Who Says Elephant Can’t Dance? By Louis V. Gerstner Jr

It is difficult to run a business if you are not in touch with the ground. The author was the ex-CEO of IBM and many wanted him to write a book on the company’s success turnaround story. The author is very grateful to his ex-colleagues for their dedication at work in turning the company around.

He (The author) had super loving parents who were very supportive. Because of them, he managed to achieve success and accomplishment in life. After graduating from Harvard, he went to work. His first job was at McKinsey & Company. After 9 years, he was made a senior partner of the firm. After that, he wanted to move into management. He joined American Express shortly after as the head of its Travel Related Services Group. After Amex, he joined RJR Nabisco, a merger between 2 companies. It was taken private by KKR through an LBO. He was the CEO of RJR Nabisco. It was a difficult period as RJR needed to manage debt and clean the balance sheet. This was when he learnt about ‘free cash flow’. When RJR was underperforming, he wanted to leave and so did KKR.

Mr Burke persuaded him to take up the job at IBM. IBM was having serious problems at that time. The then-CEO, John Akers from IBM resigned. The author’s qualifications were not really suitable for the role in a tech company. The board wanted a change agent with excellent leadership skills. Many thought their prospects were very bleak. The media was also very sceptical. It was slow to develop new technology and was facing increasing competition. KKR paid too much for RJR and there wasn’t enough operating leverage. Taking up the job at IBM would prove to be extremely challenging. IBM’s sales and profits were declining rapidly. The company also wanted to separate into independent operating units. The survival rate was only 20% at that time. He finally said yes. Mr Burke was extremely persistent.

In IBM, stock ownership was a minimal even for top management. He told Henry Kravis of KKR that he would take up the job. Lou Gerstner was not well versed in technology. ‘Information and high-technology industry experience (are) highly desirable, but not opposed to considering extraordinary business leaders.’ Upper management of IBM wanted to seek a lot of attention for themselves. The office layout seemed drab. The company had the policy of ‘no lay-offs’. He believed in quality, competitive strategies, teamwork, helpful colleagues, hated surprises, fast action, hated hierarchy. He did not want the press to know of their problems. John Akers, the previous CEO, resigned. There was practically no culture of teamwork, leadership etc.

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 decentralize decision making with central strategy and common customer focus. – Lou Gerstner

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. – Lou Gerstner

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. – Lou Gerstner

In April 1993, the share price was $13. Many of the mid and senior-level executives had assistants assigned to them. These AAs often had to do administrative work. However, the middle management did not interact with customers often enough. IBM wanted to recover lost ground from Microsoft and Intel. Walt Burdick, the head of HR, was about to resign. During his time, he imposed a lot of strict rules that employees needed to follow. Lou needed to hire both a CFO and a HR director. He had a very capable assistant named Isabelle Cummins. His brother, Dick, also worked for IBM. Their mainframes like the S/390 were not selling well at all. The mainframe needed repositioning. Gerry Czarnecki was the new CFO of the company. However, he left within a year after bring hired. Paul Rizzo was called back from retirement to help IBM. He suggested breaking up the company into individual, autonomous units. Bold and swift action was necessary. During the shareholder meeting, shareholders were furious with the company’s performance. The stock price reached a high of $43 in 1987. The shareholders blasted the directors. He introduced alcohol on IBM private planes.

He wanted to experience fieldwork. IBM at that time was not big in the PC-centric segment. There was a level of fear and uncertainty that pervaded the organization. Their competitors were pricing their mainframes at a much cheaper price. He knew he had to make a decision regarding the mainframe. He wanted to have a massive price reduction strategy. CMOS allowed mainframe production to continue at lower costs, thereby earning better margins. There was plenty of red tape at IBM. He hoped that IBM would be defined in terms of their service to the customer. It is very crucial to listen to your customer and deliver what they need. Their price cutting strategy worked as revenue growth from sale of mainframes increased substantially.

There was too much decentralization in decision making. He made executives meet customers frequently and talk to them. He wanted to build a company from the outside in. Lou did away with the management committee as people used it to push through their own agendas. Andy Grove suggested that IBM do away with microprocessors. Bill Gates suggested that IBM get away from the PC business. The financials were turning bad at that time. A stabilization of financials were necessary. IBM was bleeding and the media was constantly hounding him. He would soon have to reveal his plans on how to save the company.

