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IBM's grand plan to save the planet

Here is CEO Sam Palmisano's formula for changing the world: Find problems, throw in billions of dollars in R&D, add consultants and an earnest ad campaign - and watch the profits roll in.

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By Jeffrey M. O'Brien, senior editor
Last Updated: April 21, 2009: 3:17 PM ET

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CEO Palmisano has shifted IBM from selling tech services to hawking high-tech problem solving.
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Gunnar Johansson helps Stockholm reduce car congestion. IBM gear tracks license plates so that the city can charge drivers who use roads at peak hours.
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Matiq's Viktor Varan (left) and IBM's Epsen Braathe are trying to use RFID chips to track meat and produce shipments to ensure safe food.
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Howard-Yana Shapiro of Mars Inc. is seeking IBM's help in analyzing the cacao genome to ensure the future of the plant, which is being wiped out.

(Fortune Magazine) -- Hurricane Ike rips into southeastern Texas, blowing jagged tree limbs onto power lines all over the Houston metropolitan area. Like firemen responding to an alarm, gumshoe utility workers packing flashlights and rain slickers scour the region for broken branches as 2 million homes sit in the dark. In some areas the search takes weeks. The total cost of the outage runs in the billions.

Half a world away, Stockholm bogs down in rush-hour traffic. A series of bridges connecting Sweden's capital creates bottlenecks that cause gridlock and air pollution, waste millions of gallons of fuel, hamper public transportation, and endanger pedestrians.

Just over the border in Norway, an E. coli outbreak devastates the entire nation. One child dies, nine others are hospitalized, and a country known for the quality of its food now eats in fear. Meanwhile, in West Africa a fungal disease and global warming threaten the world's largest repository of cacao trees, holding the region's primary economic engine hostage - not to mention humanity's sweet tooth.

From one view, this global tour of woe shows our world buckling because of poor planning, too much demand, and strained infrastructure. But there's a more opportunistic way to look at the vignettes. From another angle it becomes clear that they're all propagated by a single culprit: a lack of quality information.

Gridlock is what happens when drivers aren't aware of congestion or don't know how to avoid it. How do we stop E. coli? Cut off the bacteria at its source - if only we had a transparent supply chain. The same goes for power outages. If we could accurately monitor power flow across the electricity grid, the location of a short would become apparent. As for the tree that gives us chocolate, well, with a clear fix on its genome, creating a disease-resistant, heat-tolerant supercacao would be as easy as cross-breeding garden tomatoes.

In the parlance of the information technology industry, these situations all represent "dumb network" problems. The term sounds pejorative, but it simply means that we don't truly understand commuter traffic or electricity flow or the inner workings of the cacao genome, and as a result our highways, utility grids, and cash crops are not managed as effectively as they could be.

The good news is that we now have the technology to convert these analog distribution systems into multidirectional "smart" networks. Readily available sensor technologies like RFID chips and digital video can track movements in granular detail. Cheap data storage, powerful analytics software, and abundant computing capacity give us the ability to warehouse and make sense of all that information. With the knowledge we're gaining, we can remake our world in a more efficient way.

If you've watched a televised sporting event or read a major newspaper, magazine, or website in the past six months, you know that this is precisely what IBM has been up to lately. With the exuberance of a fast-food commercial and all the earnest multiculturalism of a Benetton ad, its "Smarter planet" campaign celebrates Big Blue's ambitious efforts to tackle some of the most vexing dilemmas of our era. What the ads don't say is that IBM is making a killing doing it.

Which may be why the company's president, chairman, and chief executive officer, Sam Palmisano, is in such a cheery mood. Times are tight for everyone, and IBM (IBM, Fortune 500) isn't immune to the severe economic downturn. The company has laid off thousands in recent months and has been criticized for shipping many more jobs to India and elsewhere. But it also handed out bonuses to 386,000 employees this year while announcing blowout financials: In 2008 the company earned $12.3 billion on $103.6 billion in revenue, with a 44.1% gross profit margin - new high-water marks in each category.

Fresh off January appearances with President Obama in Washington, Palmisano is putting the finishing touches on his "Letter From the Chairman" for the annual report. It may be a frigid February morning in Armonk, N.Y., but the note reads like a Palm Springs weather forecast: blue skies and sunshine. When you log three financial records, he says with an exaggerated smile that pushes his eyes into a squint, "it's hard to be depressed."

