I remember flying back to New York alone that evening on an IBM
corporate airplane. My thoughts turned to the Board of Directors.
It was clear from the annual meeting that board changes would be necessary—and sooner rather than later. I turned to the flight attendant and said, “This has been a really tough day. I think I’d like to have a drink.”
She said, “You don’t mean an alcoholic drink, do you?”
“I certainly do!” I replied. “What kind of vodka do you have?”
40 / LOUIS V. GERSTNER, JR.
“We have no alcohol on IBM airplanes. It is prohibited to serve alcohol.”
I said, “Can you think of anyone who could change that rule?”
“Well, perhaps you could, sir.”
“It’s changed, effective immediately.”
4
Out to the Field
I t was crucial that I get out into the field. I didn’t want my understanding of the company to be based on the impres-sions of headquarters employees. Moreover, the local IBM princes and barons were eager to view the new leader. So the day after the annual meeting, I flew to France to meet with the mightiest of all nobles—IBM Europe, Middle East, and Africa (we call it “EMEA”). I visited France, Italy, Germany, and the United Kingdom, all in one week. It was dawn-to-midnight business reviews with senior executives, employee “town hall” meetings, and customer visits.
IBM EMEA was a giant organization operating in 44 countries with more than 90,000 employees. Revenue had peaked at $27 billion in 1990 and had declined since. Gross profit margin on hardware had dropped from 56 percent in 1990 to 38 percent in 1992. Very important was the fact that in the face of this huge decline in gross profits, total expenses had dropped only $700 million. Pretax profit margin had declined from 18 percent in 1990 to 6 percent in 1992.
Wherever I went, the business message was the same: rapidly declining mainframe sales, much higher prices than those of our competitors, a lack of participation in the rapidly growing client/server (PC-centric) segment, and an alarming decline in the company’s
42 / LOUIS V. GERSTNER, JR.
image. One of the most disturbing statements in my advance reading material was: “We estimate our net cash change at negative $800
million in 1993. We expect to be self-funding but will not be able for some time to pay dividends to the corporation.”
While I learned a lot on this trip—the meetings with customers were particularly useful—perhaps the most important messages were internal. It was clear that at all levels of the organization there was fear, uncertainty, and an extraordinary preoccupation with internal processes as the cause of our problems and, therefore, a belief that tinkering with the processes would provide the solutions we needed. There were long discussions of transfer pricing between units, alternative divisions of authority, and other intramural matters.
When EMEA executives summarized their action program for the company, number one was: “Use country as prime point of optimiz-ation.”
I returned home with a healthy appreciation of what I had been warned to expect: powerful geographic fiefdoms with duplicate infrastructure in each country. (Of the 90,000 EMEA employees, 23,000
were in support functions!)
I also came away with an understanding that these were enormously talented people, a team as deeply committed and competent as I had ever seen in any organization. I reached this conclusion repeatedly over the next few months. On the flight home I asked myself: “How could such truly talented people allow themselves to get into such a morass?”
The Click Heard Round the World
As Paul Rizzo had said in our secret meeting in Washington, D.C., IBM’s sustainability, at least in the short term, depended heavily on the mainframe. More than 90 percent of the company’s profits came from these large “servers” and the software that ran on them. It didn’t take a Harvard MBA or a McKinsey consultant to understand
WHO SAYS ELEPHANTS CAN’T DANCE? / 43
that the fate of the mainframe was the fate of IBM, and, at the time, both were sinking like stones.
One of the first meetings I asked for was a briefing on the state of this business. I remember at least two things about that first meeting with Nick Donofrio, who was then running the System/390 business.
One is that I drove to his office in Somers, New York, about fifteen miles north of Armonk, and experienced a repeat of my first day on the job. Once again, I found myself lacking a badge to open the doors at this complex, which housed the staffs of all of IBM’s major product groups, and nobody there knew who I was. I finally persuaded some kind soul to let me in, found Nick, and we got started. Sort of.
At that time, the standard format of any important IBM meeting was a presentation using overhead projectors and graphics on transparencies that IBMers called—and no one remembers why—“foils.” Nick was on his second foil when I stepped to the table and, as politely as I could in front of his team, switched off the projector. After a long moment of awkward silence, I simply said,
“Let’s just talk about your business.”
I mention this episode because it had an unintended, but terribly powerful ripple effect. By that afternoon an e-mail about my hitting the Off button on the overhead projector was crisscrossing the world.
Talk about consternation! It was as if the President of the United States had banned the use of English at White House meetings.
By the way, in the telling of that story, I’m in no way suggesting that Nick didn’t know his business. In many ways he was the god-father of the technology that would end up saving the IBM mainframe, and his strong technical underpinnings, combined with his uncanny ability to translate technical complexities into common language, were a great source of reassurance to me in the days ahead.
