IBM CEO Ginni Rometty on leadership, challenges, and reinvention

September 18, 2014, 1:23 PM UTC

When Virginia Rometty became chief executive of IBM (IBM) in 2012, she took control of a company that was took in more than $100 billion in annual revenue but was clearly facing an existential crisis as rapidly rising cloud computing technology threatened its core businesses.

Two years into her tenure, Rometty sat down with Fortune senior writer Michal Lev-Ram to discuss how Big Blue’s reinvention is progressing. (You can read the full story, which leads our Oct. 6 issue, here.) The interview below, portions of which we have also made available as video, has been edited and condensed for clarity.

Fortune: You’ve made a lot of big changes in a relatively short amount of time. Can you kind of walk me through the one or two top, boldest, biggest moves that you’ve made at IBM?

Ginni Rometty: Sure. Well, look, all of these changes are rooted in this belief that you’ve got to constantly reinvent yourself, and all the big changes have been around the major points of our strategy: around reinventing industries and professions for data, around remaking the enterprise era for cloud, and all around this theory of engagement.

If I picked one from each—some of the biggest, boldest—in the beginning of the year we launched Watson, built a whole new division around it, and dedicated over a billion dollars to it. This is really a great play for the long-term—for a whole world of not just artificial intelligence but beyond, and how we’re going to handle all of this data in a system that actually learns. It’s not programmed.

Then another big announcement we made in the area of cloud. On the heels of having acquired SoftLayer, we not only invested another billion dollars to deploy up to 40 data centers around the world—knowing what’s most important to the enterprise, where these should be placed, our cloud data centers—but the excitement was around something called BlueMix, which is a platform as a service to help the enterprise write new-wave applications for that world.

And then in the whole area of engagement, most recently, we announced our partnership with Apple.

We talked about some of the big technological shifts and transformations that are taking place now. What presents the biggest challenge to you and what’s the biggest opportunity? You’ve got social, mobile, cloud, big data.

I think the challenge and opportunity, ironically, it’s the same no matter what industry you’re in, not just the industry we’re in. So you see three big shifts in the market today: data, big data, and analytics; the advent of cloud and everything as-a-service; and this whole idea about mobility and one-on-one engagement.

What makes this time different is that the three of those things are happening at one time, at a speed we haven’t seen before. So you’re going to get a shift that’s faster and more profound. And it impacts every industry.

So when I talk to all of my colleagues in other industries, the same things we experience in reinventing our company are the same things they’re experiencing. You’ve got to keep reinventing. You’ll have new competitors. You’ll have new customers all around you. To me, those three together is what’s driving all of the change in the industry.

It seems like that would present kind of a double challenge for you. Your customers, historically and today, look to you for guidance. Do you feel that you’re under even more pressure than your customers to sort of see these transformations through and do it quickly?

You know, as part of being a company that is 100 years old, I think this is all about what continuous transformation is. I too feel, like any company, that’s how you’ve got to look at this. This constant reinvention. As I say to our own team: Never protect your past, never define yourself by a single product, and always continue to steward for the long-term. Keep moving towards the future.

I think those rules kind of apply to everyone. They apply to us in that some of the businesses we’re in, they’re mission-critical, they’re core franchises for clients. We keep changing and taking those clients to the future. It moves us to the future, it moves them to the future.

Do you think that you are under more scrutiny, under more pressure to deliver on some of those transformations that you’ve made because your customers look to you for that guidance?

Well, look, I think given who the IBM target company is, I feel our purpose is to be essential to our clients. We can’t declare it—only they can declare that—and that in and of itself puts you in a realm where you think very carefully about what you do and you take very seriously the value of it. You have to provide for them.

I feel we’ve taken that pretty seriously no matter what the time or change was, even now in constant change. There have been many shifts in this industry, and there will be many more. As long as you continually reinvent yourself, that’s what I think clients expect from us.

With all of these technological shifts—new technologies, new ways of working—the pool of competitors for you seems to have broadened. What companies, what shifts, keep you up at night?

It’s actually not a company that keeps me up at night because I believe the other thing is to never define yourself by competitors. You define yourself by either what your clients want or what you believe they’ll need for the future. So: Define yourself by your client, not your competitor.

What keeps me up at night is speed. Speed of transformation, continuing to move to that future. It’s always around doing this faster. You get it, test it, try it, move it, and make bold moves, whether that is around Watson, cloud, the partnership with Apple, or the announcement of a new platform for hardware that’s built for data and cloud.

Those are the things you just want to do to keep moving forward.

