Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (8 page)

Almost as frustrating as the bad results was the fact that, while the corporation could add up its numbers quite well in total, the internal budgeting and financial management systems were full of holes. There was not one budget but two or three, because each element of the IBM organization matrix (e.g., the geographic units versus the product divisions) insisted on its own budget. As a result, there really wasn’t single, consolidated budget. Allocations were constantly debated and changed, and accountability was extremely difficult to determine.

54 / LOUIS V. GERSTNER, JR.

Given the fact that the mainframe was still in free fall and so much of IBM’s business at that point depended on the mainframe, the outlook was extremely precarious. We were shoring up the balance sheet as best we could with financing, but something had to be done to stabilize the operations.

The Media Early On

There was a very short honeymoon with the media—understandably, given the nature of the story, but also because it’s impossible to transform a badly ailing company under the glare of daily press briefings and publicity. There’s too much work to do inside without having to contend with a daily progress report in the papers focusing everyone on results that take months and years, and not hours and days, to achieve. A reporter from the Associated Press wanted to follow me around all day my first day.
USA Today
said it was working on graphics for a daily progress chart. We said, “No, thank you. We’re going dark for a bit while we assess the task at hand.”

That was not a popular way to answer reporters who were used to writing daily stories about the problems at IBM.

I brought with me to IBM from the first day my communications executive, David Kalis. David had been with me for many years, going back to American Express in the 1980s. He was, in my opinion, the best public relations executive in America. He was also the first true PR professional in IBM’s history to hold the top communications job. For decades the position had been a rotation slot for sales executives being groomed for other top jobs.

He inherited a shambles at IBM. There were some talented people, but the communications department was staffed for the most part with well-meaning but untrained employees. However, even if they had all been professionals, it would have been impossible for them to perform, given the foxhole mentality that permeated the company in

WHO SAYS ELEPHANTS CAN’T DANCE? / 55

1993. Typically, IBM executives believed that the only real problem the company had was the daily beating in was getting in the press.

They felt that if we had more positive stories in the media, IBM would return to profitability and everything would be normal again.

Although my clear priority was meeting and talking with IBM

customers and employees, I had to make some time for the media as well. Pressure was almost overwhelming. During the first months, on any given day there were more than sixty-five standing requests for Gerstner interviews from the major media. If requests from local newspapers and computer industry press were factored in, the demand was in the hundreds. If one included international demand…and so on.

I did what I could on a tight schedule. I conducted individual interviews with
The New York Times, The Wall Street Journal, Business-Week, Fortune, USA Today
, and the
Financial Times
. But, the media let us know, loudly and frequently, that that just wasn’t enough.

More than anything else, I wanted time, but I knew I didn’t have a lot of it. Pressure was building—in the media, on the Street, and with shareholders. A lot had been done, but I knew I would have to go public, and do it soon, with my plans to fix IBM.

6

Stop the Bleeding

(and Hold the Vision)

B
y July 1993, the pressure to act—and to act in a comprehensive manner—was acute. The financials were omin-ous. Employees wanted their new leader to do something, anything, to give them a sense of direction. The media, typically, were losing patience (not that I’ve ever felt the media had any particularly noteworthy insights into what was going on in IBM, but given the fragility of the company at that time, their stories, right or wrong, could have had a devastating impact on customer attitudes).

On July 14,
USA Today
celebrated my one hundredth day on the job in a long cover story. This was the story’s lead: IBM stockholders and customers might have hoped for miracles in Louis Gerstner’s first 100 days as IBM’S CEO. But that honeymoon period ended Friday—with no major organizational overhauls or strategic moves.

WHO SAYS ELEPHANTS CAN’T DANCE? / 57

“Clearly he is not a miracle worker,” computer analyst Ulric Weil says.

IBM stock, down 6% since Gerstner took over, “has done nothing because he’s done nothing,” says computer analyst David Wu at S. G. Warburg.

Although I thought I had already done a lot, it was clearly time to make some major decisions and go public with them. And after all the customer and employee and industry meetings, as well as weekend and air travel reflection, I was indeed ready to make four critical decisions:

• Keep the company together.

• Change our fundamental economic model.

• Reengineer how we did business.

• Sell underproductive assets in order to raise cash.

And, I decided I would not disclose any of the other strategic initiatives that were forming in my head during the summer of 1993.

Keep the Company Together

I can’t tell you exactly when I decided to keep IBM together, nor do I remember a formal announcement. I had always talked about our size and breadth as a distinct competitive advantage. However, I do know that it wasn’t a particularly difficult decision for me.

Here’s why.

When the computer industry first appeared on the world’s stage, its model was to deliver to customers a total, integrated package.

When a company bought a computer, it came with all the basic technologies, like microprocessors and storage, incorporated into a system; all the software loaded onto the hardware; all the services to

58 / LOUIS V. GERSTNER, JR.

install and maintain the system were bundled into the pricing. The customer basically purchased a total system and had it installed for a single price. This was the model created by IBM, and over time, only a handful of computer competitors, all fully integrated, emerged in the United States (often described as the BUNCH—Burroughs, Univac, NCR, Control Data, and Honeywell). The same model emerged in Japan and, to a lesser extent, in Europe.

In the mid-1980s a new model started to appear. It argued that vertical integration was no longer the way to go. The new breed of successful information technology companies would provide a narrow, horizontal slice of the total package. So companies that sold only databases began to emerge, as well as companies that sold only operating systems, that sold only storage devices, and so on. Suddenly the industry went from a handful of competitors to thousands and then tens of thousands, many of which sold a single, tiny piece of a computer solution.

