SINCE TAKING OVER FROM LOU GERSTNER IN 2002, IBM CEO Sam Palmisano has set in motion a set of initiatives that, in plain terms, to revolutionize the IT industry.

To do this he faces several hurdles. He needs to persuade investors to support the concept with their dollars, yen and euros; get customers to change the way they operate; and ensure his staff execute it on the ground.

Once he took the lead role at IBM, Palmisano considered how to put his mark on the world’s largest IT company, as all great CEOs had done in the past. On August 5, 2002 he threw down the gauntlet to his senior management team—to create something as revolutionary as the mainframe computer had been thirty years ago.

Three months later, “e-business on-demand” was born.

At New York’s American Museum of Natural History, Palmisano declared, “We have an opportunity to set the agenda in our industry.” e-business on-demand is IBM in this millennium. It has an annual budget of $5 billion. It intends to redefine how IT works. And to do this, IBM has to achieve a few objectives.

First, it will help customers standardize all of their computing needs. IBM is involved in all the major boards that determine new specifications, such as those for Java and Web Services.

It will then manage the on-demand data with its grid technologies and other ‘on-demand’ products. A grid is a massive “always-on” network that operates in the background delivering services and products to users on an ‘as-needs’ basis.

John Chambers, CEO of Cisco Systems Inc. comments, “Sam is aiming to go where the market’s going, not to where it’s been.”

What is e-business on-demand?
From IBM’s perspective we’re entering a new era that demands a more responsive, flexible, and resilient business model. The gamut of suppliers, partners, contractors (and your own internal departments) all need to be more tightly integrated if they are to respond ‘on-demand’ to customer needs.

IBM’s own definition of on-demand is “an enterprise whose business processes—integrated end-to-end across the company and with key partners, suppliers and customers—can respond with speed to any customer demand, market opportunity or external threat.”

Leading by Example
To convert this concept into dollars, IBM has to lead by example. The company has committed to changing its entire internal operations and will model them on ‘e-business on-demand’ principles. After all, if they don’t embrace the concept, why should customers?

This is a mammoth task. IBM is like a small country. To move all the pieces in line with the new strategy is an expensive undertaking. In principle, most analysts see merit in the idea; however the expense, business interruptions and return on investment can only be scrutinized once it’s implemented.

Getting the message out
To date, IBM has committed over $800 million in marketing and promoting the concept. Palmisano can’t afford to lose. If this goes sour, he will lose his credibility and put IBM in an unattractive strategic position. Rivals will pounce.

Gartner’s Tom Bittman noted that the two most important parts of IBM’s business—services and software—are very closely tied to the on-demand strategy and have to succeed.

In an article with Information Week, Palmisano explains, “A pay-as-you-go delivery model frees customers from the up-front investment of owning traditional IT assets. It lets them concentrate on their core business and tap into computing resources far beyond what they could reasonably own or manage.” He adds that companies are moving to a new business model supported by an integrated computing infrastructure virtualized across disparate systems, with self-managing abilities.

This initiative gives Palmisano an instrument to paint IBM in his own colors. While Lou Gerstner resuscitated IBM and then steered it into software and services, the e-business on-demand strategy has to reach every aspect of the company’s makeup, right across the army of consultants, sales teams, administration, Human Resources and right into the R&D labs. Overcoming internal opposition and passive resistance will be a major obstacle.

Jim Collins, author of Good to Great, says that the way Palmisano operates reminds him of how Tom Watson Sr. managed IBM during the Depression at IBM. Watson had long-term plans—which were high risk—but ultimately paid rich dividends.

Palmisano chose Irving Wladawsky-Berger, the renowned Cuban-born computer scientist as General Manager for the overall ‘on-demand’ strategy, who rapidly planted a team in every division looking for areas where on-demand opportunities can be realized.

Finally, some competition
IBM is no longer alone in this space. Others see where this model can take them and—though they are loath to admitting it—have cobbled together their own respective strategies.

Sun Microsystems, HP, Microsoft and other have all starting working on high-performance computing systems, and generate lucrative services that can be spun out of these.

HP is the closest rival for now. It has a broad array of hardware, software, and services at its disposal, and comes armored with its Utility Data Center that shifts data across a company’s computers, networks, and storage devices. Once HP and Compaq are truly aligned, it could pose a real threat to IBM’s ‘on-demand’ dominance.

Sun is pushing N1, which it claims offer superior performance and at a better costs—however the software is designed solely for Sun’s products.

Old Customers, New Deals
IBM’s investments seem to be paying off. This year, it sealed several high profile on-demand deals. The most recent is with London-based alcoholic beverage giant Diageo, who own the Guinness and Smirnoff brands. Diageo signed a ‘pay-as-you-go’ IT services deal for IBM to manage their global IT infrastructure.

The seven-year contract will see IBM provide Diageo with computing services, such as managing its data-center and server operations. As per most ‘on-demand ’ deals Diageo will pay a variable rate for the services depending on its requirements over the term of the contract. Analysts estimate the deals value at around $500 million, which brings the total value of IBM service related deals to $3.8 billion for the third quarter.

Other contracts in the same period include the Swiss automation technology firm ABB who signed a 10-year IT outsourcing contract worth $1.1 billion, a three-year on-demand business transformation agreement with Avaya, and a contract with Raytheon worth up to $100 million over five years.

Stratos Sarassamlis, an analyst at Meta Group, adds that, “the flexible price structure of (IBM’s) utility model is very appealing to customers in light of the current economy. The cost reductions appreciated though the strategy allow businesses to reinvest in their infrastructures, which they see as a catalyst for growth in the future.”

For now, IBM is further down this path than their rivals and is setting the pace for on-demand initiatives. Its expansive portfolio, marketing drive and investments should maintain its leadership positioning until others, such as BEA, Dell and Oracle, enter the fray and the competition really heats up.

Ivan Walsh is the Editor of IBMStrategy.com, an independent research firm that tracks IBM's business strategy and technology activities. Previous to this venture, Ivan worked for Intel, NEC, the U.S. Dept of Justice and others across the US, UK and Asia.