Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (9 page)

We stopped all the internal activities that were creating separate business processes and systems for each of these units, all of which were enormous drains of energy and money. For example, even in the midst of financial chaos, we had managed to hire more than seventy different advertising agencies in the United States alone (more on this later). Human resources people were willy-nilly changing benefits programs so that if an employee left one IBM

business unit for another, it was like entering another country, with different language, currency, and customs.

I began telling customers and employees that IBM would remain one unified enterprise. I remember that the response from our executive team was mixed—great joy from those who saw the company as being saved, and bitter disappointment from those who saw a breaking apart as their personal lifeboat to get off the
Titanic
.

Changing Our Economic Model

The second major decision that summer was to restructure IBM’s fundamental economics. At the risk of sounding pompously tutorial, a profit-making business is a relatively simple system. You need to generate revenue, which comes from selling things at an acceptable price. You have to achieve a good gross profit on those sales. And you have to manage your expenses, which are the investments you make in selling, research and development, building plants and equipment, maintaining financial controls, developing and running advertising, and so on. If revenue, gross profit, and expenses are all moving in the right relationship, the net effect is growing profits and positive cash flow.

Unfortunately, in IBM’s case the relationships were all wrong.

Revenue was slowing because the company was so dependent on the

WHO SAYS ELEPHANTS CAN’T DANCE? / 63

mainframe, and mainframe sales were declining. Gross profit margin was sinking like a stone because we had to reduce mainframe prices in order to compete. The only way to stabilize the ship was to ensure that expenses were going down faster than the decline in gross profit.

Expenses were a major problem. After months of hard work, CFO

Jerry York and his team determined that IBM’s expense-to-revenue ratio—i.e., how much expense is required to produce a dollar of revenue—was wildly out of range with those of our competitors.

On average, our competitors were spending 31 cents to produce $1

of revenue, while we were spending 42 cents for the same end. When we multiplied this inefficiency times the total revenue of the company, we discovered that we had a $7 billion expense problem!

Since the repositioning of the mainframe was a long-term challenge and we had to reduce mainframe prices and thus our gross profit, the only way to save the company, at least in the short term, was to slash uncompetitive levels of expenses.

So we made the decision to launch a massive program of expense reduction—$8.9 billion in total. Unfortunately, this necessitated, among other things, reducing our employment by 35,000 people, in addition to the 45,000 people whom John Akers had already laid off in 1992. That meant additional pain for everyone, but this was a matter of survival, not choice.

Reengineer How We Did Business

These early expense cuts were necessary to keep the company alive, but I knew they were far from sufficient to create a vibrant, ongoing, successful enterprise. We needed fundamental change in the way we carried out almost every process at IBM. All of our business processes were cumbersome and highly expensive. So in 1993 we began what ultimately became one of the largest, if not
the
largest,

64 / LOUIS V. GERSTNER, JR.

reengineering projects ever undertaken by a multinational corporation. It would last a decade and, as it unfolded, change almost every management process inside IBM.

Reengineering is difficult, boring, and painful. One of my senior executives at the time said: “Reengineering is like starting a fire on your head and putting it out with a hammer.” But IBM truly needed a top-to-bottom overhaul of its basic business operations.

Jerry York led the effort. By addressing some of the obvious excesses, he had already cut $2.8 billion from our expenses that year alone. Beyond the obvious, however, the overall task was enormous and daunting. We were bloated. We were inefficient. We had piled redundancy on top of redundancy.

We were running inventory systems, accounting systems, fulfillment systems, and distribution systems that were all, to a greater or lesser degree, the mutant offspring of systems built in the early mainframe days and then adapted and patched together to fit the needs of one of twenty-four independent business units. Today IBM

has one Chief Information Officer. Back then we had, by actual count, 128 people with CIO in their titles—all of them managing their own local systems architectures and funding home-grown applications.

The result was the business equivalent of the railroad systems of the nineteenth century—different tracks, different gauges, different specifications for the rolling stock. If we had a financial issue that required the cooperation of several business units to resolve, we had no common way of talking about it because we were maintaining 266 different general ledger systems. At one time our HR systems were so rigid that you actually had to be fired by one division to be employed by another.

Rather than approach our reengineering sequentially, we attacked the entire organization at once. At any given time, more than sixty major reengineering projects were under way—and hundreds more among individual units and divisions.

Most of the work centered on eleven areas. The first six we called WHO SAYS ELEPHANTS CAN’T DANCE? / 65

the core initiatives, meaning those parts of the business that dealt most with the outside world: hardware development, software development (later, these two units were combined into integrated product development), fulfillment, integrated supply chain, customer relationship management, and services.

The rest focused on internal processes, called enabling initiatives: human resources, procurement, finance, real estate, and surprisingly—at least at first glance—information technology.

When I’d arrived at IBM, I wasn’t taking too much for granted, but I did expect I’d find the best internal IT systems in the world.

This might have been my greatest shock. We were spending $4 billion a year on this line item alone, yet we didn’t have the basic information we needed to run our business. The systems were antiquated and couldn’t communicate with one another. We had hundreds of data centers and networks scattered around the world; many of them were largely dormant or being used inefficiently.

We saved $2 billion in IT expenses by the end of 1995. We went from 155 data centers to 16, and we consolidated 31 internal communications networks into a single one.

Real estate was an especially big project. The real estate and construction division in the United States had grown so big that it could have been a separate company. In the early 1990s it employed 240

people. We had tens of millions of square feet in fancy city-center office buildings that had been built by IBM in its heyday in the 1970s and 1980s. You couldn’t walk into a major city in the United States that did not have a large IBM tower. The same was true overseas.

