More important for IBM, increasing numbers of people and enterprises conducting business over networks would drive a correspond-ing increase in computing workloads. The difficult task of managing all of that free-flowing digital information certainly was
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not going to be done on desktop computers. Those workloads would have to be handled by large-scale systems—meaning huge demand for computing infrastructure products, in addition to networking gear.
Finally, this new landscape would change who made technology buying decisions. In a PC and client/server world, consumers, end-users, and small-department heads were in the driver’s seat. But with the action shifting back to enterprise systems and mainstream business strategies, the decision makers would once again be chief technology officers and senior business leaders—people IBM knew and understood.
All of this wasn’t so neat, tidy, and clear to us at the time. But there were indications that the world of computing was indeed shifting in ways that, at least in theory, played to IBM’s traditional strengths and assets.
We would have to do an enormous amount of work and take significant risks—from continuing to open up all our products, to building the services business. But even the chance that the game might be thrown open to a new set of leaders was powerfully motivating. We were going to take our fate into our own hands. We were going to play offense.
14
Services-the Key
to Integration
S ome people might have been surprised to read in the previous chapter that IBM placed a big bet on services. I mean, hasn’t IBM always been known for its doting customer support? Wasn’t superior customer service one of IBM’s cornerstone beliefs? Wasn’t IBM revered for standing by its customers no matter what happened, at any hour of the day or night?
As a customer, I always valued IBM’s attentive service. It made up for certain IBM products that weren’t quite as powerful or cost-effective as others on the market, and it (almost) justified IBM’s very high prices.
But that is not the kind of services I’m talking about here. The big bet we made was on another kind of services—services that would address customer needs that frankly didn’t exist during the 1960s, 1970s, and 1980s, prior to the Big Bang of rampant industry disaggregation. Traditionally, IBM’s services were completely tied to products—more specifically, products bearing IBM logos. If an IBM
system went down, IBM fixed it. However, if customers had a problem with a product from Digital, Compaq, or Amdahl, or if they wanted
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help installing some other company’s equipment, they had to fend for themselves. Services was an adjunct to the main product business.
Enter Dennie Welsh. As with all things in life, luck plays a big part. I got lucky twice at IBM. The first time was at a meeting in 1993
with Dennie, a long-term IBMer, who was running the services organization. The second time was the arrival of the Internet and the big bet we made on the networked world. Coincidentally, Dennie had a strong hand in that, too (more on that later).
When I arrived at IBM, Dennie was running a wholly owned IBM
subsidiary named the Integrated Systems Services Corporation. ISSC
was our services and network operations unit in the United States—a promising but minor part of IBM’s portfolio. In fact, it wasn’t even a stand-alone business in IBM. It was a sub-unit of the sales force.
No one forgets a meeting with Dennie. He’s a big man, friendly, quick to laugh, but intense. He was a former army pilot and air defense officer who’d made his IBM career in the unit that built highly technical systems for United States government projects, including the Apollo moon program. He was in the control room at Cape Kennedy for Neil Armstrong’s historic Apollo XI launch to the moon.
It was our first private meeting, but he didn’t waste much time on small talk. He told me that his vision of a services company was not one that did just IBM product maintenance and strung together computer codes for customers. He envisioned a company that would literally take over and act on behalf of the customers in all aspects of information technology—from building systems to defining architectures to actually managing the computers and running them for the customers.
My mind was afire. Not only was he describing something I’d wanted when I was a customer (for example, I had tried unsuccessfully to outsource the running of RJR Nabisco’s data centers), but this idea meshed exactly with our strategy of integration. Here was a man who understood what customers were willing to spend money on, and he knew what that meant—not just the business potential for
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IBM, but the coming restructuring of the industry around solutions rather than piece parts.
However, Dennie pointed out, this system was not going to be easy to implement inside the IBM culture. To be truly successful, we would have to do things that would shake the place to its roots. For example, the services unit would need to be able to recommend the products of Microsoft, HP, Sun, and all other major IBM competitors if that, in fact, was the best solution for the customer. Of course, we’d have to maintain and service these products as well.
Moreover, Dennie believed the services unit would have to be separated from the regular sales force, because our sales force would never permit an IBM services person inside their account if there was any chance that the services rep would sell anything other than IBM
products.
Finally he pointed out that the economics of a services business were very different from those of a product-based business. A major services contract might last six to twelve years. An outsourcing contract for, say, seven years might lose money in the first year. All of this was foreign to the traditional world of product sales and would create problems for our sales compensation system and the financial management system.
