Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (12 page)

The local boss would often ignore those resources and use his or her own people. (One day I looked at the financial newswires and was shocked to see

86 / LOUIS V. GERSTNER, JR.

that IBM’s trading area for Alabama and Mississippi had sent to the media its own earnings news release.)

Staff units abounded at every level. Outside the United States, the structure was even more rigid, like in Europe, with its 23,000 support people. Other IBMers practically had to ask permission to enter the territory of a country manager. Each country had its own independent system. In Europe alone we had 142 different financial systems.

Customer data could not be tracked across the company. Employees belonged to their geography first, while IBM took a distant second place.

Breaking Up the Fiefdoms

I declared war on the geographic fiefdoms. I decided we would organize the company around global industry teams. I had first encountered the power of this kind of structure when I had been a very young consultant at McKinsey. We’d conducted a seminal organization study for what was then Citibank. The result was to transform Citibank from a geographical organization to a global, customer-oriented organization, and it became the model for most financial institutions over the next decade.

With this model in mind, I asked Ned Lautenbach, then head of all non-United States sales organizations, to build a customer-oriented organization. It was a painful and sometimes tumultuous process to get the organization to embrace this new direction, but by mid-1995 we were ready to implement it. We broke our customer base into twelve groups: eleven industries (such as banking, government, insurance, distribution, and manufacturing) and a final category covering small- and medium-size businesses. We assigned all of the accounts to these industry groups and announced that the groups would be in charge of all budgets and personnel. The response from the country managers was swift and predictable: “It will never work.” And: “You will destroy the company!”

WHO SAYS ELEPHANTS CAN’T DANCE? / 87

I’ll never forget one run-in with the head of the powerful Europe, Middle East, and Africa unit. During a visit to Europe I discovered, by accident, that European employees were not receiving all of my company-wide e-mails. After some investigation, we found that the head of Europe was intercepting messages at the central messaging node. When asked why, he replied simply, “These messages were inappropriate for
my
employees.” And: “They were hard to translate.”

I summoned him to Armonk the next day. I explained that he had no employees, that all employees belonged to IBM, and that from that day on he would never interfere with messages sent from my office. He grimaced, nodded, and sulked as he walked out the door.

He never did adapt to the new global organization, and a few months later he left the company.

Although we implemented the new industry structure in mid-1995, it was never fully accepted until at least three years later. Regional heads clung to the old system, sometimes out of mutiny, but more often out of tradition.

We needed to do a massive shift of resources, systems, and processes to make the new system work. Building an organizational plan was easy. It took three years of hard work to implement the plan, and implement it well.

I’ll never forget one particularly stubborn—and inventive—country general manager in Europe. He simply refused to recognize that the vast majority of the people in his country had been reassigned to specialized units reporting to global leaders.

Anytime one of these new worldwide leaders would pay a visit to meet with his or her new team, the country general manager, or GM, would round up a group loyal to the GM, herd them into a room, and tell them, “Okay, today you’re database specialists. Go talk about databases.” Or for the next visit: “Today you’re experts on the insurance industry.” We eventually caught on and ended the charade.

9

Reviving the Brand

A
ll of our efforts to save IBM—through right-sizing and reengineering and creating strategy and boosting morale and all the rest—would have been for naught if, while we were hard at work on the other things, the IBM brand fell apart. I have always believed a successful company must have a customer/marketplace orientation and a strong marketing organization. That’s why my second step in creating a global enterprise had to be to fix and focus IBM’s marketing efforts.

IBM won numerous awards in the 1980s for its ingenious Charlie Chaplin commercials, which had introduced the IBM personal computer. By the early 1990s, however, the company’s advertising system had fallen into a state of chaos. As part of the drive toward decentralization, it seemed that every product manager in just about every part of the company was hiring his or her own advertising agency.

IBM had more than seventy ad agencies in 1993, each working on its own, without any central coordination. It was like seventy tiny trumpets all tooting simultaneously for attention. A single issue of an industry trade magazine could have up to eighteen different IBM

ads, with eighteen different designs, messages, and even logos.

In June 1993 I hired Abby Kohnstamm as the head of Corporate WHO SAYS ELEPHANTS CAN’T DANCE? / 89

Marketing for IBM. She had worked with me for many years at American Express. What we had to do here was so important and urgent that I wanted someone who knew me and how I managed, and with whom I could speak in shorthand.

Abby had an especially tough challenge. There had never been a true head of marketing in IBM. Few people in the business units understood or accepted her role, and at first they tried to ignore her.

IBM was built on technology and sales. And, in IBM at that time, the term “marketing” really meant “sales.” Using the broadest definition, sales is about fulfilling the demand that marketing generates. When it’s done well, marketing is a multi-disciplinary function that involves market segmentation and analysis of both competitors and customer preferences, corporate and product brand management, advertising, and direct mail. That’s only a partial listing. While IBM clearly had to sell more of what it made, it also had to recast its image and reestablish its relevance to the marketplace. When I arrived at IBM, marketing was not considered a distinct professional discipline, and it was not being managed as such. I told Abby to take sixty days to do a situation analysis.

Her research found that despite our well-chronicled problems, the overall IBM brand was still strong. Customers believed that if they bought an IBM product, it would be a good one. As I had expected, our biggest strength was as a unified brand, and not as each of our parts. Consequently, the marketing mission would be to articulate why customers would want to do business with an integrated IBM.

Abby knew she had to end the dissonance. We got there in stages because, while you can force anything down the throat of an organization, if people don’t buy into the logic, the change won’t stick.