There was a tremendous pressure to act. The stock price plummeted because Lou was perceived to be doing nothing. He wanted to change their economic model, reengineer the way business was conducted and sell underproductive assets. Customers wanted distributed computing, but IBM was very slow in providing this service. Integration was a big problem. However, he wanted IBM to be the integrator. There was plenty of competition, but most of them only produced one aspect of the whole package. He wanted IBM to piece together everything and sell it as a package. In that sense, decentralization was not good. He wanted IBM to remain one unified enterprise. There was a need to trim expenses significantly. This included laying off staff. Reengineering of processes was difficult, boring and painful. There were too many CIOs, too many GL systems, too much redundancy. Their core initiatives were hardware development, software development, fulfillment, integrated supply chain, customer relationship management, and services. He sold things like the corporate airline fleet, the corporate HQ, the art work, the IBM’s Federal Systems Company. He finally delivered a speech to the public and highlighted the few areas: profitability, better customer service, more client/server business, integrated service provider, improved efficiency.

…One of the first things I learned was that whatever hard or painful things you have to do, do them quickly and make sure everyone knows what you are doing and why. Whether dwelling on a problem, hiding a problem, or dribbling out partial solutions to a problem while you wait for a high tide to raise your boat – dithering and delay almost always compound a negative solution. I believe in getting the problem behind me quickly and moving on. – Lou Gerstner

Most of the heads of the business units have stayed with the firm for a long time. He believed in loyalty and not just importing talented people from outside. Talent retention was very important in an organization. He created a corporate executive committee which would help solve problems. He created a worldwide management council to encourage communication among different businesses. The board was now smaller and had people who had different perspectives and ideas. Famous CEOs were now sitting on the board as a director. There was a great need to improve employee communication. Change usually means uncertainty and pain. Crisis is a good time to introduce change. He sent long emails to his employees. He tried his best to visit as many employees as possible.

IBM’s competitive advantage was to create integrated solutions. Technology was rapidly changing and IBM is such a global company. A common system was needed to support every major country in the world. Customer data was needed to be made readily available across the different global operations. He broke up the geographic fiefdoms. He wanted global industry teams instead. Lou faced resistance and slow adaptation.

The next step was to fix their marketing efforts. Advertising was very decentralized with over 70 advertising agency. IBM brand was still strong. Abby was in charge of controlling the spending and messages. All the agencies were now consolidated into 1. They settled on Ogilvy and Mather. The media criticized his decision. Shortly after, their advertisement was well received. An overhaul of their budgeting an media buying took place. Abby was the hero of the turn in fortunes.

The old compensation structure was mostly just salary, with little bonus, stock options etc. Payouts were quite similar, even for top or average performers. However, there were plenty of health benefits, medical benefits etc. He suggested paying for performance instead (differentiation, variable rewards, external, benchmarks, performance). In order for management to think like long term shareholders, one way is to give stock options. He made stock options available to most employees. Cash compensation was now reduced. He believed in having his own money at risk. This was a move towards performance based compensation. The health benefits were cut back as IBM was running short of cash.

He knew IBM would not sink anymore. The computer model was evolving. They sold using a direct sales force. Hardware was become commoditized. The move was towards software now. He was doubting his ability to carry IBM in the near future. The big question was how to proceed and compete globally. He wanted to pull this off, to get IBM to be the industry leader. The next few years would be a lot more difficult. By 1997, the turnaround was complete. In Mar 2002, IBM was the top for IT services, hardware, enterprise software and high performance computer chips. The rest of the book talks about the history of IBM.

IBM was a great company until the early 1990s. It was founded by Thomas J Watson Sr. It was one of the pioneers in computation. Thomas was a powerful leader and had good values for his firm. His son took over in 1956. During his time, the mainframe System/360 was the Windows. IBM starting buildings things on integrated chips. System/360 was built with integrated circuits. A lot of money was spent on creating new technology for System/360. When employees became obsessed with the success of System/360, they neglected how the market was doing. ‘IBM had ridden one horse, and ridden it well. But that horse could carry it only so far before it broke down.’ Another factor was that IBM was a victim of an antitrust suit filed by the US Department of Justice. UNIX was a big threat to System/360. It was an open OS. PCs were needed to be used by both businesses and enterprises as well. IBM surrendered the OS to Microsoft and the microprocessor to Intel.

He betted big on the company’s strategy and on the industry’s direction. Microsoft and Intel started to offer IT infrastructure and support systems for their customers too. His bet was that customers would want an integrated technology from different suppliers. In addition, he betted on the fact that a network model of computing will replace the PC world. He wanted to develop the service industry.