It was in this new environment that IBM faltered, and so it was logical for many of the visionaries and pundits, both inside and outside the company, to argue that the solution lay in splitting IBM

into individual segments. This conclusion, however, appeared to me to be a knee-jerk reaction to what new competitors were doing without understanding what created fragmentation in the industry.

Two things really drove the customer to support this new, fragmented supplier environment:

• Customers wanted to break IBM’s grip on the economics of the industry—to rip apart IBM’s pricing umbrella, which allowed it to bundle prices and achieve significantly high margins.

• The customer was increasingly interested in delivering computing power to individual employees (the term was “distributed computing,” in contrast to the mainframe’s “centralized computing”).

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IBM was slow, very slow, in delivering distributed computing, and many small companies moved in to fill the gap. These companies were in no position to deliver an entire integrated solution, so they offered add-ons to the basic IBM system and built around IBM’s central processing hub. This is clearly what Microsoft and Intel did when IBM reluctantly moved into the PC business.

So it really wasn’t that the customer desired a whole bunch of fragmented suppliers. The broad objective was to bring more competition into the marketplace and to seek suppliers for a new model of computing.

And it worked. By the early 1990s there were tens of thousands of companies in the computer industry, many of which lived for a few months or years, then disappeared. But the impact of all this dynamism was lower prices and more choices (with the notable exception of the PC industry, where Microsoft re-created the IBM choke hold, only this time around it was in the desktop operating environment rather than in the mainframe computer).

While there were good consequences to this fundamental reshaping of the computer industry, there was also one very undesirable outcome. The customer now had to be the integrator of the technology into a usable solution to meet his or her business requirements.

Before, there was a general contractor called IBM or Burroughs or Honeywell. Now, in the new industry structure, the burden was on the customer to make everything work together.

This was all complicated by the absence of uniform standards throughout the computer industry. Competitors in the computer industry, unlike any other industry I know, try to create unique standards that they “own.” They do not make it easy for other companies in the industry to connect with or understand these standards without extracting a huge price. Thus, there is a cacophony of standards and interconnect requirements that makes the creation of a single solution very difficult. (I’ll discuss this in more detail later.)

60 / LOUIS V. GERSTNER, JR.

As a big customer of the information technology industry in the early 1990s, I knew firsthand that integration was becoming a gigantic problem. At American Express, our wallet-sized piece of plastic was going to be moving data all over the world, a fact which brought with it enormous technical challenges. All I wanted was an information technology platform, and a partner, that would allow me to run that business the way I wanted it to run. So when I arrived at IBM in 1993, I believed there was a very important role for some company to be able to integrate all of the pieces and deliver a working solution to the customer.

Why? Because at the end of the day, in every industry there’s an integrator. Sure, there are supply chains, and there are enterprises at various points in the chain that offer only one piece of a finished product: steelmakers in the auto industry; component makers in consumer electronics; or providers of a marketing or tax application in financial services. But before the components reach the consumer, somebody has to sit at the end of the line and bring it all together in a way that creates value. In effect, he or she takes responsibility for translating the pieces into value. I believed that if IBM was uniquely positioned to do or to be anything, it was to be that company.

Another myth that was playing out at the time was that the information technology (IT) industry was going to continue to evolve—or devolve—toward totally distributed computing. Everything was going to get more local, more self-contained, smaller and cheaper until the point at which all the information in the world would be running on somebody’s wristwatch. A lot of people had bought into the value of information democratization extended to its extreme, and they accepted the industry’s promise that all the piece parts would work together, or, in the industry’s term, “interoperate.”

But even before I had crossed the threshold at IBM, I knew that promise was empty. I’d spent too long a time on the other side. The idea that all this complicated, difficult-to-integrate, proprietary col WHO SAYS ELEPHANTS CAN’T DANCE? / 61

lection of technologies was going to be purchased by customers who would be willing to be their own general contractors made no sense.

Unfortunately, in 1993 IBM was rocketing down a path that would have made it a virtual mirror image of the rest of the industry. The company was being splintered—you could say it was being destroyed.

Now, I must tell you, I am not sure that in 1993 I or anyone else would have started out to create an IBM. But, given IBM’s scale and broad-based capabilities, and the trajectories of the information technology industry, it would have been insane to destroy its unique competitive advantage and turn IBM into a group of individual component suppliers—more minnows in an ocean.

In the big April customer meeting at Chantilly and in my other customer meetings, CIOs made it very clear that the last thing in the world they needed was one more disk drive company, one more operating system company, one more PC company. They also made it clear that our ability to execute against an integrator strategy was nearly bankrupt and that much had to be done before IBM could provide a kind of value that we were not providing at the time—but which they believed only IBM had a shot at delivering: genuine problem solving, the ability to apply complex technologies to solve business challenges, and integration.

So keeping IBM together was the first strategic decision, and, I believe, the most important decision I ever made—not just at IBM, but in my entire business career. I didn’t know then exactly how we were going to deliver on the potential of that unified enterprise, but I knew that if IBM could serve as the foremost integrator of technologies, we’d be delivering extraordinary value.

As a result, we threw out the investment bankers who were arranging IPOs of all the pieces of the enterprise. We threw out the accountants who were creating official financial statements required in order to sell off the individual components. We threw out the naming 62 / LOUIS V. GERSTNER, JR.

consultants who had decided that the printer division should be called “Pennant” and the storage division “AdStar.”