Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (10 page)

“Fourth, we are going to continue to be, in fact, the only full-service provider in the industry, but what our customers are telling us is they need IBM to be a full-solutions company. And we’re going to do more and more of that and build the skills to get it done.

“And lastly, we’re doing a lot of things that I would just call

‘customer responsiveness’—just being more attentive to the customer, faster cycle time, faster delivery time, and a higher quality of service.”

The reaction to the expense cuts was, for the most part, supportive.

“This is the most realistic restructuring program IBM’s had,” analyst David Wu told
The Wall Street Journal
.

Michael Hammer, coauthor of
Reengineering the Corporation
, told
The New York Times
: “Gerstner decided that sooner is better than perfect—that was anathema to the old IBM. That is the most important kind of change that can come from the top.”

70 / LOUIS V. GERSTNER, JR.

As for my vision statement, the doom industry had a grand time nailing my hide to the wall.

The ubiquitous Charles Ferguson, coauthor of
Computer Wars
, told
The New York Times
: “Gerstner can be fabulous at this cost-cutting stuff and still see IBM all but collapse over the next five years or so.

The tough part will be deciding what strategies it will pursue and to carve out a profitable niche for IBM in the future.”

Barron’s
was blunt: “George Bush would have called it the vision thing. Others may be calling it the ‘lack-of-vision thing,’ in a pointed reference to IBM Chairman Louis V. Gerstner’s assertion that ‘the last thing IBM needs now is a vision.’ Instead, he told reporters last week, the company most needs ‘market-driven…strategies in each of its businesses.’ In other words, a super-duper tool kit.

“In truth, however, IBM’s newish chief
does
have a solution for the ailing computer colossus, though it is neither poetic nor grand.

Rather, it is one of corporate anorexia.”

The Economist
asked: “But does cost-cutting amount to a strategy for survival?”

The Economist
called my intention to keep IBM together “shortsighted.” The magazine said: “As PCs become cheaper, more powerful, and easier to link into networks, the number of customers prepared to buy everything from IBM will dwindle. Indeed, IBM’s various businesses would be much stronger competitors if they were not hamstrung either by Big Blue’s still-vast corporate overheads, or by the need not to tread on other divisions’ toes. It may take a few more quarters of leaping losses to convince Mr. Gerstner of the need to break up IBM. Shareholders, their investment at an eighteen-year low, and their dividend halved for the second time this year, might wish that their axeman would turn visionary overnight.”

I don’t know if I was surprised at the reaction—I guess I was. I was certainly annoyed—and for good reason.

A lot of reporters dropped the words “right now” from my vision statement when they wrote their stories. And so they had me say WHO SAYS ELEPHANTS CAN’T DANCE? / 71

ing that “the last thing IBM needs is a vision.” That was inaccurate reporting, and it changed my message in a big way.

I said we didn’t need a vision
right now
because I had discovered in my first ninety days on the job that IBM had file 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.

However, what was also clear was that IBM was paralyzed, unable to act on any predictions, and there were no easy solutions to its problems. The IBM organization, so full of brilliant, insightful people, would have loved to receive a bold recipe for success—the more sophisticated, the more complicated the recipe, the better everyone would have liked it.

It wasn’t going to work that way. The real issue was going out and making things happen every day in the marketplace. Our products weren’t bad; our people were good people; our customers had long, successful relationships with us. We just weren’t getting the job done. As I said frequently to IBMers those days, “If you don’t like the pain, the only answer is to move the pain onto the backs of your competitors. They’re the ones who have taken your market share. They’re the ones who have taken away your net worth. They’re the ones who made it more difficult to send your children and grandchildren to college. The answer is to shift the pain to them and return IBM to a world of success.”

Fixing IBM was all about execution. We had to stop looking for people to blame, stop tweaking the internal structure and systems.

I wanted no excuses. I wanted no long-term projects that people could wait for that would somehow produce a magic turnaround.

I wanted—IBM needed—an enormous sense of urgency.

What the pundits also missed was that we had already made some very fundamental strategic decisions that were the early elements of a vision. I did not talk about them in that July meeting—at least, I didn’t talk about them as forthrightly as I might have—be 72 / LOUIS V. GERSTNER, JR.

cause I did not want our competitors to see where we were going.

The key strategic decisions that were already made before that eventful day were extraordinarily significant in the turnaround of IBM. They were:

• Keep the company together and not spin off the pieces.

• Reinvest in the mainframe.

• Remain in the core semiconductor technology business.

• Protect the fundamental R&D budget.

• Drive all we did from the customer back and turn IBM into a market-driven rather than an internally focused, process-driven enterprise.

You could argue that a lot of these decisions represented a return to IBM’s Watson roots. However, to have announced in July 1993 a strategy built around past experience would have subjected us to gales of laughter that would have blown around the world. If the last thing IBM needed in July 1993 was a vision, the second last thing it needed was for me to stand up and say that IBM had basically everything right and we would stand pat but work harder. That would have had a devastating effect on all our constituents—customers, employees, and shareholders.

So the truly unique challenge of my first few months at IBM was to reject the knee-jerk responses that would have destroyed the company, and to focus on day-to-day execution, stabilizing the company while we sought growth strategies that would build on our unique position in the industry. Those were not to come until a year later.

7

Creating the

Leadership Team

A
s 1993 drew to a close, I turned my attention increasingly to the overall IBM team, my top management team, and our Board of Directors.

If you ask me today what single accomplishment I am most proud of in all my years at IBM, I would tell you it is this—that as I retire, my successor is a longtime IBMer, and so are the heads of all our major business units.

