multidisciplinary and obviously, the work in collaborative environments.  And so that's what it really takes.  And in a way, you know, if you think about it, if you stand back, sort of, how would you take some issue that we face and solve it?  That is the roadmap, right?  Get a diverse group of people, have them listen to each other.  Tell them they can't work on their own personal agendas, right?  And they can't leave till they come out with an answer.  And then we need a salesman to sell it.  Anyway, it's the same sort of thing.  That's how it all comes together.

Thank you for your time.  I loved the questions.  I hope you found some benefit in them, versus just my mouth running for whatever it's been -- almost an hour.  But again, thank you.

RUBIN:  You were terrific.  Thank you.  (Applause.)









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