I left my session with Dennie both thrilled and depressed (a state of confusion I experienced often in my early days at IBM). I was thrilled that I had discovered a base from which we could build the integration capability our customers so desperately needed—and, in so doing, provide the raison d’être for keeping IBM together. I was depressed to realize that despite the powerful logic—that this services-led model was IBM’s unique competitive advantage—the culture of IBM would fight it.
Thus began another major challenge: establishing this powerful new business, and at the same time integrating this unit into IBM so that it was viewed, not as a threat, but as a great new ally of our traditional product units.
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I knew this was going to be an exquisitely difficult trick to pull off. My experience in prior jobs told me that intense rivalries between units of a large company were a prevalent behavior pattern. The units that had been the traditional base of a company more often than not resisted (overtly or silently) the emergence of a new sibling—either homegrown or an arrival through acquisition.
Building the Organization
Despite Dennie’s view that his unit should be a stand-alone business, not a subset of the sales team, I did not break it out initially.
Rather, I spent countless hours working with our teams to develop a sense of mutual dependence between the services and sales people.
Services people had to learn that the sales team could get them in the door. The sales people had to realize that services specialists could develop major new avenues of revenue in their accounts.
Still, there were fireworks. Throughout those critical early days, it seemed there was a crisis a week between services and some other IBM unit. Many of our brand executives or sales leaders went ballistic every time the services unit proposed a product solution that incorporated a competitor’s product. On more than one occasion I found one of these people in my office, railing against the renegades from services. My answer was always the same: “You need to invest the resources necessary to work with the s
ervices team to ensure they understand the competitive advantages of your products. View them as a distribution channel for your products. Your competitors do!”
Meanwhile we started to pull the services units together on a global basis. As I said, Dennie ran just a United States services unit.
There were dozens of other such services organizations spread all over the world. They had totally different processes, pricing, offerings, terms, and brand names. I asked Dennie to create a unified organization—still under the wing of the sales force—and introduce
132 / LOUIS V. GERSTNER, JR.
outsourcing and network services globally. This was a Herculean task—common problem solving, methodologies, nomenclatures, skill definitions, capturing and disseminating knowledge on a global basis, and hiring and training thousands of new people every year.
By 1996 I was ready to break the services unit out as a separate business. We formed IBM Global Services. The change was still traumatic for some of our managers, but it was eventually accepted as inevitable by most of our colleagues.
Had the effort to build IBM Global Services failed, IBM—or at least my vision of IBM—would have failed with it. In 1992 services was a $7.4 billion business at IBM (excluding maintenance). In 2001 it had risen to a $30 billion business and accounted for roughly half of our workforce. I would guess there are few companies that have ever grown a multibillion-dollar business at this pace.
There were several reasons customers were pouring so much investment into services. First, skilled IT professionals were in such short supply that millions of IT jobs went unfilled. Customers simply couldn’t staff up to do what needed to be done. But the main reason came back to what Dennie and I had discussed at that first meeting: customers’ overpowering desire for someone to provide integration.
At first that was just the integration of technologies. But as the networked computing model took hold, it created whole new dimen-sions around integration, forcing customers to integrate technologies with core business processes, and then to integrate processes—like pricing, fulfillment, or logistics—with one another.
The Nature of the Bet
When I say that we made a big bet on services, let me describe what we gambled.
I have worked in services companies (McKinsey and American Express) and product companies (RJR Nabisco and IBM). I will state
WHO SAYS ELEPHANTS CAN’T DANCE? / 133
unequivocally that services businesses are much more difficult to manage.
The skills required in managing services processes are very different from those that drive successful product companies. We had no experience building a labor-based business inside an asset-intensive company. We were expert at managing factories and developing technologies. We understood cost of goods and inventory turns and manufacturing. But a human-intensive services business is entirely different. In services you don’t make a product and then sell it. You sell a capability. You sell knowledge. You create it at the same time you deliver it. The business model is different. The economics are entirely different.
Think for a moment about just the outsourcing business. What you’re telling the customer is: “Transfer your IT assets—products, facilities, plus the staff—onto my books. I’ll absorb it all, manage it, guarantee performance levels, and promise that you’ll always be on or close to the leading edge of technology. All that, and I’ll charge you less than it’s costing you now.”
At the same time, you’re telling yourself: “I can do all that and still make a profit.”
That’s a bet on a couple of things, starting with your willingness to use your balance sheet. You can’t get into that kind of business without making the commitment to carry the infrastructure and loss until a contract that could extend over five or ten years becomes profitable. There’s no such thing as a toe in the water. When you take this plunge, it’s full-body immersion.
