Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (2 page)

Like many other successful McKinsey partners, I had gotten a number of offers to join my clients over the years, but none of the proposals seemed attractive enough to make me want to leave. In 1977, however, I received and accepted an offer from American Express, which was my largest client at that time, to join it as the head of its Travel Related Services Group (basically, the American Express Card, Traveler’s Checks, and Travel Office businesses). I stayed at American Express for eleven years, and it was a time of great fun and personal satisfaction. Our team grew Travel Related Services earnings at a compounded rate of 17 percent over a decade; expanded the number of cards issued from 8 million to nearly 31 million, and built whole new businesses around the Corporate Card, merchandise sales, and credit card processing industries.

I also learned a great deal. Early on I discovered, to my dismay, that the open exchange of ideas—in a sense, the free-for-all of problem solving in the absence of hierarchy that I had learned at McKinsey—doesn’t work so easily in a large, hierarchical-based organization. I well remember stumbling in my first months when I reached out to people whom I considered knowledgeable on a subject regardless of whether they were two or three levels down from me in the organization. My team went into semi-revolt! Thus began a lifelong process of trying to build organizations that allow for hierarchy but at the same time bring people together for problem solving, regardless of where they are positioned within the organization.

It was also at American Express that I developed a sense of the strategic value of information technology. Think about what the American Express Card represents. It is a gigantic e-business, although we never thought about it in those terms in the 1970s. Millions of people travel the world with a sliver of plastic, charging goods and

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services in many countries. Every month they receive a single bill listing those transactions, all translated into a single currency. Concurrently merchants are paid around the globe for transactions completed by hundreds, if not thousands, of people whom they do not know and may never see again. All of this is done for the most part electronically, with massive data processing centers worldwide.

The technology imperative of this business was something I wrestled with for many years.

This was also when I first discovered the “old IBM.” I’ll never forget the day one of my division managers called and said that he had recently installed an Amdahl computer in a large data center that had historically been 100-percent IBM equipped. He said that his IBM representative had arrived that morning and told him that IBM was withdrawing all support for his massive data processing center as a result of the Amdahl decision. I was flabbergasted. Given that American Express was at that time one of IBM’s largest customers, I could not believe that a vendor had reacted with this degree of arrogance. I placed a call immediately to the office of the chief executive of IBM to ask if he knew about and condoned this behavior.

I was unable to reach him and was shunted off to an AA (administrative assistant) who took my message and said he would pass it on. Cooler (or, should I say, smarter) heads prevailed at IBM and the incident passed. Nevertheless, it did not go out of my memory.

I left American Express on April 1, 1989, to accept what some in the media called at the time the “beauty contest” of the decade. RJR

Nabisco, a huge packaged-goods company that had been formed a few years earlier through the merger of Nabisco and R. J. Reynolds Tobacco Company, was rated the ninth-most-admired company in America when the headhunters called me. The organization had just gone through one of the wildest adventures in modern American business history: an extraordinary bidding contest among various investment firms to take the company private through a leveraged WHO SAYS ELEPHANTS CAN’T DANCE? / 5

buyout (LBO). The winning bid was made by the venture capital firm of Kohlberg Kravis Roberts & Co. (KKR). Soon afterward, KKR sought me out to become chief executive of the now private and heavily indebted company.

For the next four years I became immersed in a whole new set of challenges. While I understood well from my American Express days the ongoing demands of a consumer products company, I really spent most of my time at RJR Nabisco managing an extraordinarily complex and overburdened balance sheet. The LBO bubble of the 1980s burst shortly after the RJR Nabisco transaction, sending a tidal wave of trouble over this deal. In hindsight, KKR paid too much for the company, and the next four years became a race to refinance the balance sheet, while trying to keep some semblance of order in the many individual businesses of the company. It was a wild scene.

We had to sell $11 billion worth of assets in the first twelve months.

We had debt that paid interest rates as high as 21 percent a year. We had lender and creditor committees galore and, of course, the cleanup from the profligate spending of the prior management. (For example, when I arrived we had thirty-two professional athletes on our payroll—all part of “Team Nabisco.”)

That was a difficult time for me. I love building businesses, not disassembling them. However, we all have an opportunity to learn in everything we do. I came away from this experience with a profound appreciation of the importance of cash in corporate performance—“free cash flow” as the single most important measure of corporate soundness and performance.

I also came away with a greater sense of the relationship between management and owners. I had experienced this at McKinsey, which was a private company owned by its partners. The importance of managers being aligned with shareholders—not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company—became a critical part of the management philosophy I brought to IBM.

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By 1992 it was clear to all that while RJR Nabisco itself was doing quite well, the LBO was not going to produce the financial returns the owners had expected. It was clear to me that KKR was headed for the exit, so it made sense for me to do the same. This book, which starts on the next page, picks up my story from there.

PART 1

Grabbing Hold

1

The Courtship

O
n December 14, 1992, I had just returned from one of those always well-intentioned but rarely stimulating charity dinners that are part of a New York City CEO’s life, including mine as CEO of RJR Nabisco. I had not been in my Fifth Avenue apartment more than five minutes when my phone rang with a call from the concierge desk downstairs. It was nearly 10 P.M. The concierge said, “Mr. Burke wants to see you as soon as possible this evening.”

Startled at such a request so late at night in a building in which neighbors don’t call neighbors, I asked which Mr. Burke, where is he now, and does he really want to see me face to face this evening?

The answers were: “Jim Burke. He lives upstairs in the building.

And, yes, he wants very much to speak to you tonight.”

I didn’t know Jim Burke well, but I greatly admired his leadership at Johnson & Johnson, as well as at Partnership for a Drug-Free America. His handling of the Tylenol poisoning crisis years earlier had made him a business legend. I had no idea why he wanted to see me so urgently. When I called, he said he would come right down.

