Who Says Elephants
Can’t Dance?
Leading a Great
Enterprise Through
Dramatic Change
Louis V.
Gerstner, Jr.
This book is dedicated to the thousands of IBMers who never gave
up on their company, their colleagues, and themselves. They are the
real heroes of the reinvention of IBM.
Contents
Foreword
vii
Introduction
1
PART I-GRABBING HOLD
7
1 The Courtship
9
2 The Announcement
18
3 Drinking from a Fire Hose
29
4 Out to the Field
41
5 Operation Bear Hug
49
6 Stop the Bleeding (and Hold the Vision)
56
7 Creating the Leadership Team
73
8 Creating a Global Enterprise
83
9 Reviving the Brand
88
10 Resetting the Corporate Compensation Philosophy
11 Back on the Beach
93
103
PART II-STRATEGY
111
12 A Brief History of IBM
113
13 Making the Big Bets
121
14 Services—the Key to Integration
128
15 Building the World’s Already Biggest Software Business
136
16 Opening the Company Store
146
17 Unstacking the Stack and Focusing the Portfolio
153
18 The Emergence of e-business
165
19 Reflections on Strategy
176
PART III-CULTURE
179
20 On Corporate Culture
181
21 An Inside-Out World
189
22 Leading by Principles
200
PART IV-LESSONS LEARNED
217
23 Focus—You Have to Know (and Love) Your Business
219
24 Execution—Strategy Goes Only So Far
229
25 Leadership Is Personal
235
26 Elephants Can Dance
242
27 IBM—a Farewell
253
APPENDICES
259
Appendix A—The Future of e-business
261
Appendix B—Financial Overview
277
Index
287
ABOUT THE AUTHOR
CREDITS
COVER
COPYRIGHT
ABOUT THE PUBLISHER
Foreword
I
have never said to myself, “Gee, I think I want to write a
book.” I am not a book writer. Until now I haven’t had the
time or the inclination to lean back and reflect on my thirty-five
years in business. I haven’t had the patience it takes to sit down for
a long time and create a book. Throughout my business life I have
been wary of telling others how to manage their enterprises based
on my personal experiences.
And, frankly, I wasn’t sure if anyone would be interested in
reading my thoughts. I read a lot of books, but not many about
business. After a twelve-hour day at the office, who would want to
go home and read about someone else’s career at the office?
I have always believed you cannot run a successful enterprise
from behind a desk. That’s why, during my nine years as Chief Executive Officer of International Business Machines Corporation, I
have flown more than I million miles and met with untold thousands
of IBM customers, business partners, and employees. Over the past
two years, after people began speculating that my retirement might
be just around the corner, I thought I’d get a lot of big-picture
questions that outgoing CEOs get about the economy, the world, and
the future. Instead, I have been surprised by how many times—at
big meetings and small ones, and even at private sessions with CEOs
and heads of state—I was asked: “How did you save IBM?” “What
was it like when you got there?” “What were the problems?” “What
specific things did
viii / LOUIS V. GERSTNER, JR.
you do to bring the company back to life?” “What did you learn
from the experience?”
They wanted to know, many of them said, because their own
companies, organizations, or governments faced some of the same
issues IBM had encountered during its very, very public near collapse
in the early 1990s. Businesspeople outside the United States, confronted with the need to transform tradition-bound enterprises into
tough and nimble players in a world economy, seemed particularly
interested in the subject.
More recently, after I had announced my intention to retire, I was
amused to read an editorial in an American newspaper, USA Today,
that said, in effect, it hoped Gerstner was going to do something
more useful than write a book and play golf. Nice thought, but since
the announcement, I got thousands of letters and e-mails, and the
most frequent sentiment was, again, that I should tell what I had
learned from my tenure at IBM. (I was also invited to appear in a TV
commercial with golf pros Jack Nicklaus and Gary Player.) You
might say that I concluded, a little reluctantly, that the easiest way
for me to fulfill all this “popular demand” was to write a book and
to hold off on serious golf for the time being.
So, here I am, ready to tell you the story of the revival of IBM.
Of course, this book would never have appeared without the heroes among my IBM colleagues who helped me restore IBM to a position of leadership. In many respects this is their book as much as it
is mine. There were many such leaders, but clearly among the most
important were Dennie Welsh and Sam Palmisano, who built our
services company; John Thompson, who created our Software Group;
Abby Kohnstamm, who took a cacophony of confused messages
and melded them into one of the most powerful brand statements
in the world; Nick Donofrio, who was my translator from the world
of high tech to the world of management; Jerry York, Rick Thoman,
and John Joyce, three great financial executives who instilled a level
of productivity, discipline, and probing analysis into a company
that
WHO SAYS ELEPHANTS CAN’T DANCE? / ix
appeared to value these quite lightly when I arrived; Larry Ricciardi,
my colleague of many years, who brought his intellect and counsel
to many of our critical decisions; and, finally, Tom Bouchard, who
as head of Human Resources stood tall and took the heat as we
transformed the IBM culture.
There are many more. In fact, there are thousands of IBMers who
answered the call, put their shoulders to the wheel, and performed
magnificently as we undertook an exhausting—at times frightening,
but always exhilarating—journey to restore this extraordinary
company. To all of them, I dedicate this book.
I wrote this book without the aid of a coauthor or a ghostwriter
(which is why it’s a good bet this is going to be my last book; I had
no idea it would be so hard to do). I am responsible for any mistakes
or confusion the reader may endure. The views expressed are mine
and are not necessarily those of the IBM Corporation or any other
IBMer.
I did have a great deal of help from some longtime IBM colleagues.
They include Jon Iwata, Mark Harris, and Mike Wing, who made
substantial contributions. Michele Andrle managed production of
every draft and redraft deftly and patiently—an unbelievable amount
of stitching and restitching. I want to thank them and everyone else
who helped me.
Introduction
T
his is not my autobiography. I can’t think of anyone other
than my children who might want to read that book (and
I’m not 100 percent sure they would, either). However, in the spirit
of trying to provide some contextual background for my views, what
follows is a brief historical perspective.
I was born on March 1, 1942, in Mineola, New York—the county
seat of Nassau County, Long Island.
My father started work as a milk-truck driver and ultimately became a dispatcher at the F&M Schaeffer Brewing Company. My
mother was a secretary, sold real estate, and eventually became an
administrator at a community college. Along with three brothers—one older, two younger—I lived in the same house in Mineola
until I left for college, in 1959.
We were a warm, tightly knit, Catholic, middle-class family.
Whatever I have done well in life has been a result of my parents’
influence. My father was a very private man with a great love of
learning and inner strength that needed no approbation or reinforcement from broader audiences. My mother was enormously disciplined, hard-working, and ambitious for all her children. She drove
us toward excellence, accomplishment, and success.
Education was a high priority in the Gerstner household. My
parents remortgaged their house every four years to pay for
schooling. I attended public grade school, then Chaminade, a Catholic high school in Mineola. I graduated in 1959 and was almost on
my way to
2 / LOUIS V. GERSTNER, JR.
