Published on February 7th, 2011 | by Jonathan Gifford
Louis Gerstner’s vision for IBM: the customer is always right
In my blog ‘Gerstner and the IBM turnaround: vision or execution’, I wrote about the life-threatening hole that IBM had got itself into by the early 1990s, before Louis Gerstner was persuaded to take up one of the most challenging Chief Executive roles in the history of the modern corporation, and about how Gerstner rather mystifyingly said to the press in his early days with the company that ‘The last thing IBM needs right now is a vision’. He went on to say, more understandably, that what the company needed was a series of ‘tough-minded, market-driven, highly effective strategies for each of its businesses’. But the ‘We don’t need a vision’ statement baffled everyone. It also earned him some adverse press comment, as shown in my earlier blog: “IBM stock, down 6% since Gerstner took over, has done nothing because he’s done nothing.” “Does cost-cutting amount to a strategy for survival?” “George Bush may have called it the vision thing. Others may be calling it the ‘lack-of-vision’ thing.”
Change without vision?
With hindsight, perhaps none of this matters. Gerstner did an astonishing job, turning around a company that appeared to be in terminal decline. In 1993 IBM had declared record losses of over $8 billion. The PC revolution and the accompanying client/server revolution (whereby desktop computers—‘clients’—were supplied with data and applications back-up from more powerful, remote ‘servers’) had not merely undermined IBM’s position as the preeminent supplier of integrated solutions to large corporations but had, on the face of it, taken away its reason to exist. IBM was declared to be a dinosaur about to enter an evolutionary dead-end. Yet Gerstner took control of a company that was fighting for survival and brought it back to vigorous health. So who cares about the vision thing? Well, for one thing, if Gerstner really did achieve such a dramatic turnaround without having a clear vision of where he was headed, then a lot of leadership textbooks will need to be rewritten. It is generally accepted that leaders can only bring about significant change if they offer people a different, believable and desirable vision of the future; that the people who are being asked to do the changing have to have a clear idea of what all of the grief and pain is for. If there was no new vision for IBM, then what Gerstner was effectively saying was, ‘Don’t worry guys, I’m going to carry out a classic rationalisation and restructuring of the company and save us a bunch of money so that we can carry on as before, only profitably. Lots of people will lose their jobs but—hey—that’s business. Now let’s get started.’ This is the scenario implied by the journalist who asked, quite correctly, “Does cost-cutting amount to a strategy for survival?” No, it does not. A programme of rationalisation and restructuring is a management process. It doesn’t set out to change the fundamentals of a business, it just improves efficiency.
Just doing a McKinsey?
So was Gerstner really just ‘doing a McKinsey’? Was he just knocking the business back into shape without making any fundamental changes to its goals, direction, philosophy and culture? Is it really imaginable that IBM’s $8bn hole was caused merely by a lack of efficiency? The answer is an emphatic ‘no’. Gerstner changed the very culture of IBM. Indeed, reflecting on his time with IBM some years later, he wrote: ‘I came to see, in my time at IBM, that culture isn’t just one aspect of the game—it is the game.’ I speculated in my earlier blog that Gerstner may have had several things in mind when he made his provocative statement. There were several possible explanations, I felt, but they boiled down to one of two options: either the long-term vision for IBM could wait until Gerstner had secured its short-term survival (and Gerstner couldn’t even be sure what that vision should be until he had done all of the unglamorous stuff needed to keep the company alive) or Gerstner did, in fact, have a vision for the future direction of the company, but he didn’t want people to get distracted by philosophical ideas about ‘new visions’ before they had sorted out the essentials. Gerstner himself says that no one paid enough attention to the fact that he said ‘The last thing IBM needs right now is a vision’—but this still brings us back to my two fundamental options; either Gerstner knew where he wanted to take the company, but would let people know in good time where all the changes were headed, or he himself didn’t know where they were headed, but would figure it out later. And if it was the latter—that Gerstner was hoping that the vision would become clear to him as the restructuring progressed, then we are going to have to start rewriting those textbooks again: a major change programme that isn’t held together by an overriding vision is supposed to unravel very quickly, as all of the changes done to the various parts fail to add up to something that is greater than the mere sum of its parts.
