Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (6 page)

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planted their flags into each business unit. It reminded me of a gold rush. Each one saw an initial public offering of stock (IPO) for the unit or units that he or she advised. We were spending tens of millions of dollars on accountants to create the bookkeeping required for IPOs because IBM’s financial system did not support stand-alone units. Paul was also deeply involved in the financing activities that were under way to raise additional capital.

For me, asking Paul to stay on was an easy decision, and I’m grateful he did. Over the next year he was a tower of strength, a wise mentor, and an insightful partner in evaluating strategy and people—another important hero of the IBM turnaround.

A special moment occurred during those first weeks of April. I walked out of my home one morning at my usual early hour.

However, when I opened my car door, I suddenly realized there was someone sitting in the back seat. It was Thomas J. Watson, Jr., former IBM CEO and the son of IBM’s founder. Tom literally lived across the street and had walked up my driveway to surprise me and ride to work with me. He was 79 years old, and he had retired as CEO of IBM in 1971.

He was animated and, perhaps better stated, agitated. He said he was angry about what had happened to “my company.” He said I needed to shake it up “from top to bottom” and to take whatever steps were necessary to get it back on track.

He offered support, urged me to move quickly, reflected on his own career, and, in particular, the need he had seen over and over again to take bold action. At the end of our ride together, I had the feeling he wished he could take on the assignment himself!

On April 15 I made my first official visit to a nonheadquarters site.

I had chosen it carefully: the company’s research laboratory in Yorktown Heights, New York. If there was a soul of IBM, this lab was it.

38 / LOUIS V. GERSTNER, JR.

Appropriately named the T. J. Watson Research Center, it contained the intellectual fervor that had led IBM over decades to invent most of the important developments that had created the computer industry.

It was my first “public” appearance inside IBM, and it was important because I knew this was my greatest immediate vulnerability.

Would the researchers reject me as an unacceptable leader? Some in the company were calling me the “Cookie Monster” because of my previous job at Nabisco.

I spoke from a stage in an auditorium. The house was full, and my remarks were broadcast to an overflow of employees in the cafeteria. Other IBM research facilities around the world picked up the broadcast as well.

The stereotype of researchers says they are so focused on big ideas that they are disconnected from the real world. Well, not these researchers! I saw the pain of IBM’s problems on their faces. I don’t know if they were curious or apprehensive, but they certainly came to listen.

I gave what soon became my stump speech on focus, speed, customers, teamwork, and getting all the pain behind us. I talked about how proud I was to be at IBM. I underscored the importance of research to IBM’s future, but I said we probably needed to figure out ways to get our customers and our researchers closer together so that more of IBM’s great foundry of innovation would be aimed at helping people solve real, and pressing, problems.

There was applause, but I wasn’t sure what they were thinking.

The Shareholders’ Meeting

Perhaps the most traumatic event of my first month at IBM was the annual shareholders’ meeting. It had been scheduled, I’m sure, several years in advance for April 26 in Tampa, Florida. Needless to

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say, it was a daunting challenge to chair my first shareholders’

meeting when the company had such major and visible problems.

I had been there for only three weeks, could barely identify the products, let alone explain what they did, or, God forbid, describe the technologies inside them. Moreover, it was clear IBM’s shareholders were angry and out for blood—perhaps deservedly so. IBM stock had dropped from a high of $43 a share in 1987 to $12 a share the day of the shareholders’ meeting. That was less than half its price at the previous year’s meeting.

There were 2,300 shareholders waiting impatiently for the show to start when I walked out onto the stage at 10 A.M. that day—in the biggest convention hall I had ever seen. You couldn’t help but notice a sea of white hair—obviously, a lot of retirees in Florida owned IBM

stock. I made a brief speech in which I asked for some patience, but I made it clear that I was going to move quickly, make all changes necessary, and return the company’s focus to the customer.

I got polite applause, and then the fireworks started. Shareholder after shareholder stood up and blasted the company, and frequently the Board of Directors, all of whom were sitting in front of me in the first row of the auditorium. It was a massacre. The directors took direct hit after direct hit. The shareholders were reasonably kind to me in terms of not holding me accountable for the problems, but they also showed little patience for anything other than a fast recovery. It was a long, exhausting meeting—for everyone, I think.

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.