Notre Dame when Dartmouth College offered me a substantial
scholarship. It was a major benefit for our family finances, so I packed
off for Dartmouth in September 1959, without ever having set foot
on its campus.
Four years later I graduated with a degree in engineering science.
I immediately went to Harvard Business School for two years. (Back
then one could leave undergraduate school and go directly to business school, a practice that has since, for the most part, been abandoned by business schools.)
Then, at the tender age of 23, I emerged from Harvard and went
into business.
I joined the management consulting firm of McKinsey & Company
in New York City in June 1965. My first assignment was to conduct
an executive compensation study for the Socony Mobil Oil Co. I’ll
never forget my first day on that project. I knew nothing about executive compensation, and absolutely nothing about the oil industry.
Thank goodness I was the low man on the totem pole, but in the
McKinsey world one was expected to get up to speed in a hurry.
Within days I was out meeting with senior executives decades older
than I was.
Over the next nine years I advanced to the level of senior partner
at McKinsey. I was responsible for its finance practice and was a
member of its senior leadership committee. I was the partner in
charge of three major clients, two of which were financial services
companies.
The most important thing I learned at McKinsey was the detailed
process of understanding the underpinnings of a company. McKinsey
was obsessive about deep analysis of a company’s marketplace, its
competitive position, and its strategic direction.
When I reached my early thirties, it became clear to me that I
didn’t want to stay in consulting as a career. Although I enjoyed the
intellectual challenge, the fast pace, and the interaction with topranking senior people, I found myself increasingly frustrated playing
the role of an advisor to the decision makers. I remember saying to
WHO SAYS ELEPHANTS CAN’T DANCE? / 3
myself, “I no longer want to be the person who walks into the room
and presents a report to a person sitting at the other end of the table;
I want to be the person sitting in that chair—the one who makes the
decisions and carries out the actions.”
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
4 / LOUIS V. GERSTNER, JR.
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.
6 / LOUIS V. GERSTNER, JR.
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
10 / LOUIS V. GERSTNER, JR.
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 impending 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. BusinessWeek 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 mammals 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?
“The answer to both questions may be no.”
And, said the usually sober Economist, “IBM’s humiliation is already
being viewed by some as a defeat for America.”
The Decision
The turning point in my thinking occurred over Presidents’ Day
weekend in February 1993. I was at my house in Florida, where I
love to walk the beach, clearing and settling my mind. It’s very
therapeutic for me. During an hour’s walk each day that weekend,
I realized that I had to think differently about the IBM situation. What
prompted my change of heart was what was happening at RJR
Nabisco. As I noted in the Introduction, it had become clear that KKR
had given up on making its leveraged buyout work as planned.
There were two reasons for this. First, as discussed in Bryan Burroughs and John Helyar’s book Barbarians at the Gate, in the fury and
madness of the bidding process in 1988, KKR overpaid for RJR
Nabisco. This meant that despite achieving all of the restructuring
objectives of the LBO, there simply wasn’t enough operating leverage
to produce the projected returns. Second, the operating returns from
the tobacco business were under pressure as a result of a price war
started by Philip Morris soon after
14 / LOUIS V. GERSTNER, JR.
the RJR Nabisco buy out. Philip Morris was simply following the
advice of Ray Kroc, founder of McDonald’s, who’d once said, “When
you see your competitor drowning, grab a fire hose and put it in his
mouth.”
KKR obviously was working on an exit strategy. As I walked the
beach that February, I decided I should be doing the same thing.
And so, as much as anything else, the view that I would not be at
RJR Nabisco too much longer was what got me thinking more about
the IBM proposal.
I called Vernon Jordan, the Washington attorney who was a
longtime friend as well as a director of RJR Nabisco, and asked his
advice. He confirmed my feeling that KKR was ready to move out
of RJR Nabisco and that this phase of the company’s tumultuous life
was coming to an end. Also, it was clear that Jim Burke had already
talked with Vernon, because Vernon knew I was on the IBM list. His
advice was, as usual, to the point. He said, “IBM is the job you have
been in training for since you left Harvard Business School. Go for
it!”
I suppose there was a second reason I changed my mind. I have
always been drawn to a challenge. The IBM proposition was daunting
and almost frightening, but it was also intriguing. The same was
true of RJR Nabisco when I’d joined it in 1989. I think it is fair to say
that from February 15 on, I was prepared to consider taking on IBM
and its problems. Vernon got word to Jim Burke that I might be in
play after all. I began to organize my questions and concerns for
Burke and his committee.
When Burke called later that week, I told him that I would take a
look at the IBM job. I told him I would need a lot more information,
particularly about the company’s short- and intermediate-term
prospects. The dire predictions of the media and the pundits had
me worried. I had learned a hard lesson at RJR Nabisco: A company
facing too many challenges can run out of cash very quickly.
I told Burke that I wanted to meet with Paul Rizzo. Paul had been
an executive at IBM in the 1980s. I had met him on several occa
WHO SAYS ELEPHANTS CAN’T DANCE? / 15
sions and admired him greatly. He had retired from IBM in 1987 but
had been called back by the IBM Board of Directors in December
1992 to work with John Akers to stem the decline of the company.
I told Burke during that February phone call that I wanted to go
over the budget and plans for 1993 and 1994 with Rizzo.
Jim moved quickly, and on February 24, at the Park Hyatt hotel
in Washington, D.C., where I was attending a meeting of The Business
Council, I broke away for an hour and a half to meet secretly with
Paul in my hotel room. He had brought me the current financials
and budgets for the company.
The discussion that ensued was very sobering. IBM’s sales and
profits were declining at an alarming rate. More important, its cash
position was getting scary. We went over each product line. A lot
of the information was difficult to evaluate. However, Paul clearly
underscored the make-or-break issue for the company: He said that
mainframe revenue had dropped from $13 billion in 1990 to a projection of less than $7 billion in 1993, and if it did not level off in the
next year or so, all would be lost. He also confirmed that the reports
in the press about IBM pursuing a strategy of breaking up the company into independent operating units was true. I thanked Paul for
his honesty and insight and promised to treat the material with total
confidentiality.
When he left the room, I was convinced that, on the basis of those
documents, the odds were no better than one in five that IBM could
be saved and that I should never take the position. A consumer
products company has long-term brands that go on forever. However, that was clearly not the case in a technology company in the
1990s. There, a product could be born, rise, succeed wildly, crash,
disappear, and be forgotten all within a few years. When I woke up
the next morning, I was convinced IBM was not in my future. The
company was slipping rapidly, and whether that decline could be
arrested in time—by anyone—was at issue.
Still, Jim Burke would not give up. His persistence may have
16 / LOUIS V. GERSTNER, JR.
had more to do with a growing desperation to get anyone to take
this job than it did with a particular conviction that I was the right
candidate. I wondered at this point if he was just trying to keep a
warm body in play.
Two weeks later I was back in Florida for a brief vacation. Burke
and Murphy insisted on a meeting to pursue the issue one last time.
We met in a new house that headhunter Gerry Roche and his wife
had just built in a community near my own. Roche only played the
role of host. In his new living room, it was Burke, Murphy, and me
alone. I remember that it was a long afternoon.