Gerstner’s guilty secret – a new vision for IBM
Well, guess what? Gerstner did have a clear vision of the fundamental changes that he wanted to make to IBM, of the different that he wanted to make to its very culture, and he was giving his key staff very strong indications of this new direction from day one. He himself rather sheepishly defended ‘The last thing IBM needs right now is a new vision’ by saying that he had come to realise that his new vision for IBM was actually a bit like taking the company ‘back to its Watson roots’. Thomas J. Watson, Senior became President of IBM in 1915 and handed over to his son, Thomas Watson Jr., in 1952. Thomas Watson Jr. led IBM to become the dominant force in the global computing industry. He retired in 1971. In 1998, he was included in Time Magazine’s 100 Most Influential People of the 20th Century. So what’s wrong with announcing that you are going back to the Watson days? Gerstner thought that people might laugh. He also suggests that he didn’t want to tell the company’s competitors about the new vision for the company. Rightly, or wrongly, Gerstner declined to announce to the world in his early days at IBM exactly what was his vision for the company. But he sure as hell had one (which is a relief for the writers of leadership textbooks.) And what, in a nutshell, did Gerstner actually do to save IBM?
Starting with the customer
In his book, Who says elephants can’t dance, Gerstner makes it plain that from the earliest days of his appointment, he had a gut feeling that the most-favoured rescue plan—to break IBM up into a number of independent ‘Baby Blues’ (from IBM’s nickname of ‘Big Blue’)—was the wrong solution. In his very first meeting with IBM executives, he said this about the advice to break the giant into smaller, independent units: ‘Maybe that’s 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?’ Gerstner had another deeply-held conviction, which came from having been an IBM customer during his days with American Express. He understood customers’ potential frustrations with IBM’s rather patrician attitude towards its clients—but he also understood the benefits of IBM’s famed commitment to customer service. His customer’s-eye view showed him what the company did right and what it could do much better. In one of his early, broad brushstroke list of expectations for the transformation of IBM, Gerstner put forward this list:
- “We would redefine IBM and its priorities starting with the customer.
- We would give our laboratories free rein and deliver open, distributed, user-based solutions
- We would recommit to quality, be easier to work with and re-establish our 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.”
The mainframe is not dead – and the PC is not the future
Gerstner had one other really important belief that he brought with him from American Express. The mainframe computer was not dead, despite the clever and persistent PR being put out by the new kids on the block—the personal computer manufacturers and their software allies like Microsoft. Gerstner understood, despite what the personal computer lobby was implying with all of the hype about ‘the death of the mainframe’, that you cannot run a major international transactions-based business on a personal computer, even with remote server back-up. You need something—what shall we say?—bigger. In fact, and very impressively, Gerstner had realised something far more fundamental: as the supposedly all-powerful PC would need more powerful back up from remote servers if it was to cope with heavyweight computing tasks so, ironically, the PC itself became almost irrelevant. The power of the network was what mattered, and the network (which IBM strategists began to call ‘the cloud’) could power any number of remote appliances, from PCs to mobile phones to TVs. So although the expensive IBM ‘mainframe’ computer in the basement might be about to become a thing of the past, the personal computer was only, in fact, a small, part of the future. The network—‘the cloud’—would be the driving force.