Stage one was weaning IBM executives off the luxury of having their own advertising budgets, their personal agencies, and the discretion to order up an ad anytime they wanted to do so. One month there’d be no IBM advertising in important industry magazines; the next month we’d have so many pages that it seemed as if we were sponsoring a

90 / LOUIS V. GERSTNER, JR.

special issue. The latter was especially true in November and December, when marketing departments wanted to spend leftover dollars in their budgets.

Abby’s job was to get control of the spending and the messages.

I asked her to present a plan to the newly formed Worldwide Management Council at our conference center in Palisades, New York.

It was a tough meeting, but she did a very smart thing. When the thirty-five WMC members walked into the room, they found every wall adorned with the advertising, packaging, and marketing collat-eral of all our agencies. It was a train wreck of brand and product positioning.

After her presentation, I posed one question: “Does anyone doubt we can do this better?” There was no discussion.

One Voice, One Agency

Abby decided to consolidate all of IBM’s advertising relationships into a single agency—not just in the United States, but around the world. At the time, it was the largest advertising consolidation in history. Few people knew about her plan at first—a handful of people inside IBM, and only the chief executives of the agencies under consideration. There was no formal advertising review process. No creative development. No presentations. Abby narrowed down the list to four agencies, including just one that was then handling any of the IBM accounts. Over four weeks, she held a series of two-day meetings in hotels (with people on both sides using aliases) to gauge chemistry, thinking, and how each would approach a challenge this big.

She and her small team of IBMers unanimously settled on Ogilvy

& Mather, which had solid worldwide expertise and experience.

That was exactly what IBM needed, since the agency would manage advertising for all of our products and services, as well as our overall brand, around the world.

Before we signed off on the deal, I asked Abby to bring the top WHO SAYS ELEPHANTS CAN’T DANCE? / 91

three people at O&M to our corporate headquarters. We were about to bet the IBM brand on these people, so I wanted to make sure we were all clear about the stakes we were playing for—to look them in the eye and hear them commit to the success of this effort, no matter what it was going to take. Interestingly, the meeting revealed that they had a parallel objective. They were betting a big part of their future on IBM—and resigning from several of their existing accounts. So, in fact, we were looking each other in the eye.

Abby had my complete support, but others were a tougher sell, both inside and outside the company. Many of the product and geographic units adopted a “this too shall pass” approach—up until the time when we centralized most of the advertising spending and the media buying and went to global contracts. The ad community itself was in absolute shock. Not only was this not done in the advertising world—but by stodgy, trouble-plagued IBM?

The New York Times
covered the consolidation on page one.
Advertising Age
called it the “marketing shot heard ’round the world.” But it was a mostly positive shot.
Ad Age
went on to say: “Because computer products, brands, and publications have few geographic boundaries, a world approach makes sense.…A single agency meshed neatly with Mr. Gerstner’s strategy to centralize controls and bring independent units like the PC division back into the fold.”

Always critical,
The Wall Street Journal
called the decision “auda-cious” and “fraught with risk.” The paper warned: “If the agency doesn’t devise an instantly winning campaign, it could set IBM’s re-covery back for months.”

Far from it. Despite the fierce kicking and screaming of many local managers, the first campaign debuted in 1994 under the theme

“Solutions for a Small Planet.” The innovative TV spots—featuring an international cast, from Czech nuns to old Parisians speaking in their native language with all the dialogue subtitled—were highly acclaimed.

The campaign reaffirmed important messages: IBM was global, 92 / LOUIS V. GERSTNER, JR.

and we were staying together as a world-class integrator. At the same time, it signaled that we were a very different company—able to change and make bold decisions, just as we had done with the decision to consolidate; able to move quickly; able to take risks and do innovative things; and we were more accessible. The campaign humanized our brand.

In conjunction with the creative work, we completely overhauled our budgeting and media buying. We knew we’d save money through the consolidation, and we certainly did. But that wasn’t the reason to do it. In fact, we immediately doubled our investment in marketing and advertising, and we’ve sustained that level of investment over the years.

“Solutions for a Small Planet” was followed by a campaign that coined the term “e-business” and helped establish IBM as the leader of the most important trend in the industry at that time (more on that later).

Against all odds, Abby Kohnstamm had made something great and impactful happen. She had to build the marketing function from scratch and simultaneously create a unified, global campaign for a company that had a recent history of dysfunctional, fractious, competing messaging. All of this rubbed mightily against the historical culture of IBM. Abby was another hero of the turnaround.

10

Resetting the Corporate

Compensation Philosophy

T
he “old” IBM had very fixed views about compensation; much of it, I suspect, had been derived from the management philosophy of Tom Watson, Jr., the man who had created the great IBM of the 1960s and 1970s. Since the company’s performance during that time had been so extraordinary, it would be foolish to say it was not an effective compensation system.

Let me briefly describe the system I discovered when I arrived.

First, compensation at all levels consisted predominantly of salary.

Relatively little was paid in bonus, stock options, or performance units.

Second, there was little differentiation in the system.

• Annual increases were typically given to all employees except those rated unsatisfactory.

94 / LOUIS V. GERSTNER, JR.

• There was very little variance in the size of the annual increase between a top-ranked and a lower-ranked employee.

• Increase sizes were in a small band around that year’s average.

For example, if there was a 5 percent increase in budget, actual increases fell between 4 percent and 6 percent.

• All employee skill groups (such as software engineers, hardware engineers, salesmen, and finance professionals) were paid the same within a salary grade level, regardless of the fact that some skills were in higher demand externally.

Third, there was a heavy emphasis on benefits. IBM was a very paternal organization and provided generously for all forms of employee support. Pensions, medical benefits, employee country clubs, a commitment to lifelong employment, outstanding educational opportunities—all were among the best of any United States company.