Burke introduced the most novel recruitment argument I have
ever heard: “You owe it to America to take the job.” He said IBM
was such a national treasure that it was my obligation to fix it.
I responded that what he said might be true only if I felt confident
I could do it. However, I remained convinced the job was not
doable—at least not by me.
Burke persisted. He said he was going to have President Bill
Clinton call me and tell me that I had to take the job.
Tom Murphy, who tended to let Burke do most of the talking in
our previous meetings, spoke up more frequently this time. Murph,
as he is called by his friends, was quite persuasive in arguing that
my track record as a change agent (his term) was exactly what IBM
needed and that he believed there was a reasonable chance that,
with the right leadership, the company could be saved. He reiterated
what I’d heard from Burke, and even Paul Rizzo. The company
didn’t lack for smart, talented people. Its problems weren’t fundamentally technical in nature. It had file drawers full of winning
strategies. Yet, the company was frozen in place. What it needed
was someone to grab hold of it and shake it back into action. The
point Murphy came back to again and again was that the challenge
for the next leader would begin with driving the kind of strategic
and cultural change that had characterized a lot of what I’d done at
American Express and RJR.
WHO SAYS ELEPHANTS CAN’T DANCE? / 17
At the end of that long afternoon, I was prepared to make the
most important career decision of my life. I said yes. In retrospect,
it’s almost hard for me to remember why. I suppose it was some of
Jim Burke’s patriotism and some of Tom Murphy’s arguments
playing to my gluttony for world-class challenges. At any rate, we
shook hands and agreed to work out a financial package and announcement.
In hindsight, it’s interesting that both Burke and Murphy were
operating under the assumption provided by the management of
IBM that a strategy of breaking up the company into independent
units was the right one to pursue. What would they have said if they
realized that not only was the company in financial trouble and had
lost touch with its customers, but that it was also barreling toward
a strategy of disaster?
I drove home that afternoon and told my family of my decision.
As usual in my wonderful family, I got a mixed reaction. One of my
children said, “Yes, go for it, Dad!” The other, more conservative
child thought I had lost my mind. My wife, who had been quite
wary of the idea originally, supported my decision and was excited
about it.
2
The Announcement
O
ver the next ten days we worked out an employment
contract. Doing so was not easy, for several reasons. The
big one was the fact that RJR Nabisco was an LBO, and in an LBO the
CEO is expected to align himself or herself with the owners and have
a large equity position in his or her company. Consequently, at RJR
Nabisco I owned 2.4 million shares and had options for 2.6 million
more. In IBM, stock ownership was a de minimus part of executive
compensation. The IBM board and human resources (HR) bureaucracy
apparently did not share the view that managers should have a
significant stake in the company. This was my first taste of the extraordinary insularity of IBM.
Somehow we worked everything out, and my next task was to
tell KKR and the RJR board of my decision. That weekend, March 2021, was the annual Nabisco Dinah Shore Golf Tournament. Nabisco
invited all of its major customers to the event, and it was important
for me to attend. I also knew that Henry Kravis, one of KKR’s senior
partners, would be there, and I decided that I would discuss my
decision with him then. My name had already surfaced in the media
as a candidate for the IBM job, and I knew that KKR and the RJR board
were nervous. In meetings with KKR over the preceding weeks, there
WHO SAYS ELEPHANTS CAN’T DANCE? / 19
was a noticeable tension in the air. So, on Sunday, March 21, in my
hotel room at the Dinah Shore tournament, I told Henry Kravis I
was going to accept the IBM job. He was not happy, but true to form,
he was polite and calm. He tried to talk me out of my decision, but
I was firm that there was no going back. While we never discussed
it, what was implicit in that conversation was the knowledge we
shared that both of us were working on our exits from RJR. I just
happened to finish sooner. (KKR started its exit a year later.)
The next day, Monday, I returned from California for the beginning of a very eventful week. The IBM board was meeting a week
later. It became obvious that the search committee had begun to shut
down its operations—because, one by one, the other rumored candidates for the IBM job started to announce or to leak to the media
that they were not interested in the job. On Wednesday The Wall
Street Journal reported that I was the only candidate; the next day,
so did every other major business publication. It was time to get this
whole ordeal over with. Burke and I agreed to announce on that
Friday, March 26. That set off a mad scramble to organize both internal and external messages in the midst of a firestorm of leaks and
headlines.
IBM made the announcement on Friday morning (even though
the cover story of Business Week, published that morning, already
stated I had taken the job). A press conference began at 9:30 A.M. at
the Hilton hotel in New York City. John Akers, Jim Burke, and I
spoke. Burke wanted to explain the search process that had seemed
so public and disjointed for three months. He made these comments
during his opening statement: “There was only a handful of people
in the world who were capable of handling this job. I want you to
know that Lou Gerstner was on that original list, but we then did a
worldwide search of well over one hundred twenty-five names,
which we processed and kept reducing…and pretty well got back
to the list that we started with. We gave those people on the list code
names in an attempt to keep it out of the press—a vain attempt, I
might add. You might be
20 / LOUIS V. GERSTNER, JR.
interested that Lou Gerstner was the first person I talked to on that
list and consequently had the code name ‘Able.’ I knew all the other
candidates—and I knew them all well. There isn’t another candidate
that could do this job any better than Lou Gerstner will. We made
one specific offer for this job and only one, and that was to Louis
Gerstner. While many people felt that technology was the key to
this, there’s a list of the specifications that we as a committee put
together from the beginning. The fact is, there are fifteen things on
the list and only one statement of the fifteen: ‘Information and hightechnology industry experience [are] highly desirable, but not opposed to considering extraordinary business leaders.’ All of the
others list qualities which are inherent in Lou Gerstner.”
I knew my life was changing forever when I walked to the podium
and three dozen photographers surged forward, and I had to conduct
an entire press conference through nonstop, blinding camera flashes.
As visible as American Express and RJR had been, this was something
altogether different. I was now a public figure. This wasn’t just any
company—even any very big company. IBM was an institution—a
global one—and its every move was scrutinized by the outside
world. I was taking on a daunting challenge, and I’d be doing it in
a fishbowl.
I am by nature a private person and, to be frank, I don’t enjoy
dealing with the press. On top of that, I looked around the industry,
and as far as the eye could see there were (and still are) senior executives seeking the highest personal profile they could manage. I felt
then, and I feel today, that while that kind of relentless publicity
seeking generates a lot of coverage, and may even help the company
in the short run, in the long run it damages corporate reputation
and customer trust.
So I faced the cameras and lights that morning with mixed emotions. I was as full of adrenaline as I had ever been in my life. At the
same time, I knew this was the big show and there was no escaping
it.
WHO SAYS ELEPHANTS CAN’T DANCE? / 21
My own remarks were brief. I was just trying to get through the
ordeal without dealing with a lot of specific questions about why I
felt I was qualified for the job and what I was going to do to fix IBM.
But those were exactly the questions I got in a lengthy Q&A following
the formal remarks. Needless to say, I provided little nourishment
for the reporters. I simply had no idea what I would find when I
actually arrived at IBM.