I think it would have been absolutely naïve—as well as dangerous—if I had come into a company as complex as IBM with a plan to import a band of outsiders somehow magically to run the place better than the people who were there in the first place. I’ve entered other companies from the outside, and based on my experience, you might be able to pull that off at a small company in a relatively simple industry and under optimal conditions. It certainly wasn’t going to work at IBM. It was too big and too complex a structure.

More important, the company was brimming with talented people who had unique expertise. If I didn’t give the players on the home team a

74 / LOUIS V. GERSTNER, JR.

chance, they’d simply take their talent and knowledge and go somewhere else. I just had to find the teammates who were ready to try to do things a different way.

We had many big-stakes business decisions to make, so deciding whom I was going to trust was critically important. There is no easy way to do this. Building a management team is something you have to do business by business, person by person, day by day. I read their reports. I watched them interact with customers. I sat with them in meetings and evaluated the clarity of their thinking and whether they had the courage of their convictions or were weather-vanes ready to shift direction if I scowled or raised an eyebrow. I needed to know they were comfortable discussing their business problems candidly with me.

When I disbanded the Management Committee during my first month, it was a loud statement that there were going to be major changes in the managerial culture of IBM. However, I still needed a top-level executive committee to work with me to run the company, so in September I created the Corporate Executive Committee, which overnight was widely renamed “the CEC.” It had eleven members, including myself.

With an eye to the old Management Committee, I also announced what the CEC would
not
do: It would not accept delegation of problem solving. It would not sit through presentations or make decisions for the business units. Its focus would be solely on policy issues that cut across multiple units.

It wasn’t long before the company’s culture decided that the CEC

had fully replaced the MC as the ultimate honorific the company could bestow. I have never viewed getting a seat on a committee as something a successful person should truly value. However, sometimes you have to work within the existing system. If all the talented IBMers wanted to work harder in order to get a seat on the CEC, under the circumstances that was okay with me.

At the same time, I created a Worldwide Management Council WHO SAYS ELEPHANTS CAN’T DANCE? / 75

(WMC) to encourage communication among our businesses. The WMC had thirty-five members and was to meet four or five times a year in two-day sessions to discuss operating unit results and company-wide initiatives. In my mind, however, its primary purpose was to get the executive team working together as a group with common goals—and not to act as some United Nations of sovereign countries. These meetings represented a chance for our top executives to grab one another and say “I’ve got a great idea, but I need your help.”

Building a New Board

One of the most revolutionary, but least noticed, changes in the early days involved the Board of Directors. When I arrived there were eighteen directors, including four insiders: John Akers, Jack Kuehler, John Opel (IBM’s CEO before Akers), and Paul Rizzo. I thought this was an unwieldy size with too many insiders, particularly given the dominance of current and former employees on the powerful Executive Committee.

Clearly the CEO search, the media’s public flogging of the company, and the sharp, extended criticism at the annual meeting had traumatized many members of the board. I quietly approached a few of them, especially Jim Burke and Tom Murphy, for a series of discussions on corporate governance.

With my encouragement, the Directors’ Committee decided it would announce that the board should be reduced in size to make it more manageable. At the same time, we would add new people to bring in some different perspectives. After the announcement, it didn’t take anyone more than a minute to realize that meant a significant amount of retirements would be in order.

I think most of the directors had mixed feelings about sticking around at that point, and some welcomed the opportunity for a graceful exit. Burke and Murphy masterfully orchestrated a proposal that

76 / LOUIS V. GERSTNER, JR.

every director offer his or her resignation and that the Directors’

Committee would sort out the right structure for the ongoing board.

As a result, five directors left in 1993, then four more in 1994.

Murphy and Burke themselves retired, one year earlier than required by IBM’s retirement rules. Their move was a sign to the others that it was time to make room for the newcomers. A few were willing to go, but others found the process distasteful and personally difficult.

Nevertheless, we got it all done. To the amazement of everyone, there was never so much as a peep in the media.

By the end of 1994 we had a twelve-member board. I was the only insider. Only eight remained from the eighteen who had made up the board just a year before.

Starting in 1993 we began introducing newcomers, beginning with Chuck Knight, the chairman and CEO of Emerson Electric Co. I had known Chuck as a fellow board member at Caterpillar. He was tough and demanding of himself, the CEO, and his fellow board members, and I admired that. He was highly respected as one of the premier CEOs in America, and his selection was the important first step in the rebuilding of the board.

In 1994 we added Chuck Vest, president of MIT and Alex Trotman, chairman and CEO of Ford Motor Company. Cathie Black, president and CEO of the Newspaper Association of America, and Lou Noto, chairman and CEO of Mobil Corporation, joined in 1995. They were followed by Juergen Dormann, chairman of Hoechst AG, in 1996.

Minoru Makihara, president of Mitsubishi Corporation and one of the most senior business executives in Japan, joined us in 1997; Ken Chenault, president and chief operating officer (and later chairman and CEO) of American Express in 1998; and Sidney Taurel, chairman and CEO of Eli Lilly and Company in 2001.

This board has been an important contributor to our success.

Strong, involved, effective, it has consistently practiced corporate governance in a manner that meets the most rigorous standards. In fact, in 1994 the California Public Employees’ Retirement System WHO SAYS ELEPHANTS CAN’T DANCE? / 77

(CalPERS), whose board manages one of the world’s largest public pension funds, rated the IBM board’s governance practices among the very best. Since then there has been noteworthy recognition from other organizations.

Employee Communications

At the same time we were remaking our board and senior management system, it was essential to open up a clear and continuous line of communications with IBM employees. The sine qua non of any successful corporate transformation is public acknowledgment of the existence of a crisis. If employees do not believe a crisis exists, they will not make the sacrifices that are necessary to change.