Dennie runs Integrated Systems Services Corporation, a subsidiary under IBM. He wanted IBM to take care of all aspects of IT for their customer, which meant needing an integrative solution. This involved recommending the best products of other companies and putting them together. The sales people were furious when the services team recommended products of another company. Service businesses are very hard to manage. Service is about selling knowledge, create and deliver it. Services now account for more than 80% of their revenue.

You need to invest the resources necessary to work with the services team to ensure they understand the competitive advantages of your products. View them as a distribution channel for your products. Your competitors do! – Lou Gerstner

Networking gear would be in high demand. In 1993, IBM was the biggest software developer. To IBM, software was part of their hardware offering. The problem was that they didn’t seem themselves as a software company. The next problem was that of OS/2. Microsoft soon triumphed and even IBM computers were loaded with Windows. However, IBM refused to give up on both this front and the microchip front, despite losing plenty of cash. Windows was actually not as technically superior to OS/2. But it was packaged better. Desktop leadership was no longer viable when their OS/2 only had 5% market share. The OS was dominated by Microsoft, application software were dominated by companies like SAP, PeopleSoft etc. IBM would come in and be the middle-man. IBM made a move to acquire Lotus Development Corporation. . Their key offering was Lotus notes. The price of the deal was $3.2 billion. Thankfully, the key personnel at Lotus did not leave. Their next acquisition was Tivoli Systems, which dealt in distributed systems management product. This is a wonderful turn-around story.

IBM Research was looking to sell certain technologies to recoup costs. They had a problem of bringing and showcasing their technology to the public. They were afraid because releasing them might cannibalize main-frame sales. A lot of times, IBM software could only work with IBM systems. They started selling license technology to third parties. This was quite successful. IBM is also now number 1 in custom-design microelectronics.

He decided that IBM needed to walk away from OS/2. He also decided to slowly move away from applications. They wanted to buy SAP. However, this did not materialize. Eventually, thousands of people had these job descriptions changed because IBM was moving away from application. By partnering with other software firms, IBM stood to make more money. IBM also sold their network (hardware) business to AT&T for 5 billion. This marked another exit from the stack. He preferred focus over breadth. The PC business was also not profitable in the long run. Despite their poor performance, they weren’t ready to get out. A lesson learnt from OS/2 is that the best technology didn’t always win. One needs to stay true to their strategic vision. For example, IBM was slow to move to other distribution channels for PC sales.

Convergence was the latest big thing. Converge is the ultimate distribution channel if everything is available online. Dennie closed a $8billion contract with Sears. Dennie first introduced the cloud computing concept. The cloud was between personal users and institutions users and facilitated data transfer. Dennie strongly believed that cloud computing was the future. Irving was put in charge of the Internet Division. Network-centric computing was the way to go in future. Many of their competitors were now committed to the Net. There was a dot-com boom in the late 1990s. IBM escaped the dot-com bust in 2000.

These are interesting companies, and maybe one or two of them will be profitable someday. But I think of them as fireflies before the storm- all stirred up, throwing up sparks. But the storm that’s arriving – the real disturbance in the force – is when the thousands and thousands of institutions that exist today seize the power of the global computing and communications infrastructure and use it to transform themselves. That’s the real revolution. – Louis Gerstner

All the assets needed to achieve success were present more than 10 years ago. However, the mainframe business was too outdated and needed to be removed. Changing people’s mindsets and the company culture was the most crucial. This was also the most difficult part of the journey.

Culture is extremely crucial in an organization’s success. An organization is a collective capacity of people to create value. One needs to make culture part of your DNA. Bad cultures are rather evident. Does the culture reward individual achievement or team play? Does it encourage risk taking? IBM was the extension of its founder, Thomas J. Watson Sr. The culture was one of respect, hard work and ethical behaviour. IBM people are definitely very committed. The 3 basic beliefs were ‘excellence in everything we do. Superior customer service. Respect for the individual.’ Respect your customer and dress accordingly. Lou changed it to dress accordingly to the circumstances of the day. Somehow along the way, people misinterpreted the beliefs. You can only create the conditions for transformation and the incentives. You have to trust the people to do it by themselves. There was a culture where people didn’t take responsibility. He wanted to shake employees by realizing that they needed to think and work together, not just follow instructions. He wanted them to not be followers.