We had a great meeting, and there is a straight line between what I heard that day and one early major decision at IBM.
44 / LOUIS V. GERSTNER, JR.
The Mainframe Decision
In a subsequent meeting in the conference room near my office in Armonk, the mainframe team documented a rapid decline in sales and, more important, a precipitous drop in market share in the last fifteen months. I asked why we were losing so much share, and the answer was, “Hitachi, Fujitsu, and Amdahl are pricing 30 to 40
percent below our price.”
I asked the obvious: “Why don’t we lower our prices so they don’t keep beating us like a drum?”
The answer: “We would lose substantial revenues and profits at a time when we need profits badly.”
I had hoped to follow the advice of all the management gurus and try to avoid making major decisions in the first ninety days, but that only happens in guru world. The company was hemorrhaging, and at the heart of it was the System/390 mainframe. But almost immediately after joining the company, I had to do something.
It became clear to me at that point that the company, either consciously or unconsciously, was milking the S/390 and that the business was on a path to die. I told the team that, effective immediately, the milking strategy was over and instructed them to get back to me with an aggressive price reduction plan that we could announce two weeks later at a major customer conference.
The financial people gulped hard. There was no doubt that a new CEO could take the alternative strategy: Keep S/390 prices high for a number of years, since it wasn’t easy for customers to shift to competitive products in the near future. The revenue—hundreds of millions of dollars—would have been a powerful short-term underpinning of a restructuring of the company. But it would also have been painful for customers and contrary to what they were pleading with us to do, which was to fix the problem rather than walk away
WHO SAYS ELEPHANTS CAN’T DANCE? / 45
from it. Over the longer term, we would have destroyed the company’s greatest asset—and perhaps the company itself. So we made a bet on a dramatic price reduction on the product that produced virtually all of IBM’s profit.
We made another important decision that day—or, better said, I reaffirmed an important decision that had been made a number of months before I’d arrived. The technical team in the 390 division had staked out a bold move to a totally different technical architecture for the System/390: to move from what was known as a bipolar to CMOS (pronounced “C-moss”) technology. If this enormously complex project could be pulled off, it would permit substantial price reductions in the S/390 without commensurate loss in gross profit, thus improving dramatically the competitiveness of the S/390
versus alternative products. If the project failed, the 390 was dead.
But it didn’t fail! And the technical wizards from labs in Europe and the United States who pulled it off deserve a place among the heroes of the new IBM. I have always been thankful (and lucky) that some insightful people had made that decision before I’d arrived.
My job was simply to reaffirm it and to protect the billion dollars we would spend on it over the next four years.
I am convinced that had we not made the decision to go with CMOS, we’d have been out of the mainframe business by 1997. In fact, that point has been proven more or less by what happened to our principal competitor at the time, Hitachi. It continued development of bigger and bigger bipolar systems, but that technology eventually ran out of gas, and Hitachi is no longer in this business.
The CMOS performance curve was staggering on paper, and it didn’t disappoint us. We’re building bigger, more powerful systems today than anyone ever dreamed about with bipolar technology. So if you want to think about the return on the $1 billion investment we made back in the early 1990s, I think one fair measure is high-end server revenue from 1997 forward—$19 billion through the end of 2001.
46 / LOUIS V. GERSTNER, JR.
The First Strategy Conference
On Sunday, May 16, I convened a two-day internal meeting on corporate strategy at a conference center in Chantilly, Virginia. There were twenty-six senior IBM executives present. Dress was casual, but the presentations were both formal and formidable.
I was totally exhausted at the end. It was truly like drinking from a fire hose. The technical jargon, the abbreviations, and the arcane terminology were by themselves enough to wear anyone down. But what was really draining was the recognition that while the people in the room were extremely bright, very committed, and, at times, quite convinced of what needed to be done, there was little true strategic underpinning for the strategies discussed. Not once was the question of customer segmentation raised. Rarely did we compare our offerings to those of our competitors. There was no integration across the various topics that allowed the group to pull together a total IBM view. I was truly confused, and that may have been the real low point of my first year at IBM. I walked out of that room with an awful feeling in the pit of my stomach that Murphy and Burke had been wrong—IBM needed a technological wizard to figure out all this stuff!
I didn’t have much time to feel sorry for myself because that evening we began what may have been the most important meeting of my entire IBM career: the IBM Customer Forum.
The Customer Meeting at Chantilly
This meeting had been scheduled well before my arrival at the company. Nearly 175 chief information officers of the largest United States companies were coming to hear what was new at IBM. They represented many of the most important customers IBM had—and they could make or break us.