Meeting the IBM Team
After the press conference came a series of internal IBM meetings.
As I look back at my schedule, I see that the first meeting the IBM
human resources people had set up was a telephone conference call
with the general managers of all the country operations around the
world, underscoring that the power base of the company was the
country leaders.
We then raced from Manhattan by helicopter some thirty miles
north to the company’s worldwide headquarters, in Armonk, New
York. While I had been in some IBM facilities before as a customer,
I had never been in the headquarters building. I will never forget
my first impression. It reminded me of a government office—long,
quiet corridor after long, quiet corridor of closed offices (quiet that
was broken only by the presence of the almost blindingly bright orange carpeting). There was not a single indication in the artwork or
other displays that this was a computer company. There was no
computer in the CEO’s office.
I was ushered into a large conference room to meet with the Corporate Management Board—roughly the top fifty people in the
company. I don’t remember what the women wore, but it was very
obvious that all the men in the room were wearing white shirts, except me. Mine was blue, a major departure for an IBM executive!
(Weeks
22 / LOUIS V. GERSTNER, JR.
later at a meeting of the same group, I showed up in a white shirt
and found everyone else wearing other colors.)
When John Akers had suggested this meeting earlier in the week,
he had assumed it was going to be simply an opportunity for me to
meet the senior members assembled. However, I viewed it as a
critical opportunity to introduce myself and, at least, set an initial
agenda for my new colleagues. I worked hard in advance organizing
what I wanted to say to the group. (In fact, in researching this book,
I discovered detailed notes I had prepared—something I don’t do
very often for informal meetings.)
After John introduced me, the group sat politely, expecting nothing
more than a “welcome and I’m delighted to be part of the team”
salutation. Instead, I spoke for forty or forty-five minutes.
I started out explaining why I took the job—that I hadn’t been
looking for it, but had been asked to take on a responsibility that
was important to our country’s competitiveness and our economy’s
health. I didn’t say it at the time, but it was my feeling that if IBM
failed, there would be repercussions beyond the demise of one
company. I indicated that I had no preconceived notions of what
needed to be done and, from what I could tell, neither did the board.
I said that for each of them (and for me!) there would be no special
protection for past successes. But I clearly needed their help.
I then dealt with what I described as my early expectations: “If
IBM is as bureaucratic as people say, let’s eliminate bureaucracy fast.
Let’s decentralize decision making wherever possible, but this is not
always the right approach; we must balance decentralized decision
making with central strategy and common customer focus. If we
have too many people, let’s right-size fast; let’s get it done by the
end of the third quarter.” I explained that what I meant by right-size
is straightforward: “We have to benchmark our costs versus our
competitors and then achieve best-in-class status.” I also remarked
that we had to stop saying that IBM didn’t lay off people. “Our employees must find it duplicitous and out of touch with what has been
going
WHO SAYS ELEPHANTS CAN’T DANCE? / 23
on for the last year.” (In fact, since 1990, nearly 120,000 IBM employees had left the company, some voluntarily and some involuntarily,
but the company had continued to cling to the fiction of “no layoffs.”)
Perhaps the most important comments I made at that meeting
regarded structure and strategy. At the time, the pundits and IBM’s
own leadership were saying that IBM should break itself up into
smaller, independent units. I said, “Maybe that is the right thing to
do, but maybe not. We certainly want decentralized, market-driven
decision making. But is there not some unique strength in our ability
to offer comprehensive solutions, a continuum of support? Can’t
we do that and also sell individual products?” (In hindsight it was
clear that, even before I started, I was skeptical about the strategy
of atomizing the company.)
I then talked about morale. “It is not helpful to feel sorry for
ourselves. I’m sure our employees don’t need any rah-rah speeches.
We need leadership and a sense of direction and momentum, not
just from me but from all of us. I don’t want to see a lot of prophets
of doom around here. I want can-do people looking for short-term
victories and long-term excitement.” I told them there was no time
to focus on who created our problems. I had no interest in that. “We
have little time to spend on problem definition. We must focus our
efforts on solutions and actions.”
Regarding their own career prospects, I noted that the press was
saying that “the new CEO has to bring a lot of people in from the
outside.” I pointed out that I hoped this would not be the case, that
IBM had always had a rich talent pool—perhaps the best in the world.
I said, “If necessary, I will bring in outsiders, but you will each first
get a chance to prove yourself, and I hope you will give me some
time to prove myself to you. Everyone starts with a clean slate.
Neither your successes nor failures in the past count with me.”
I went on to summarize my management philosophy and practice:
24 / LOUIS V. GERSTNER, JR.
• I manage by principle, not procedure.
• The marketplace dictates everything we should do.
• I’m a big believer in quality, strong competitive strategies and
plans, teamwork, payoff for performance, and ethical responsibility.
• I look for people who work to solve problems and help colleagues.
I sack politicians.
• I am heavily involved in strategy; the rest is yours to implement.
Just keep me informed in an informal way. Don’t hide bad information—I hate surprises. Don’t try to blow things by me. Solve
problems laterally; don’t keep bringing them up the line.
• Move fast. If we make mistakes, let them be because we are too
fast rather than too slow.
• Hierarchy means very little to me. Let’s put together in meetings
the people who can help solve a problem, regardless of position.
Reduce committees and meetings to a minimum. No committee
decision making. Let’s have lots of candid, straightforward communications.
• I don’t completely understand the technology. I’ll need to learn
it, but don’t expect me to master it. The unit leaders must be the
translators into business terms for me.
I then proposed that, based on my reading, we had five ninetyday priorities:
• Stop hemorrhaging cash. We were precariously close to running
out of money.
• Make sure we would be profitable in 1994 to send a message to
the world—and to the IBM workforce—that we had stabilized the
company.
• Develop and implement a key customer strategy for 1993 and
1994—one that would convince customers that we were back
WHO SAYS ELEPHANTS CAN’T DANCE? / 25
serving their interests, not just pushing “iron” (mainframes) down
their throats to ease our short-term financial pressures.
• Finish right-sizing by the beginning of the third quarter.
• Develop an intermediate-term business strategy.
Finally, I laid out an assignment for the next thirty days. I asked
for a ten-page report from each business unit leader covering customer needs, product line, competitive analysis, technical outlook,
economics, both long- and short-term key issues, and the 1993-94
outlook.
I also asked all attendees to describe for me their view of IBM in
total: What short-term steps could we take to get aggressive on
customer relationships, sales, and competitive attacks? What should
we be thinking about in our long-term and short-term business
strategies?
In the meantime, I told everyone to go out and manage the company and not to talk to the press about our problems, and help me
establish a travel schedule that would take me to customers and
employees very early. “Let me know the meetings you are scheduled
to hold over the next few weeks and recommend whether I should
attend or not.”
I asked if there were any questions. There were none. I walked
around and shook everyone’s hand and the meeting ended.
As I look back from the vantage point of nine years’ tenure at IBM,
I’m surprised at how accurate my comments proved to be. Whether
it was the thoroughness of the press coverage, my experience as a
customer, or my own leadership principles, what needed to be
done—and what we did—was nearly all there in that forty-fiveminute meeting four days before I started my IBM career.
