Lessons from IBM

You don’t hear much about IBM in Silicon Valley. Oracle and Microsoft are talked about, typically with disdain or anger. But IBM—well, it’s just not really mentioned. It’s almost like it’s not a technology company. 

And yet, lately, I’ve found myself thinking about them for a number of reasons:

  • Communication. I was really impressed by the fact that in 2010 they published a 5 year earnings per share projection that they largely appear on track to hit. I wrote about this in an earlier post about the power of writing and committing one’s self or organization to a goal. The IBM projection implied an incredible degree of strategic planning and alignment. 
  • Research. IBM’s Director of Research, John Kelly III, was on NPR about a month ago, and it was an incredible talk. He talked a lot about their supercomputer Watson, which won a Jeopardy match, and Deep Blue, which beat Garry Kasparov in chess. In addition, the labs have created a dizzying array of incredible technology, ranging from barcodes to the relational database to the technology underlying laser eye surgery. Everyone loves Google’s innovations: maps, Gmail, self-driving cars, Glass, etc. But IBM historically has been just as prolific. So IBM is most definitely a technology company. 
  • Strategy. When Marissa Mayer took over as CEO of Yahoo! last year, I became curious about what it takes for a technology company to sustain itself over the long-term. Consumer products create long-lasting assets in brands and distribution. They can be disrupted, but it tends to be hard. Think Coca-Cola. With technology, however, it’s almost a bygone conclusion that today’s winner will be tomorrow’s also-ran. Microsoft is struggling with this as well, and now with Ballmer out as CEO, they’ll be more explicitly trying to clarify their strategy as well. Asking this question led me to read Lou Gerstner’s book on IBM’s turnaround, Who Says Elephants Can’t Dance? And it was a worthwhile read. 

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So, what did Gerstner, having joined IBM February of 1993, do to turn IBM around?

First, he stabilized the immediate problem—mainframe:

  • Drop the price of the mainframe. Mainframe revenue had dropped from $13 billion in 1990 to projected $7 billion in 1993. Dropping the price wasn’t straightforward as it, in fact, made the cash position worse. But it was a customer-friendly move as IBM’s mainframe customers were its most important customers and mainframe pricing was almost 50 percent higher than competitors’. Mainframe pricing per unit of processing decreased from $63,000 to $2,500 over seven years. 
  • Commit to mainframe research. Rather than exit, he doubled down. Gerstner lent support to the mainframe technical team’s efforts to migrate from bipolar to CMOS, which would lower the mainframe’s cost dramatically. IBM ended up spending $1 billion over the next four years, but it saved the mainframe business. Gerstner points out that, if not for that investment, IBM would have been out of mainframes by 1997. Staying in mainframe generated $19 billion of revenue from 1997 to 2001. 

Second, he came up with a near-term plan to stabilize the company:

  • Keep the company together. The book goes into great depth about this decision, and it’s fascinating reading. Essentially, however, Gerstner initially felt intuitively and later confirmed that IBM had a unique ability to satisfy a significant need to become a technology integrator—the person that could help companies create value from technology by integrating all the pieces and delivering a working solution. This was huge because everyone assumed that the solution was for IBM to break itself apart. This decision drove every other decision. It took enormous vision and confidence. 
  • Bring the expense base in line. Having made the decision to stay together and stay in the mainframe by dropping price, there was no other choice but to bring expenses in line. Gross margins on mainframe had dropped dramatically so it only made the problem worse. Gerstner had his CFO benchmark costs and found that IBM was spending 42 cents to generate $1 of revenue versus competitors that were spending 31 cents. This equated to $7 billion of expense that needed to be cut!
  • Improve every business process. The early expense cutting was unfortunately and predictably headcount. IBM cut 35,000 jobs in addition to the 45,000 the previous CEO had cut in 1992. Beyond that, however, it was necessary to improve every basic process, all of which had become cumbersome and bloated. Just one example was that IBM had 128 CIOs across 24 independent business units, each running their own systems and applications. This was unglamorous, grinding, and painful work. But necessary. And it worked. From 1994 to 1998, the expense reengineering effort saved $9.5 billion. 
  • Sell unproductive assets to raise cash. IBM was almost out of cash in 1993. Bankruptcy was a possible yet unmentioned scenario. More likely was a painful restructuring with creditors that would have limited options. So Gerstner cut the dividend and moved quickly to sell unproductive assets like the Federal Systems Company for $1.5 billion. 

Underlying all of this was improved customer and market awareness. A key aspect of changing the culture of the company was making everyone, from leadership down, more aware of customer needs and competitor actions. 

Another amusing aspect of these early changes was Gerstner’s statement at an early press conference that “the last thing IBM needs right now is a vision.”

Gerstner’s point was:

IBM had drawers full of vision statements. We had never missed predicting correctly a major technological trend in the industry. In fact, we were still inventing most of the technology that created those changes.

Basically,"fixing IBM was all about execution."

Underlying these tactics was a broader strategy:

  • Keep the company together.
  • Reinvest in the mainframe.
  • Remain in the core semiconductor technology business. 
  • Protect the fundamental R&D business.
  • Drive all we did from the customer back and turn IBM into a market-driven rather than an internally-focused, process-driven enterprise.

Gerstner makes the point that “a lot of these decisions represented a return to Watson’s roots.”

I find this to be amazing. Many CEOs taking over a troubled enterprise would make dramatic, visible changes in strategy. Gerstner’s bold insight was that the basics of the business were, in fact, right. The issues were in execution and structure. The solution wasn’t dramatic and glamorous. It was dramatic yet behind the scenes.

I’m only scratching the surface here. These were just Gerstner’s first steps. He went on to address the leadership team, the reporting structure, the culture, the brand, marketing, the product and services lineup, geographic organization and reporting, etc.

The entire book is filled with insight. Gerstner had no coauthor or ghostwriter. He wrote it himself.