It’s a bet on your ability to drive economies of scale—to consolidate lots of customer data centers into megaplexes (what the industry calls “server farms”) or the ability to do with 750 people what two or three customers once did with 1,000.
We had to bet that we could build the recruitment, training, compensation, and HR processes to bring in 1,000 or more people a month—even though we’d never attempted anything remotely close to that. In fact, in the mid- to late 1990s, when services was consis
134 / LOUIS V. GERSTNER, JR.
tently growing 20-plus-percent a quarter, we knew we could do even better if we had more people. But we capped our hiring at about these levels simply because we thought we’d overextend our ability to hire and train qualified people.
Finally, we had to learn how to be disciplined—how to negotiate profitable contracts, price our skills, assess risk, and walk away from bad contracts and bad deals.
For all of these reasons, I’ve said repeatedly that this is the kind of capability you can’t simply acquire (though our competitors keep trying). The bet you’re really making is on your own commitment to invest both the years and the capital, then build the experience and discipline it takes to succeed.
The Future
As I write this chapter in the spring of 2002, the IBM services business is suffering the same slowdown affecting most of the high-tech sector. I am confident this performance slump is temporary because I have never seen a business with such an astounding capacity for self-renewal. Every time the industry moves in a new direction, the IT services opportunity is reinvented. Even in an economic downturn, many services—outsourcing is the leading example—hold strong appeal as customers look for ways to reduce expenses.
When IBM made its commitment to services, we were playing a bit of a hunch. Today, when I make the statement that this industry, and our company, will be services-led for the foreseeable future, that’s no hunch. Since the financial restructuring of IBM began in 1993, services generated roughly 80 percent of all the company’s revenue growth—more than $20 billion of the $25 billion total through 2001.
I can’t finish a chapter on the IBM services business without making one additional comment. Early on, when Dennie Welsh was first
WHO SAYS ELEPHANTS CAN’T DANCE? / 135
building his services unit, he went to my predecessor and told him he had to have IBM’s number-one sales leader, a person with stature and charisma, a deal-closer extraordinaire. Sam Palmisano, the man who eventually succeeded me as CEO, was running part of IBM’s Asian operations at the time. He got the call and became president of ISSC. Not only did Sam take the business to another level, but he was a strong role model for many executives who needed to understand that a significant part of our future was in services.
15
Building the World’s
Already
Biggest Software Business
I f we were right about the end of one computing era and the arrival of the next, we needed answers to important questions: Where would the value shift in that new environment?
Where would the strategic high ground be? What would dominate customers’ attention (and spending) the way the PC had during the prior phase?
Certainly networking gear, to keep oceans of digital content moving at high speed and high bandwidth, would be in high demand. To handle the explosion in transactions, customers would need increased server and storage capacity. To design and implement networked solutions, they would need a range of services.
But the linchpin seemed to be software. I’m not referring to the software of the prior era—desktop operating systems and productivity applications sold in shrink-wrapped boxes. The software that would matter in the future would have a very different set of characteristics.
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For starters, it would have to be based on open standards that every competitor could use and build on. Why? Because the networked world would have to connect hundreds of millions, eventually billions, of devices and systems. Customers would never permit one company’s technology to control
all of those connected elements, even if the technology were capable of it.
I’m not a technologist, so I’m not going to try to explain the Internet’s underpinnings. Suffice it to say that the Internet is built on a set of open technical specifications called protocols. Once computer systems adhere to those specs, they can connect and become part of the Net.
This was basically client/server’s utopian promise—seamless connectivity. Of course, it didn’t work. Now, the Internet offered to fulfill that promise, and on a global scale.
Diamond in the Rough
In 1993 very few people—even knowledgeable business executives—would have correctly answered the following question: “What is the biggest software company in the world?” I suspect nearly all would have answered “Microsoft.” In fact, IBM sold more software in 1993 than did anyone else.
Why the misperception? It was due mainly to the fact that IBM
never thought of itself as a software company, did not talk about itself as a software company, did not have a software strategy, and did not even have a unified software organization.
Software, to IBM, was simply one part of a hardware-based offering. Since every computer needs an operating system, and most need databases and transaction processing capability, IBM built many of these software assets but never viewed them as a unique business.
Rather, they were buried inside IBM hardware or sold as an add-on feature. And critically, none of this software worked with computers made by manufacturers other than IBM.
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So, problem number one: We didn’t have a software mentality, much less a real software business. Problem number two: Most of what we had was built for the mainframe world at a time when the bulk of the customer investment was being made in smaller, distributed systems. Problem number three: a troubled child named OS/2.
Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change Page 13