26 / LOUIS V. GERSTNER, JR.
The Official Election
On Tuesday of the following week, March 30, 1993, I attended the
regularly scheduled IBM board meeting. It was at this gathering that
I was elected Chairman of the Board and Chief Executive Officer,
effective to begin two days later.
I walked into the meeting with a certain degree of trepidation.
Jim Burke had told me a week earlier that there were two board
members who were not totally happy with my selection as the new
CEO. As I walked around the room shaking hands and greeting each
of the seventeen directors in attendance (one was missing), I couldn’t
help but wonder who the two doubters were.
There are several things I remember well from that first meeting.
The first was that there was an executive committee. Three of the
eight members were current or former employees. I was taken by
the fact that this board-within-a-board discussed in more detail the
financial outlook for the company than the subsequent discussion
held with the full Board of Directors.
The full board meeting focused on a wide range of subjects. It
seemed to me from the agenda that it was a business-as-usual board
meeting. There was a presentation from the Storage Division, which
was being renamed AdStar as part of the overall corporate strategy
to spin off the operating units. There were reports on business from
the heads of domestic and international sales, discussion of a regulatory filing, and the approval of a proposed $440 million acquisition.
If the directors felt there was a crisis, they were politely hiding it
from me.
The meeting got a bit more animated during a report on financial
affairs. Among the items reported was that the March quarter’s gross
margin on hardware had declined nineteen points from the prior
year and that System/390 mainframe prices had declined 58 percent
over the same period. The projection was for a loss of 50 cents a
share for the quarter ending the next day. The cash situation was de
WHO SAYS ELEPHANTS CAN’T DANCE? / 27
teriorating fast. A major item of business was to approve a new financing plan authorizing the company to increase committed lines
of bank credit to $4.7 billion and to raise $3 billion through the issuance of preferred stock and/or debt and securitization of United
States trade receivables (selling, at a discount, “IOUS” from customers
in order to get cash sooner).
It was clear there was a high degree of uncertainty surrounding
the financial projections. The meeting ended. There were polite
statements of “good luck” and “glad you’re here,” and everyone
left.
John Akers and I then met to talk about the company. John and I
had served together on the New York Times Company Board of
Directors for several years, saw each other frequently at CEO-level
events, and had a solid personal relationship prior to his departure
from IBM. We were as comfortable as two people could be under the
circumstances. We talked mostly about people. He was surprisingly
candid about and critical of many of his direct reports. In reviewing
my notes from the meeting, I guess I subsequently agreed with 75
percent of his appraisals. What struck me was why he could be so
critical but still keep some of these executives in place. He had two
favorites. One turned out to be one of my own. The other I let go
before a year had passed.
Regarding business issues, John was preoccupied that day with
IBM’s microelectronics business. I learned that the company was
deep into discussions with Motorola to form a joint venture and, in
so doing, secure a partial exit from what John called the “technology
business.” I asked how imminent the decision was, and he said
“very.” Somewhat related to the Motorola deal was a proposal to
license manufacturing rights for Intel microprocessors.
He said the basic research unit was not affordable and needed to
be downsized. He was quite concerned about IBM’s software business, mainframe business, and midrange products. As I look back
at my notes, it is clear he understood most, if not all, of the business
issues we tackled over the ensuing years. What’s striking from my
notes is the
28 / LOUIS V. GERSTNER, JR.
absence of any mention of culture, teamwork, customers, or leadership—the elements that turned out to be the toughest challenges at
IBM.
John moved that day to an office in Stamford, Connecticut, and
as far as I know, to his credit, he never looked back.
I went home with a deepening sense of fear. Could I pull this off?
Who was going to help me?
3
Drinking from
a Fire Hose
O
n April 1, 1993, I began my IBM career (perhaps appropriately, April Fools’ Day). IBM’s stock stood at $13.1 An
op-ed piece in The New York Times greeted me with yet more advice
on how to fix the company: “IBM has plenty of brains and buttondowns. What it needs is bravado.”
An IBM company car picked me up at my home in Connecticut at
6:45 A.M. and drove me not to the headquarters building, in Armonk,
but to another of the many office complexes IBM owned at the time
in Westchester County, New York. Consistent with my message to
the senior management team the previous week, Ned Lautenbach,
who then headed all of sales outside the United States (what IBM
called “World Trade”), invited me to a meeting of all the country
general managers that happened to be scheduled for that morning.
When I arrived at this large and spacious office building (it is now
the headquarters of MasterCard International), I walked up to the
front door and it was locked. A card reader was next to the door,
1
Adjusted for subsequent stock splits.
30 / LOUIS V. GERSTNER, JR.
but I had not yet been issued a badge by IBM security. There I was,
the new CEO, knocking helplessly on the door, hoping to draw
someone’s attention to let me in. After a while a cleaning woman
arrived, checked me out rather skeptically, then opened the door—I
suspect more to stop my pounding on the door than from any sense
on her part that I belonged on the inside rather than the outside of
the building.
I wandered around and eventually found the conference room
where the meeting was just about to begin. I’ll never forget my first
impression of an IBM meeting. Arrayed around a long conference
room were all the nobles of IBM’s offshore, geographical fiefdoms.
Behind them was a double row filled with younger executives. All
the principals were white males, but the younger support staff was
far more diverse. The meeting was an operations review, and each
of the executives commented on his business. I noticed the backbenchers were scribbling furiously and occasionally delivered notes to the
people at the table. It looked like a United States congressional
hearing.
During a coffee break, I asked Ned Lautenbach, “Who are all these
people who are clearly watching but not participating?”
He said, “Those are the executives’ AAs.”
And so it was at my first meeting on my first day at IBM that I
encountered its solidly entrenched and highly revered administrative
assistant program. Hundreds, if not thousands, of IBM middle- and
senior-level executives had assistants assigned to them, drawn from
the ranks of the best and brightest of the up-and-coming managers.
The tasks were varied, but from what I could understand, AAs had
primarily administrative duties and even, at times, secretarial chores.
For the most part, AAs organized things, took notes, watched, and,
hopefully, learned. What they didn’t do was interact with customers,
learn the guts of the business, or develop leadership competencies.
However, several such assignments in a career were de rigueur if
one wanted to ascend to IBM senior management.
WHO SAYS ELEPHANTS CAN’T DANCE? / 31
I broke away from the meeting late that morning and went to
Armonk headquarters to have lunch with Jack Kuehler. Jack was
president of the company, a member of the board, and John Akers’s
chief technologist. Kuehler controlled all key technology decisions
made in the company. Over lunch he was congenial and easygoing
and offered his support. Consistent with my Akers discussion, it
was clear that IBM had an obsessive focus on recapturing the ground
lost to Microsoft and Intel in the PC world. Jack was almost evangelistic in describing the combined technical strategy behind PowerPC
and OS/2—two IBM products that were developed to regain what
had been lost to Intel in microprocessors and Microsoft in PC software. The technology plan was sweeping and comprehensive. It
sounded exciting, but I had no idea whether it had any chance of
succeeding.