In comparison, changing the attitude and behavior of hundreds of thousands of people is very, very hard to accomplish. Business schools don’t teach you how to do it. You can’t lead the revolution from the splendid isolation of corporate headquarters. You can’t simply give a couple of speeches or write a new credo for the company and declare that the new culture has taken hold. You can’t mandate it, can’t engineer it. – Lou Gerstner

IBM had too many rules and lost its robustness and quick responsiveness. There was a point when the company comes second. People became obsessed with internal status. There was a culture of saying ‘No’. Non-action. Decisions were slow to be reached as a result by lone dissenters. Divisions were hiding things from each other and competing with each other internally. Excessive Bureaucracy hurts an organization. There was plenty of debate on transfer pricing issues. Too many acronyms were used. Senior executives thought that they did not need to understand the process but just needed to review the junior’s work.

He reduced the number of rules, procedures but relied more on principles. The best companies are led by principles and not procedures. The eight principles he believed in were ‘The marketplace is the driving force behind everything to do. At our core, we are a technology company with an overriding commitment to quality. Our primary measures of success are customer satisfaction and shareholder value. We operate as an entrepreneurial organization with a minimum of bureaucracy and a never-ending focus on productivity. We never lose sight of our strategic vision. We think and act with a sense of urgency. Outstanding, dedicated people make it all happen, particularly when they work together as a team. We are sensitive to the needs of all employees and to the communities in which we operate.’ He also created new leadership competencies. Win, execute and team. People thought that any new change would bring a downfall to the company, given how good the old ways were working. E-Business became their moon shot. ‘What do we want to be?’ to ‘What do we want to do?’

There are no ifs in my vernacular. We are going to do it. We’re going to do it together. This is going to be a group of change agents – people who are imbued with the feeling of empowerment and opportunity, for ourselves and all our colleagues. Those of you who are uncomfortable with it, you should think about doing something else. Those of you who are excited about it, I welcome you to the team, because I sure can’t do it alone. – Louis Gerstner

A lack of focus is the most common cause of corporate mediocrity. Many companies have the problem of giving up on their core business too soon without fighting hard enough. Their competitors would thrive. Stick to your core business. Say no to acquisition fever. Research shows that in the long run, acquisitions usually leads to losses. The best ones fit nicely into a plan and produce organic growth. A focused enterprise is one that understand customers’ needs, its competitors and its reality in the world. Vision is not the same as strategy. Vision can create false confidence. Be wary of surveys when conducted by sales staff. They tend to pick those happiest customers. There is no need to keep coming up with new questionnaires. The ones who can best analyse their competitors usually win. It is best to get someone new to access the situation. Strategy should be documented in great details. It must be quantitative in some sense. Allocate resources to the strategy. Don’t just talk. It is more of survival of the fattest rather than fittest.

Stick to your knitting; dance with the partner who brought you. History shows that truly great and successful companies go through constant and sometimes difficult self-renewal of the base business. They don’t jump into new pools where they have no sense of the depth or temperature of the water. – Louis Gerstner

Execution is very difficult and is underrated. It is important to get it done better than the other party. People respect what you inspect. ‘People do what you inspect, not what you expect.’ This requires goal setting and accountability. Good execution depends on world-class processes, strategic clarity and a high performance culture. There are key drivers to every industry. Ensure that your firm has an excellent process for these particular drivers. ‘If you don’t know where you are going, any road will get you there.’ Old Saying. You must have a goal and direction in mind. It is about values and commitments. Do not send mixed signals. A culture in which people are leaders and self-starters matter a lot.

Great companies are lead to winning. Great CEOs do fieldwork and visit staff. They must be seen. Open communication is also very important. Leaders shouldn’t hide behind corporate double-speak. Respect your employees. Leadership is passion. All the great leaders want to win. ‘They care a lot about what they do, what they represent, and how they compete’. You need to have the culture of winning. Great CEOs show passion. Personal qualities include being smart, self-confident, someone who listens, makes difficult decisions, visible passion, customer focus, drive for speed and integrity. Fairness is essential for successful leadership. Stick to your principles and do not deviate from them. Integrity is a very important value.

Elephants can dance. There is this misconception that big companies are slow and unresponsive. But the fact is that all small companies want to become big. Decentralization is not the best thing all the time. Back office functions can be combined. Front office functions are much harder, but can be done. To be truly integrated, shift the power. Focus resources around customers. Measure and reward the future and not the past. Reward people based on company performance, not department/division performance.

I decided, like many of you, that this was the best company in the world at which to spend my career. IBM is a fascinating, important, frustrating, exhausting and fulfilling experience – and I’ve enjoyed every minute of it. – Louis Gerstner

whosayselephantscan'tdance

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