Some of your newer competitors are Amazon and Google, and Microsoft on the cloud side. In light of those, the SoftLayer acquisition, and some of the moves that you just described, what grade do you give yourselves? Where do you think you’re at? Are you on track for the goals that you’ve set for yourselves?

I am very pleased. You have to remember our competitors. We are in a big industry. They are varied, many, and over the years, they continue to change. In different parts of the business, they’re different.

How I measure myself is through IBM’s three big strategic areas. In the world of big data and analytics, we finished the year at $16 billion in analytics revenue. In the first half, it grew at 7%. In cloud, we finished last year at four-and-a-half billion, and again, growth was over 50%. In mobile, we had over 100% growth. In security, we had 20% growth.

So I measure myself by the areas in which we’ve chosen to play, by our growth, and our movement to high-value businesses in those areas. If you ask me, “So what is your business model?” Our business model’s always about shifting to higher value opportunities. For clients and thus for ourselves, and that’s what I know our shareholders expect for the long-term.

Is there something that IBM could have done prior to you becoming CEO that could have positioned you even further along today?

I’m the ninth CEO of IBM. Every one of my predecessors has steered through a technological shift, and every one left the company in a better position than the person before them, and prepared this company with a very strong balance sheet to allow it to continue to invest for the next shift.

Now, as we go through another set of transformations around these three big shifts of data, cloud, and engagement, that’s my job—to leave behind a company positioned even stronger for my successor, whenever that may be, than on the day I found it.

I feel very strong. That is the job of stewarding for the long-term, and that is certainly what has been ingrained in my mind as what part of my role is to do.

Is there something—like on the cloud side, for example—that you think could have happened faster before you became CEO?

Look, I was part of this company then. So I have no regrets, before or after. I take great responsibility and I think we’re well-positioned.

We’ve been working on cloud and data. You don’t get businesses of that size that fast if you haven’t been working on them for a long time. So I’m very pleased with the progress that the company has made over many years in these areas.

We talked about revenue growth earlier. What grade do you give yourself? Putting profit aside, just on the revenue side, are you happy with where you are? Could you do better?

When I think of revenue growth, I think of the words “mix” and “shift.” So the goals we’ve set for ourselves is to grow in the growth initiatives we’ve talked about all around data, cloud, and engagement, and continue to produce our sort of report card on those. And again, in the first half of the year, we saw another set of strong double-digit growth in those things.

Then we do work that’s what I call core franchise work, mission-critical work for clients. My job is to continue to innovate inside of that. Every one of us has challenges to work on to address those.

When you take a look at our growth, I divide it in those kinds of buckets. And the most important thing I do on growth is continue to shift to higher value businesses, and make the right decisions I have to for that.

There will be times you make decisions that actually detract from growth. Obviously we’ve done some very important divestitures that will be better suited in others’ hands, and that’ll take away from the bottom line. On the other hand, we’re strongly investing in these growth areas.

So to me, growth is always a question of remixing, and moving into higher value areas. What to watch is the growth in those high value spaces.

One of those areas of growth obviously is Watson. Watson made its public debut on Jeopardy! At what point did you decide and see that this was a big opportunity, that this is something that you wanted to place one of those big bets on?

I remember driving home that night, from the day Watson did that sort of vignette on Jeopardy!, which was a pretty bold move because obviously when you do something like that on TV . . . we agreed to do that long before it aired, right? So Watson had a lot of work to do to get ready for his big debut on television.

And I remember coming home and, on the phone, saying to my husband, “I think I just witnessed some piece of history.” It was really then I knew we had something—that this would be an era unlike any eras before it. Very simply put, the eras before had the very simplest machines. They did counting. Everything we know today is programmed—if this, do that. You tell it what to do. It may do it very fast. But it has to be programmed.

Watson is a system that reasons and learns. That is very different. It is going to be essential for the decade ahead because the amount of information is overwhelming. You will be unable to deal with it.

The ability to reinvent industries, professions—that is [now] all in front of every one of us. It’ll put a premium on things like education, science, technology. It won’t matter what your job is. everyone is going to have sort of a silver thread of having to understand how to apply data and analytics and technology in their job. What great opportunity comes out of that, both for my company and, I think, everyone’s company.

You mentioned that every CEO prior to you has left the company in a better position. What’s the biggest challenge for you to be able to do that during your tenure?

I think the biggest challenge, given the sets of shifts out in the industry today, is the speed at which they’re happening. And I think it applies not only to me as the CEO of IBM, but the CEO of any company out there today.

This change is happening faster than it has ever happened before, and so it does put a premium on speed, and speed of change, and being bold. And a bit of experimentation. To try things and then course-correct along the way.

That’s what the team is very focused on: the three initiatives, but then the speed of movement across those.

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