After lunch I raced back to the World Trade executive session to
hear more about the outlook for our business around the world. In
general, it was not good. I then traveled to yet another IBM building
to meet with a group of young executives who were in a training
class. I returned once again to Armonk to tape a video message for
employees, then ended the day with the head of IBM’s human resources department, the legendary Walt Burdick.
Burdick had announced his decision to retire before the completion
of the CEO search, but I wanted him to stay for at least a short
transitional period. IBM’s HR department had been well recognized
for years for its leadership in many areas, including diversity, recruiting, training, and executive development. Walt Burdick had been
in charge of that department for thirteen years, and he was arguably
the dean of HR professionals in America.
What perhaps is not as well known is that Burdick was a powerful
force behind the throne, one of IBM’s highest-paid executives for
many years and a major player in creating and enforcing the dominant elements of IBM’s culture. His primary interests were structure
and process. In fact, after his departure, someone gave me one of
the most remarkable documents I have ever seen. Roughly sixty
pages
32 / LOUIS V. GERSTNER, JR.
long, it is entitled “On Being the Administrative Assistant to W. E.
Burdick, Vice President, Personnel, Plans, and Programs.” It was
written on March 17, 1975, and illustrated some of the suffocating
extremes one could find all too easily in the IBM culture. The instructions for an AA in Burdick’s office included:
• White shirt and suit jacket at all times.
• Keep a supply of dimes with you. They are helpful when WEB
(Burdick) has to make a call when away from the building.
• Surprise birthday parties for WEB staff should be scheduled under
the heading “Miscellaneous” for fifteen minutes. Birthday cakes,
forks, napkins, and cake knife are handled by WEB’s secretary. AA
takes seat closest to the door to answer phones.
• WEB has three clocks: one on desk; one on table; one on windowsill
outside your office. All three should be reset daily. Call 9-637-8537
for the correct time.
• WEB enjoys Carefree Spearmint sugarless gum. When empty box
appears in out-basket, reserve box should be put in his desk and
new reserve box purchased.
Burdick and I spent nearly all of our time that day discussing two
critical searches that were under way before I had joined IBM: the
search for Burdick’s replacement, and the search for a Chief Financial
Officer (CFO). The prior CFO, Frank Metz, had retired under pressure
in January following the same board meeting that had created the
CEO search committee. Nothing was more important to me on that
first day than filling these jobs. Parachuting into a $65 billion company that was hemorrhaging cash and trying to turn it around is a
daunting enough task. Trying to do it without a good CFO and HR
director is impossible.
By 6:30 P.M., I finally had the first quiet time of the day. I sat with
my longtime assistant, Isabelle Cummins, whom I had talked into
coming to IBM despite her desire to retire. Isabelle is an extraordinary
WHO SAYS ELEPHANTS CAN’T DANCE? / 33
person of enormous talents and one of the many heroes of this book.
Had she grown up in a later era, she would have been a senior female
executive in corporate America, and one of the best. However, that
was not the case, and instead she had been my teammate for fifteen
years before I came to IBM. I talked her out of retiring because I knew
it would have been impossible for me to make it through the early
IBM crises—the toughest ones—if she had not been there. At the end
of that first day, we shared our experiences and both of us felt totally
overwhelmed. (Isabelle, who had always worked with me one-onone, discovered that nine people, including several AAs and one
person responsible for creating and maintaining organization charts,
reported to her.)
Early Priorities
The next two weeks were filled with meetings with my direct reports, interviews with candidates for the CFO and HR jobs, and visits
to key IBM sites. One of the most important meetings occurred on
my second day. I had asked my brother Dick to come by and talk
to me about the company. Dick had been a fast-rising star at IBM for
many years, having joined the company right out of college. He had
served in Europe and, at one point, had headed up the powerful
Asia-Pacific region. My guess is that he had been on track to become
one of the top executives—a member of the elite and revered Management Committee—but he was tragically cut down by undetected
Lyme disease at the height of his career. He had gone on medical
leave about six months before John Akers had left, but several executives had asked him to come back and do some consulting for the
company. His most important task was working with Nick Donofrio,
then head of the Large-Scale Systems Division, to figure out what
to do with the mainframe.
Dick (or Rich, as the family has always called him) and I were
34 / LOUIS V. GERSTNER, JR.
close as children, he being the oldest and I always the follower in
his footsteps—not uncommon, I guess, for two relatively successful
siblings. We went our separate ways in adult life, but we always
enjoyed each other’s company at family gatherings. I never felt any
sense of rivalry as each of us climbed the corporate ladder.
Nevertheless, it had to be a poignant moment as he came into the
CEO’s office at IBM and saw me sitting where, quite realistically, he
might have sat had health problems not derailed his career. He came
extremely well prepared. In fact, his was the most insightful review
anyone had given me during those early days. In particular, he argued against the premise that the mainframe was dead and against
a seemingly hysterical preoccupation in the company to allocate all
its resources to winning the PC war. I quote directly from the papers
he gave me: “We have allowed the info industry to endorse the
paradigm that the mainframe is expensive, complex, not responsive,
and workstation solutions are cheap, simple to operate, and responsive to business needs. While there is no truth to this paradigm, we
have allowed competitors, opinion leaders, and our customers to
exaggerate the differences. The result is a dramatic falloff in S/390
(mainframe) sales, increased credibility for Amdahl and Hitachi alternatives, loss of credibility for CIOs (Chief Information Officers)
at major corporations, and loss of confidence that IBM had the customers’ best interests in mind in its sales organization.
“We should cut the price of hardware ASAP, simplify software
pricing, focus development on simplification, implement a hardhitting communication program to reposition the mainframe and
workstations, and underscore that the mainframe is an important
part of the CIO’s information portfolio.”
As I think back on the three or four things that really made a difference in the turnaround of IBM, one of them was repositioning the
mainframe. And nobody pointed it out sooner or more clearly than
my brother Dick.
He also gave me a few tips that he labeled “brotherly advice”:
WHO SAYS ELEPHANTS CAN’T DANCE? / 35
• Get an office and home PC. Use PROFS (the internal messaging
system); your predecessor didn’t and it showed.
• Publicly crucify shortsighted proposals, turf battles, and backstabbing. This may seem obvious, but these are an art form in IBM.
• Expect everything you say and do to be analyzed and interpreted
inside and outside the company.
• Find a private cadre of advisors who have no axes to grind.
• Call your mom.
Over the next few months I would have liked more advice from
Dick, but there was a very watchful group of people at IBM waiting
to see if I was setting him up as my own force behind the throne. I
didn’t want to do that to him or to me. We talked several times, but
briefly, and not with the impact his first meeting had on me and the
company.
On April 13 I interviewed Jerry York at IBM’s office in New York
City. Jerry was then Chief Financial Officer at Chrysler Corporation
and was one of two candidates I was seeing that week for the CFO
job. It was a truly memorable interview. Jerry arrived in a starched
white shirt and a blue suit, everything crisp and perfect—West Point
style. He was not coy and did not pull any punches. He basically
said he wanted the job and then proceeded to outline a series of
things that he thought needed to be done as soon as possible. I was
impressed by his frankness, his lack of guile, and his candor, as well
as his analytical capabilities. It was clear to me that he was
tough—very tough—and just what I needed to get at the cost side
of IBM. I spoke to another candidate later that week, but I decided
Jerry was the right person. He joined us on May 10.