‘Lighting a fire on your head and putting it out with a hammer’
What Gerstner embarked on in his early days was a gruelling and deeply unglamorous programme of ‘reengineering’ the company – getting all of the really dull but vitally important systems right. “Reengineering,” says Gerstner, “is difficult, boring and painful.” He tells the story of one of his senior executives, who came up with the marvellous quote that ‘reengineering is like starting a fire on your head and putting it out with a hammer.’ Some reengineering was definitely needed. As Gerstner writes, ‘We were running inventory systems, accounting systems, fulfilment systems, and distribution systems that were all, to a greater or lesser degree, the mutant offspring of systems built in the early mainframe days and then adapted and patched together to fit the needs of one of twenty-four independent business units.’ The company had 266 different general ledger systems. The company also had 128 different people with ‘Chief Information Officer’ in their title. And, as Gerstner recounts, ‘Our HR systems were so rigid that you actually had to be fired by one division to be employed by another.’ Each of the overseas divisions of IBM operated as what Gerstner dubbed ‘Fiefdoms’ operating with significant and fiercely protected independence, each with their own non-compatible finance systems. The duplication of services worldwide was horrific. Europe alone had 23,000 support people. One of the key changes that Gerstner made to the remuneration system at IBM, in addition to making stock-based compensation the largest component of senior executive’s pay (to drive home the point that external perception of the company’s success was at least as important as meeting internal goals), was to ensure that part of the bonus was paid against IBM’s overall performance, and not the performance of any one territory. Based on his real concern that IBM could actually run out of cash, in July 1993 Gerstner cut the shareholders’ annual dividend from $2.16 to $1.00 and started a programme of selling-off unproductive assets. They sold the corporate HQ in New York, the fleet of airplanes and the fine-art collection. They also sold of parts of the business that were essentially successful but that were struggling to make sufficient profit within IBM’s overall cost structure as Gerstner began to shed commoditised areas of the business and consolidate around high margin areas. He also analysed the comonay’s major competitors and found that they were spending an average of 31 cents to achieve $1 of revenue, and that the same result was costing IBM 42 cents. Across the company’s vast revenues this amounted to a $7 billion dollar issue.
Putting the customer first
Gerstner was to reduce the IBM workforce worldwide by over 100,00 during his restructuring process—and this in a company that had attempted to run a ‘jobs for life’ policy. On the more positive side, and pursuing his obsession with the customer, which was at the very core of his new vision for IBM, Gerstner asked every one of top fifty member’s of the senior management team to visit at least five major clients in the next three months, and for each of their direct reports to do the same. For very visit, he asked for a short report (one or two pages). He read these reports and took action when necessary. Staff began to see that he was serious about keeping customers happy. One of Gerstner’s most radical decisions was to slash the price of mainframe computers: IBM’s vital cash cow and—arguably – the revenue stream that was keeping the company afloat (just). Gerstner could have kept milking this cow, but he felt that to do this was to ignore what IBM customers were asking for: a lower price. The few competitors in mainframe supply were offering products that were 30-40% cheaper. And, in fact, Gerstner had a potential ace up his sleeve: IBM research had been working on a new technology that would replace the current mainframe technical architecture. The new CMOS technology had the potential to deliver ever more powerful mainframes for less cost. Gerstner signed off the continuing $1 billion investment in CMOS development. It worked. IBMs aggressive pricing policy infused new life into mainframe sales. As the cost of a unit of mainframe processing decreased radically over the coming year, IBM turned around potentially fatal slump in mainframe sales and began to increase sales dramatically year on year from 1994 onwards, while the new technology helped to maintain profitability.
Supplying all of a customer’s IT needs
Finally, every aspect of Gerstner’s new vision for the company is represented in Gerstner’s most remarkable decision: to pursue IBM’s commitment to customer needs by unleashing an Integrated Services unit that would supply all of a customer’s IT needs in a rapidly changing technological world, even if it meant recommending non-IBM products if these represented the best solution to a customer’s needs, and to maintain and service those products also as part of the service contract. This deeply unpopular strategic move resulted in the creation of a division that came to deliver 50% of IBM revenues. Oh—and it was during Gerstner’s watch that IBM embraced the internet as a serious business tool.
http://www-03.ibm.com/ibm/history/history/decade_1990.html  Louis Gerstner, Who says Elephants can’t dance, Harper Collins New York, 2002,  Ibid., p 23 Ibid., p 47-48  Ibid., p 64  Ibid., p 86  http://en.wikipedia.org/wiki/Louis_V._Gerstner,_Jr.  http://en.wikipedia.org/wiki/History_of_IBM