Credit crunch? Ha! IBM is its own bank. "You're sitting on $14 billion. What are you going to do with it? Two hundred and fifty thousand people are going to get raises in the next couple of months. The executives won't - but that's fine. We make enough money!"

IBM's stellar earnings are rooted in a strategic shift implemented earlier in this decade. Former CEO Lou Gerstner gets credit for saving the company from ruin by steering away from hardware and into services and software in the early '90s. But Palmisano doubled down. In the wake of the dotcom implosion, he sold the ThinkPad division to Lenovo, exited disk drives, and moved aggressively into global consulting and data analytics by acquiring nearly 100 firms, including PricewaterhouseCoopers Consulting and Cognos.

All told, Palmisano has spent $50 billion on acquisitions and R&D in preparation for a seismic shift in IBM's business. Now the pieces are coming together. Roughly 30% of IBM's $6 billion annual R&D budget goes into long-term research, and the department churns out more than 4,000 patents a year. The consultants mine that output for so-called repeatable assets, basically problem-solving technologies that can work in various settings.

"We spend an enormous amount of our resources on exploratory work," says John Kelly, senior VP of IBM Research. "A day doesn't go by that someone in sales doesn't see me and my team. It's pretty hard to find a subject where we don't have really deep expertise." In 2004, 80% of the consulting business in the utilities sector came from the cutthroat and mind-numbing world of enterprise software implementation. Today 80% comes from the type of high-margin, world-changing program born out of the heads of brainiac researchers.

So Palmisano is encouraging his employees to think even bigger, to scout out any dumb network that can be made smarter. Because, as any self-respecting capitalist knows, in great pain lies dormant profit. "We are looking at huge problems that couldn't be solved before. We can solve congestion and pollution. We can make the grids more efficient," he says. "And quite honestly, it creates a big business opportunity."

***

Darkness comes early on a winter afternoon in Stockholm; so does rush hour. It's almost 4 p.m., and Gunnar Johansson is standing roadside, hands in the pockets of his long trench coat. Vehicles speed by as he gazes quietly at a bank of overhead cameras. A warm smile stretches across his face. Johansson is a transportation economist by training, but to the people of Stockholm he's the magician who made the city's traffic problem disappear.

The average New Yorker or Angeleno might not have noticed anything unusual about the Swedish capital circa 2003, but Swedes pride themselves on an optimum quality of life, so government officials put out a request-for-proposal on a congestion-pricing scheme that would charge vehicles for passing through city limits at various times of day. The goal was to reduce the number of vehicles downtown by 10% to 15% at peak hours. "In many cases you introduce road charges to get money out of the system," says Johansson, a 6-foot 6-inch Swede who lately has been traveling the world (in coach) to speak about the success of the system, which represents the most mature case study in the "Smarter planet" initiative. "Here, that was not the objective. This was about making the transport system work better."

Johansson joined IBM from PricewaterhouseCoopers after the acquisition, just as the Stockholm project was going out for bid. He led IBM's winning proposal, using 18 subcontractors to implement the scheme. To assuage negative public and media sentiment, the government agreed to hold a referendum to determine the program's fate after a six-month test in early 2006. Facing such pressure, officials demanded that the system accurately identify more than 99% of all vehicles. Johansson's team couldn't require drivers to carry FasTrack-style transponders, so they tried overhead cameras using optical character recognition (OCR) software. It's not new technology, but identifying half a million cars a day traveling 60 mph with near-perfect accuracy is a big leap from placing a letter on a flatbed scanner. IBM tested the cameras using a partner's software - without much luck. "We were down to 60% accurate," says Johansson. "We thought, We're never going to make it."

The team's technical architect put in a call to the IBM R&D facility in Haifa, Israel, which had been working on new OCR software, and designed a system to combine it with two commercial products. The team placed two cameras above each lane, facing opposite directions to capture front and back plates. Each camera's vision extended into adjacent lanes for multiple vantage points on every vehicle. Within months IBM had reached 99% accuracy. A small team of humans winnowed misses even further - down to four or five a day out of almost 500,000 vehicles. The information is processed at a data center in Copenhagen, and drivers receive monthly bills in the mail. In the beginning, IBM contracted a call center to handle complaints. The calls never came. "The tax authority even hired 40 lawyers to deal with expected appeals," says Johansson. "They got six appeals."

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