I also saw Gerry Czarnecki, a candidate for the HR job. Gerry was
an operations executive at a bank but had been an HR professional
years before. Over the next couple of weeks we met several times,
both by phone and in person. Although I liked Gerry’s energy and
his directness, I wasn’t certain he was prepared to go back into the
HR func
36 / LOUIS V. GERSTNER, JR.
tion. He said, “Probably not anywhere else, but to be part of the
turn-around of IBM, I’m prepared to do it.”
That turned out to be one of the few hirings that didn’t work out
as planned during my early years at IBM. It soon became clear to me
that it was proving very hard for Gerry to go back and lead the
professional HR community. Within four months he appeared to be
acting and sounding more like a vice CEO. It wasn’t that Gerry’s
ideas were wrong—in fact, he was a major proponent of substantial
cultural change. However, the organization wasn’t going to accept
from Gerry what it would accept from me. He burned his bridges
with his colleagues very soon and he left IBM within a year of his
hiring.
Of course, my top priority during those first few weeks was
meeting privately with each of the senior executives. A few of them
had prepared the ten-page briefing I had requested; most of them
offered a more ad hoc analysis of their businesses. In all the meetings
over those several weeks, I was sizing up my team, trying to understand the problems they faced and how they were dealing with them,
how clearly they thought, how well they executed, and what their
leadership potential really was.
The person I relied on most during those early days was Paul
Rizzo. As I said earlier, he had been called back from retirement by
the board to help John Akers. Paul had been a senior executive at
IBM for twenty-two years. After retiring, he became dean of the
Business School at the University of North Carolina and was building
a new house in that state. The last thing he needed was to come back
to IBM, but he did because he loved the company and he didn’t want
to see it die.
When I arrived, Paul was responsible for the program of federalism—breaking up the company into individual, autonomous units.
Not that Paul created the strategy, but in the absence of a CFO, he
was basically overseeing the finance function for the board. He was
also in charge of watching all the investment bankers who were
scrambling over most parts of the company, dollar signs in their
eyes as they
WHO SAYS ELEPHANTS CAN’T DANCE? / 37
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
WHO SAYS ELEPHANTS CAN’T DANCE? / 39
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 impressions 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 optimization.”
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 godfather 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.
My job was simply to reaffirm it and to protect the billion dollars
we would spend on it over the next four years.
I am convinced that had we not made the decision to go with
CMOS, we’d have been out of the mainframe business by 1997. In
fact, that point has been proven more or less by what happened to
our principal competitor at the time, Hitachi. It continued development of bigger and bigger bipolar systems, but that technology
eventually ran out of gas, and Hitachi is no longer in this business.
The CMOS performance curve was staggering on paper, and it
didn’t disappoint us. We’re building bigger, more powerful systems
today than anyone ever dreamed about with bipolar technology. So
if you want to think about the return on the $1 billion investment
we made back in the early 1990s, I think one fair measure is highend server revenue from 1997 forward—$19 billion through the end
of 2001.
46 / LOUIS V. GERSTNER, JR.
The First Strategy Conference
On Sunday, May 16, I convened a two-day internal meeting on
corporate strategy at a conference center in Chantilly, Virginia. There
were twenty-six senior IBM executives present. Dress was casual,
but the presentations were both formal and formidable.
I was totally exhausted at the end. It was truly like drinking from
a fire hose. The technical jargon, the abbreviations, and the arcane
terminology were by themselves enough to wear anyone down. But
what was really draining was the recognition that while the people
in the room were extremely bright, very committed, and, at times,
quite convinced of what needed to be done, there was little true
strategic underpinning for the strategies discussed. Not once was
the question of customer segmentation raised. Rarely did we compare
our offerings to those of our competitors. There was no integration
across the various topics that allowed the group to pull together a
total IBM view. I was truly confused, and that may have been the
real low point of my first year at IBM. I walked out of that room with
an awful feeling in the pit of my stomach that Murphy and Burke
had been wrong—IBM needed a technological wizard to figure out
all this stuff!
I didn’t have much time to feel sorry for myself because that
evening we began what may have been the most important meeting
of my entire IBM career: the IBM Customer Forum.
The Customer Meeting at Chantilly
This meeting had been scheduled well before my arrival at the
company. Nearly 175 chief information officers of the largest United
States companies were coming to hear what was new at IBM. They
represented many of the most important customers IBM had—and
they could make or break us.
WHO SAYS ELEPHANTS CAN’T DANCE? / 47
On Tuesday night, I met with several CIOs at dinner, and they
shared the same perspective I had heard in Europe. They were angry
at IBM—perturbed that we had let the myth that “the mainframe
was dead” grow and prosper. The PC bigots had convinced the media
that the world’s great IT infrastructure—the back offices that ran
banks, airlines, utilities, and the like—could somehow be moved to
desktop computers. These CIOs knew this line of thinking wasn’t
true, and they were angry at IBM for not defending their position.
They were upset about some other things, too, like mainframe pricing
for both hardware and software. They were irritated by the bureaucracy at IBM and by how difficult it was to get integration—integration of a solution or integration across geographies.
Early the next morning, I threw out my prepared speech and decided to speak extemporaneously. I stood before my most important
customers and started talking from the heart. I began by telling my
audience that a customer was now running IBM; that I had been a
customer of the information technology industry for far longer than
I would ever be an IBM employee; that while I was not a technologist,
I was a true believer that information technology would transform
every institution in the world. Thus, I had a strategic view about
information technology, and I would bring that to IBM and its customers.
I addressed the issue of the mainframe head-on. I said I agreed
with the CIOs that we had failed in our responsibility to define its
role in a PC world, that our prices were high, and that there was no
question that we were bureaucratic. I shared with them some of my
bad experiences with IBM as communicated to me by my CIOs when
I was at American Express and RJR Nabisco.
I laid out my expectations:
• We would redefine IBM and its priorties starting with the customer.
• We would give our laboratories free rein and deliver open, distributed, user-based solutions.
48 / LOUIS V. GERSTNER, JR.
• We would recommit to quality, be easier to work with, and reestablish a leadership position (but not the old dominance) in the
industry.
• Everything at IBM would begin with listening to our customers
and delivering the performance they expected.
Finally, I made the big mainframe pricing announcement. Our
team had been working hard over the past two weeks and literally
was still putting the proposal together the night before this big
meeting. I didn’t delve into the details—that was done later in the
meeting—but I made it very clear that mainframe prices, both
hardware and software, were coming down, and coming down
quickly. The price of a unit of mainframe processing moved from
$63,000 that month to less than $2,500 seven years later, an incredible
96-percent decline. Mainframe software price/performance improved, on average, 20 percent a year for each of the next six years.