WHO SAYS ELEPHANTS CAN’T DANCE? / 47
On Tuesday night, I met with several CIOs at dinner, and they shared the same perspective I had heard in Europe. They were angry at IBM—perturbed that we had let the myth that “the mainframe was dead” grow and prosper. The PC bigots had convinced the media that the world’s great IT infrastructure—the back offices that ran banks, airlines, utilities, and the like—could somehow be moved to desktop computers. These CIOs knew this line of thinking wasn’t true, and they were angry at IBM for not defending their position.
They were upset about some other things, too, like mainframe pricing for both hardware and software. They were irritated by the bureaucracy at IBM and by how difficult it was to get integration—integration of a solution or integration across geographies.
Early the next morning, I threw out my prepared speech and decided to speak extemporaneously. I stood before my most important customers and started talking from the heart. I began by telling my audience that a customer was now running IBM; that I had been a customer of the information technology industry for far longer than I would ever be an IBM employee; that while I was not a technologist, I was a true believer that information technology would transform every institution in the world. Thus, I had a strategic view about information technology, and I would bring that to IBM and its customers.
I addressed the issue of the mainframe head-on. I said I agreed with the CIOs that we had failed in our responsibility to define its role in a PC world, that our prices were high, and that there was no question that we were bureaucratic. I shared with them some of my bad experiences with IBM as communicated to me by my CIOs when I was at American Express and RJR Nabisco.
I laid out my expectations:
• We would redefine IBM and its priorties starting with the customer.
• We would give our laboratories free rein and deliver open, distributed, user-based solutions.
48 / LOUIS V. GERSTNER, JR.
• We would recommit to quality, be easier to work with, and reestablish a leadership position (but not the old dominance) in the industry.
• Everything at IBM would begin with listening to our customers and delivering the performance they expected.
Finally, I made the big mainframe pricing announcement. Our team had been working hard over the past two weeks and literally was still putting the proposal together the night before this big meeting. I didn’t delve into the details—that was done later in the meeting—but I made it very clear that mainframe prices, both hardware and software, were coming down, and coming down quickly. The price of a unit of mainframe processing moved from $63,000 that month to less than $2,500 seven years later, an incredible 96-percent decline. Mainframe software price/performance improved, on average, 20 percent a year for each of the next six years.
This program, probably more than any other, save IBM. Over the short term it raised the risk of insolvency as it drained billions of dollars of potential revenue and profits from the company. Had the strategy not worked, I would have been the CEO who had presided over the demise of the company—Louis the Last. However, the plan did work. IBM mainframe capacity shipped to customers had declined 15 percent in 1993. By 1994, it had grown 41 percent, in 1995 it had grown 60 percent, followed by 47 percent in 1996, 29 percent in 1997
63 percent in 1998, 6 percent in 1999, 25 percent in 2000, and 34 percent in 2001. This represented a staggering turnaround. While pricing was not the only reason IBM survived, it would not have happened had we not made this risky move.
5
Operation Bear Hug
I n late April we had a meeting of the Corporate Management Board. This was the group of fifty top executives with whom I had met in March, the day I was announced as the new CEO.
I shared with them my observations after three weeks on the job.
I started by saying that I saw a lot of positive things going on, particularly in research, product development, and in the can-do attitude of a number of people.
However, there were troublesome areas, including:
• Loss of customer trust, supported by some disturbing customer ratings on quality.
• The mindless rush for decentralization, with managers leaping forward saying “make me a subsidiary.”
• Cross-unit issues not being resolved quickly.
• Major tension in the organization over who controlled marketing and sales processes.
• A confusing and contentious performance measurement system, causing serious problems when closing sales with customers.
• A bewild
ering array of alliances that didn’t make any sense to me.
50 / LOUIS V. GERSTNER, JR.
I announced Operation Bear Hug. Each of the fifty members of the senior management team was to visit a minimum of five of our biggest customers during the next three months. The executives were to listen, to show the customer that we cared, and to implement holding action as appropriate. Each of their direct reports (a total of more than 200 executives) was to do the same. For each Bear Hug visit, I asked that a one- to two-page report be sent to me and anyone else who could solve that customer’s problems. I wanted these meetings to be a major step in reducing the customer perception that dealing with us was difficult. I also made it clear that there was no reason to stop at five customers. This was clearly an exam in which extra credit would be awarded.
Bear Hug became a first step in IBM’s cultural change. It was an important way for me to emphasize that we were going to build a company from the outside in and that the customer was going to drive everything we did in the company. It created quite a stir, and when people realized that I really did read every one of the reports, there was quick improvement in action and responsiveness.
The Management Committee Dies
That same day in late April, there was a meeting of the Management Committee (its inside-IBM name was “the MC”). It is important to understand that a seat on the MC was the ultimate position of power that every IBM executive aspired to as the apex of his or her career. When I’d joined the company there were six members, including Akers and Kuehler. The MC met once or twice a week, usually in formal, all-day meetings with lots of presentations. Every major decision in the company was presented to this committee.
Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change Page 5