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IBM: Best in Class

IBM, which recently clinched a major IT services deal with Australian airline Qantas, is also one of the world's largest software makers, a designation that has assumed greater importance during Palmisano's reign.

Big Blue has been on a software-buying spree in recent years, most recently grabbing SPSS for $1.2 billion. This followed a slew of acquisitions, notably a $5 billion deal for Cognos and a $2.1 billion purchase of Rational Software.

Shrewdly, Palmisano has pursued a "vertical" approach to selling software, according to Gruia, who says that the firm often targets its wares at specific sectors such as the oil and transport industries.

"This means that they can insert themselves at a very high level," he adds, explaining that software also offers a recurring revenue stream.

This approach certainly seems to be paying off. The company recently reconfirmed its profit forecast for 2009 and 2010, which followed strong quarterly numbers. In its recent second-quarter results, IBM boosted its pre-tax margin by four points, its biggest margin improvement since it sold off its PC business to Lenovo in 2005. Despite seeing revenue dip 3% year over year, the firm also expanded its gross margin by two points.

IBM clearly has learned the lessons of the last recession, which followed the bubble and saw the company take a sales and earnings hit. Big Blue's gross margin had also been declining during the '90s, weighed down by commodity products like PCs, hard-disk drives and printers.

This is where Palmisano's predecessor also deserves credit for the firm's current health, overseeing the sell-off of its hard-disk-drive business in 2002, and starting the company's margin obsession. The current CEO, however, was at the helm for the Lenovo deal, as well the creation of a printer joint venture with Ricoh in 2007. Under the terms of the deal, Ricoh acquired an initial 51% of the printer business, which will eventually become its wholly owned subsidiary.
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