When he arrived he got straight to the point: “I’ve heard that you may go back to American Express as CEO, and I don’t want you to do that because I may have a much bigger challenge for you.” The refer

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ence to American Express was probably prompted by rumors that I was going to return to the company where I had worked for eleven years. In fact, in mid-November 1992, three members of the American Express board had met secretly with me at the Sky Club in New York City to ask that I come back. It’s hard to say if I was surprised—Wall Street and the media were humming with speculation that then CEO Jim Robinson was under board pressure to step down.

However, I told the three directors politely that I had no interest in returning to American Express. I had loved my tenure there, but I was not going back to fix mistakes I had fought so hard to avoid.

(Robinson left two months later.)

I told Burke I wasn’t returning to American Express. He told me that the top position at IBM might soon be open and he wanted me to consider taking the job. Needless to say, I was very surprised.

While it was widely known and reported in the media that IBM was having serious problems, there had been no public signs of an im-pending change in CEOs. I told Burke that, given my lack of technical background, I couldn’t conceive of running IBM. He said, “I’m glad you’re not going back to American Express. And please, keep an open mind on IBM.” That was it. He went back upstairs, and I went to bed thinking about our conversation.

The media drumbeat intensified in the following weeks.
Business-Week
ran a story titled “IBM’s Board Should Clean Out the Corner Office.”
Fortune
published a story, “King John [Akers, the chairman and CEO] Wears an Uneasy Crown.” It seemed that everyone had advice about what to do at IBM, and reading it, I was glad I wasn’t there. The media, at least, appeared convinced that IBM’s time had long passed.

The Search

On January 26, 1993, IBM announced that John Akers had decided to retire and that a search committee had been formed to con WHO SAYS ELEPHANTS CAN’T DANCE? / 11

sider outside and internal candidates. The committee was headed by Jim Burke. It didn’t take long for him to call.

I gave Jim the same answer in January as I had in December: I wasn’t qualified and I wasn’t interested. He urged me, again: “Keep an open mind.”

He and his committee then embarked on a rather public sweep of the top CEOs in America. Names like Jack Welch of General Electric, Larry Bossidy of Allied Signal, George Fisher of Motorola, and even Bill Gates of Microsoft surfaced fairly quickly in the press. So did the names of several IBM executives. The search committee also conducted a series of meetings with the heads of many technology companies, presumably seeking advice on who should lead their number one competitor! (Scott McNealy, CEO of Sun Microsystems, candidly told one reporter that IBM should hire “someone lousy.”) In what was believed to be a first-of-its-kind transaction, the search committee hired two recruiting firms in order to get the services of the two leading recruiters—Tom Neff of Spencer Stuart Management Consultants N.V., and Gerry Roche of Heidrick & Struggles International, Inc.

In February I met with Burke and his fellow search committee member, Tom Murphy, then CEO of Cap Cities/ABC. Jim made an emphatic, even passionate pitch that the board was not looking for a technologist, but rather a broad-based leader and change agent.

In fact, Burke’s message was consistent throughout the whole process. At the time the search committee was established, he said,

“The committee members and I are totally open-minded about who the new person will be and where he or she will come from. What is critically important is the person must be a proven, effective leader—one who is skilled at generating and managing change.”

Once again, I told Burke and Murphy that I really did not feel qualified for the position and that I did not want to proceed any further with the process. The discussion ended amicably and they went

12 / LOUIS V. GERSTNER, JR.

off, I presumed, to continue the wide sweep they were carrying out, simultaneously, with multiple candidates.

What the Experts Had to Say

I read what the press, Wall Street, and the Silicon Valley computer visionaries and pundits were saying about IBM at that time. All of it certainly fueled my skepticism and, I believe, that of many of the other candidates.

Most prominent were two guys who seemed to pop up everywhere you looked, in print and on TV—Charles Morris and Charles Ferguson. They had written a book,
Computer Wars
, that took a grim view of IBM’s prospects. They stated: “There is a serious possibility that IBM is finished as a force in the industry. Bill Gates, the software tycoon whom everybody in the industry loves to hate, denies having said in an unguarded moment that IBM ‘will fold in seven years.’

But Gates may be right. IBM is now an also-ran in almost every major computer technology introduced since 1980.…Traditional big computers are not going to disappear overnight, but they are old technology, and the realm in which they hold sway is steadily shrinking.

The brontosaurus moved deeper into the swamps when the mam-mals took over the forests, but one day it ran out of swamps.”

Their book concluded that “the question for the present is whether IBM can survive. From our analysis thus far, it is clear that we think its prospects are very bleak.”

Morris and Ferguson wrote a longer, more technical, and even grimmer report on IBM and sold it to corporations and institutions for a few thousand dollars per copy. Among others, it frightened a number of commercial banks that were lenders to IBM.

Paul Carroll, IBM’s beat reporter at
The Wall Street Journal
, published a book that year chronicling IBM’s descent. In it, he said: “The world will look very different by the time IBM pulls itself together—

WHO SAYS ELEPHANTS CAN’T DANCE? / 13

assuming it
can
pull itself together—and IBM will never again hold sway over the computer industry.”

Even
The Economist
—understated and reliable—over the span of six weeks, published three major stories and one lengthy editorial on IBM’s problems. “Two questions still hang over the company,”

its editors wrote. “In an industry driven by rapid technological change and swarming with smaller, nimbler firms, can a company of IBM’s size, however organized, react quickly enough to compete?

And can IBM earn enough from expanding market segments such as computer services, software, and consulting to offset the horrifying decline in mainframe sales, from which it has always made most of its money?