This program, probably more than any other, save IBM. Over the
short term it raised the risk of insolvency as it drained billions of
dollars of potential revenue and profits from the company. Had the
strategy not worked, I would have been the CEO who had presided
over the demise of the company—Louis the Last. However, the plan
did work. IBM mainframe capacity shipped to customers had declined
15 percent in 1993. By 1994, it had grown 41 percent, in 1995 it had
grown 60 percent, followed by 47 percent in 1996, 29 percent in 1997
63 percent in 1998, 6 percent in 1999, 25 percent in 2000, and 34 percent in 2001. This represented a staggering turnaround. While pricing
was not the only reason IBM survived, it would not have happened
had we not made this risky move.
5
Operation Bear Hug
I
n late April we had a meeting of the Corporate Management Board. This was the group of fifty top executives with
whom I had met in March, the day I was announced as the new CEO.
I shared with them my observations after three weeks on the job.
I started by saying that I saw a lot of positive things going on, particularly in research, product development, and in the can-do attitude
of a number of people.
However, there were troublesome areas, including:
• Loss of customer trust, supported by some disturbing customer
ratings on quality.
• The mindless rush for decentralization, with managers leaping
forward saying “make me a subsidiary.”
• Cross-unit issues not being resolved quickly.
• Major tension in the organization over who controlled marketing
and sales processes.
• A confusing and contentious performance measurement system,
causing serious problems when closing sales with customers.
• A bewildering array of alliances that didn’t make any sense to
me.
50 / LOUIS V. GERSTNER, JR.
I announced Operation Bear Hug. Each of the fifty members of
the senior management team was to visit a minimum of five of our
biggest customers during the next three months. The executives
were to listen, to show the customer that we cared, and to implement
holding action as appropriate. Each of their direct reports (a total of
more than 200 executives) was to do the same. For each Bear Hug
visit, I asked that a one- to two-page report be sent to me and anyone
else who could solve that customer’s problems. I wanted these
meetings to be a major step in reducing the customer perception
that dealing with us was difficult. I also made it clear that there was
no reason to stop at five customers. This was clearly an exam in
which extra credit would be awarded.
Bear Hug became a first step in IBM’s cultural change. It was an
important way for me to emphasize that we were going to build a
company from the outside in and that the customer was going to
drive everything we did in the company. It created quite a stir, and
when people realized that I really did read every one of the reports,
there was quick improvement in action and responsiveness.
The Management Committee Dies
That same day in late April, there was a meeting of the Management Committee (its inside-IBM name was “the MC”). It is important
to understand that a seat on the MC was the ultimate position of
power that every IBM executive aspired to as the apex of his or her
career. When I’d joined the company there were six members, including Akers and Kuehler. The MC met once or twice a week, usually
in formal, all-day meetings with lots of presentations. Every major
decision in the company was presented to this committee.
Some members of the MC had only recently been appointed. To
their utter—and probably crushing—dismay, I told them that afternoon, at my first meeting, that it was unlikely this structure would
WHO SAYS ELEPHANTS CAN’T DANCE? / 51
continue. I wanted to be more deeply involved personally in the
decision making of the company, and I was uncomfortable with
committees making decisions. While it wasn’t officially disbanded
until months later, the Management Committee, a dominant element
of IBM’s management system for decades, died in April 1993.
In some ways, the rise and fall of the Management Committee
symbolized the whole process of rigor mortis that had set in IBM. It
seemed to me an odd way to manage a company—apparently
centralized control, but in a way that ultimately diffused responsibility and leadership. The MC was part of IBM’s famed contention
system, in which the recommendations of powerful line units were
contested by an equally powerful corporate staff. As I think about
the complexity of the technology industry and the risks associated
with important business and product decisions, this approach may
very well have been a brilliant innovation when it was created. The
problem was that over time, IBM people learned how to exploit the
system to promote their own agendas. So by the early 1990s a system
of true contention was apparently replaced by a system of prearranged consensus. Rather than have proposals debated, the corporate staff, without executives, worked out a consensus across the
company at the lowest possible level. Consequently, what the
Management Committee most often got to see was a single proposal
that encompassed numerous compromises. Too often the MC’s mission was a formality—a rubberstamp approval.
I haven’t spent much time unearthing and analyzing IBM’s history,
but I have been told that the administrative assistant network
emerged as the facilitator of this process of compromise. Much like
the eunuchs of the ancient Chinese court, they wielded power beyond
their visible responsibilities.
52 / LOUIS V. GERSTNER, JR.
Meetings with Industry Experts
In the course of everything else during the first weeks of my being
on the job, I scheduled a number of one-on-one meetings with various leaders in the computer and telecommunications industry. They
included John Malone of TCI, Bill Gates of Microsoft, Andy Grove
of Intel, Chuck Exley of NCR, and Jim Manzi of Lotus. These meetings
were very helpful to me, more for their insights into the industry
than for anything said about IBM. And, as you might expect, many
of my visitors arrived with thinly disguised agendas.
The meeting with Andy Grove was perhaps the most focused. In
his wonderfully direct style, Andy delivered the message that IBM
had no future in the microprocessor business, that we should stop
competing with Intel with our PowerPC chip, and that, unless this
happened, relationship between the two companies were going to
be difficult. I thanked Andy, but, having no real understanding at
that point of what we should do, I tucked the message away.
The meeting with Bill Gates was not significant from the point of
view of content. Basically, he delivered the message that I should
stick to mainframes and get out of the PC business. More memorable
are the incidentals.
We met at 8 A.M. on May 26 at the IBM building on Madison Avenue in New York City. Coincidentally, I was to meet later that same
day with Jim Manzi, head of Lotus. The IBM security person in the
lobby got confused and called Gates “Mr. Manzi” and gave him
Manzi’s security pass. By the time Bill arrived on the 40th floor, he
wasn’t happy. Nevertheless, we had a useful discussion.
What followed the meeting was more noteworthy. He and I, as
well as our staffs, had agreed there would be no publicity in advance
of or after the meeting. However, the press had the story two hours
after he left the IBM building, and by evening everyone knew about
the confusion over his security badge. He apparently didn’t deduce
WHO SAYS ELEPHANTS CAN’T DANCE? / 53
that I had a meeting with Manzi that same day. To some, the mixup seemed to be further evidence of IBM’s—and perhaps Lou Gerstner’s—ineptitude.
The Financials: Sinking Fast
We announced first-quarter operating results at the end of April,
and they were dismal. Revenue had declined 7 percent. The gross
profit margin had fallen more than 10 points—to 39.5 percent from
50 percent. The company’s loss before taxes was $400 million. In the
first quarter of the previous year, IBM had had a pretax profit of close
to $1 billion.
At the end of May I saw April’s and they were sobering. Profit
had declined another $400 million, for a total decline of $800 million
for the first four months. Mainframe sales had dropped 43 percent
during the same four months. Other large IBM businesses—software,
maintenance, and financing—were all dependent, for the most part,
on mainframe sales and, thus, were declining as well. The only part
of the company that was growing was services, but it was a relatively
small segment and not very profitable. Head count had declined
slightly, from 302,000 at the beginning of the year to 298,000 at the
end of April. Several business units, including application-specific
software and our semiconductor businesses, were struggling.
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 t...
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