However, by the 1990s, many properties were underused or being rented out. At the same time, we were renting an entire floor in a midtown Manhattan office building mostly for product introductions, for $1 million a year.

We sold 8,000 acres of undeveloped land. We sold first-class real estate that we didn’t need, like the tallest building in Atlanta. We hired outside providers and cut full-time staff to 42. Around our cor 66 / LOUIS V. GERSTNER, JR.

porate headquarters in Westchester County, New York, we consolidated twenty-one locations into five.

From 1994 to 1998, the total savings from these reengineering projects was $9.5 billion. Since the reengineering work began, we’ve achieved more than $14 billion in overall savings. Hardware development was reduced from four years to an average of sixteen months—and for some products, it’s far faster. We improved on-time product delivery rates from 30 percent in 1995 to 95 percent in 2001; reduced inventory carrying costs by $80 million, write-offs by $600 million, delivery costs by $270 million; and avoided materials costs of close to $15 billion.

Sell Unproductive Assets to Raise Cash

The fourth action program that we kicked off that summer represented a scramble to sell unproductive assets and raise cash. Only a handful of people understand how precariously close IBM came to running out of cash in 1993. Whether we would have had to file for bankruptcy, I can’t say. There were certainly lots of assets that could be sold to make the company solvent again. The issue was: Could that be done before we turned down that horrible spiral that companies enter when their cash flow shrinks and their creditors are no longer willing to stand behind them?

In July we announced that we would cut our annual dividend to shareholders from $2.16 to $1. That fall, Jerry York and his team went to work to sell any asset that was not essential to the company.

We sold much of the corporate airplane fleet. We sold the corporate headquarters in New York City. We had massive investments in expensive training centers where we housed and fed tens of thousands of people a year. In 1993 we had four such private facilities within an hour’s drive of the Armonk headquarters, one of which, a former estate of

WHO SAYS ELEPHANTS CAN’T DANCE? / 67

the Guggenheim family on the Gold Coast of Long Island, was used almost exclusively by the IBM human resources organization.

Over the prior decade, IBM had amassed a large and important fine-art collection, most of which was stored in crates out of sight from anyone. Some of it did show up now and again in a public gallery in the IBM tower on 57th Street in Manhattan. We had a cur-ator and a staff who maintained this collection. In 1995 the bulk of it was sold at auction at Sotheby’s for $31 million. Unfortunately, the sale was condemned by many people in the art world. For some reason, these people felt that it was fine for IBM to fire employees and send them home, as long as we kept some paintings in a gallery in New York City for people to view occasionally.

The largest sale we made in the first year was IBM’s Federal Systems Company, which did major projects primarily for the United States government. We took advantage of the fact that the United States defense industry was consolidating rapidly at that time and there were buyers who would pay top dollar to increase their concentration. The unit had an illustrious history of important technological breakthroughs for various national security and space programs. However, it was also a perpetual low-margin business because we never figured out how to fit it into the overall high-expense model of the commercial side of the business. Loral Corporation bought it in January 1994 for $1.5 billion.

The program of selling off unproductive assets continued for many years. The need to raise cash became less important as we moved into 1995 and 1996. However, as the years went by, we continued to streamline the company for a different reason: focus. (I will return to this subject later.)

68 / LOUIS V. GERSTNER, JR.

Hold the Vision

I’ve had a lot of experience turning around troubled companies, and one of the first things I learned was that whatever hard or painful things you have to do, do them quickly and make sure everyone knows what you are doing and why. Whether dwelling on a problem, hiding a problem, or dribbling out partial solutions to a problem while you wait for a high tide to raise your boat—dithering and delay almost always compound a negative situation. I believe in getting the problem behind me quickly and moving on.

There were so many constituencies involved with a stake in IBM’s future that we decided the only way to communicate with them all about our decisions, including expense reductions and additional layoffs, was through a press conference.

We made the announcement the morning of July 27 at a large meeting room in a midtown Manhattan hotel. It seemed there were two hot topics that year that guaranteed big press attendance—jobs and IBM. So when IBM made an announcement about jobs, it was a full house, with every TV network and major paper in the world present.

This was basically my coming-out event—my first public discussion of what I had learned and planned to do at IBM. I worked hard on what I would say, but given IBM’s longtime image of starchy formality, I decided to speak without notes or even a podium. No props. Nothing to lean on. Just me and what I had to say.

I said something at the press conference that turned out to be the most quotable statement I ever made:

“What I’d like to do now is put these announcements in some sort of perspective for you. There’s been a lot of speculation as to when I’m going to deliver a vision of IBM, and what I’d like to say to all of you is that the last thing IBM needs right now is a vision.”

You could almost hear the reporters blink.

WHO SAYS ELEPHANTS CAN’T DANCE? / 69

I went on: “What IBM needs right now is a series of very tough-minded, market-driven, highly effective strategies for each of its businesses—strategies that deliver performance in the marketplace and shareholder value. And that’s what we’re working on.

“Now, the number-one priority is to restore the company to profitability. I mean, if you’re going to have a vision for a company, the first frame of that vision better be that you’re making money and that the company has got its economics correct.

“And so we are committed to make this company profitable, and that’s what today’s actions are about.

“The second priority for the company,” I said, “is to win the battle in the customers’ premises. And we’re going to do a lot of things in that regard, and again, they’re not visions—they’re people making things happen to serve customers.”

I continued: “Third, in the marketplace, we are moving to be much more aggressive in the client/server arena. Now, we do more client/server solutions than anybody else in the world, but we have been sort of typecast as the ‘mainframe company.’ Well, we are going to do even more in client/server.