Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (17 page)

130 / LOUIS V. GERSTNER, JR.

IBM, but the coming restructuring of the industry around solutions rather than piece parts.

However, Dennie pointed out, this system was not going to be easy to implement inside the IBM culture. To be truly successful, we would have to do things that would shake the place to its roots. For example, the services unit would need to be able to recommend the products of Microsoft, HP, Sun, and all other major IBM competitors if that, in fact, was the best solution for the customer. Of course, we’d have to maintain and service these products as well.

Moreover, Dennie believed the services unit would have to be separated from the regular sales force, because our sales force would never permit an IBM services person inside their account if there was any chance that the services rep would sell anything other than IBM

products.

Finally he pointed out that the economics of a services business were very different from those of a product-based business. A major services contract might last six to twelve years. An outsourcing contract for, say, seven years might lose money in the first year. All of this was foreign to the traditional world of product sales and would create problems for our sales compensation system and the financial management system.

I left my session with Dennie both thrilled and depressed (a state of confusion I experienced often in my early days at IBM). I was thrilled that I had discovered a base from which we could build the integration capability our customers so desperately needed—and, in so doing, provide the raison d’être for keeping IBM together. I was depressed to realize that despite the powerful logic—that this services-led model was IBM’s unique competitive advantage—the culture of IBM would fight it.

Thus began another major challenge: establishing this powerful new business, and at the same time integrating this unit into IBM so that it was viewed, not as a threat, but as a great new ally of our traditional product units.

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I knew this was going to be an exquisitely difficult trick to pull off. My experience in prior jobs told me that intense rivalries between units of a large company were a prevalent behavior pattern. The units that had been the traditional base of a company more often than not resisted (overtly or silently) the emergence of a new sibling—either homegrown or an arrival through acquisition.

Building the Organization

Despite Dennie’s view that his unit should be a stand-alone business, not a subset of the sales team, I did not break it out initially.

Rather, I spent countless hours working with our teams to develop a sense of mutual dependence between the services and sales people.

Services people had to learn that the sales team could get them in the door. The sales people had to realize that services specialists could develop major new avenues of revenue in their accounts.

Still, there were fireworks. Throughout those critical early days, it seemed there was a crisis a week between services and some other IBM unit. Many of our brand executives or sales leaders went ballistic every time the services unit proposed a product solution that incorporated a competitor’s product. On more than one occasion I found one of these people in my office, railing against the renegades from services. My answer was always the same: “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!”

Meanwhile we started to pull the services units together on a global basis. As I said, Dennie ran just a United States services unit.

There were dozens of other such services organizations spread all over the world. They had totally different processes, pricing, offerings, terms, and brand names. I asked Dennie to create a unified organization—still under the wing of the sales force—and introduce 132 / LOUIS V. GERSTNER, JR.

outsourcing and network services globally. This was a Herculean task—common problem solving, methodologies, nomenclatures, skill definitions, capturing and disseminating knowledge on a global basis, and hiring and training thousands of new people every year.

By 1996 I was ready to break the services unit out as a separate business. We formed IBM Global Services. The change was still traumatic for some of our managers, but it was eventually accepted as inevitable by most of our colleagues.

Had the effort to build IBM Global Services failed, IBM—or at least my vision of IBM—would have failed with it. In 1992 services was a $7.4 billion business at IBM (excluding maintenance). In 2001 it had risen to a $30 billion business and accounted for roughly half of our workforce. I would guess there are few companies that have ever grown a multibillion-dollar business at this pace.

There were several reasons customers were pouring so much investment into services. First, skilled IT professionals were in such short supply that millions of IT jobs went unfilled. Customers simply couldn’t staff up to do what needed to be done. But the main reason came back to what Dennie and I had discussed at that first meeting: customers’ overpowering desire for someone to provide integration.

At first that was just the integration of technologies. But as the networked computing model took hold, it created whole new dimen-sions around integration, forcing customers to integrate technologies with core business processes, and then to integrate processes—like pricing, fulfillment, or logistics—with one another.

The Nature of the Bet

When I say that we made a big bet on services, let me describe what we gambled.

I have worked in services companies (McKinsey and American Express) and product companies (RJR Nabisco and IBM). I will state WHO SAYS ELEPHANTS CAN’T DANCE? / 133

unequivocally that services businesses are much more difficult to manage.

The skills required in managing services processes are very different from those that drive successful product companies. We had no experience building a labor-based business inside an asset-intensive company. We were expert at managing factories and developing technologies. We understood cost of goods and inventory turns and manufacturing. But a human-intensive services business is entirely different. In services you don’t make a product and then sell it. You sell a capability. You sell knowledge. You create it at the same time you deliver it. The business model is different. The economics are entirely different.

Think for a moment about just the outsourcing business. What you’re telling the customer is: “Transfer your IT assets—products, facilities, plus the staff—onto my books. I’ll absorb it all, manage it, guarantee performance levels, and promise that you’ll always be on or close to the leading edge of technology. All that,
and
I’ll charge you less than it’s costing you now.”

At the same time, you’re telling yourself: “I can do all that and still make a profit.”

That’s a bet on a couple of things, starting with your willingness to use your balance sheet. You can’t get into that kind of business without making the commitment to carry the infrastructure and loss until a contract that could extend over five or ten years becomes profitable. There’s no such thing as a toe in the water. When you take this plunge, it’s full-body immersion.

It’s a bet on your ability to drive economies of scale—to consolidate lots of customer data centers into megaplexes (what the industry calls “server farms”) or the ability to do with 750 people what two or three customers once did with 1,000.

We had to bet that we could build the recruitment, training, compensation, and HR processes to bring in 1,000 or more people a month—even though we’d never attempted anything remotely close to that. In fact, in the mid- to late 1990s, when services was consis 134 / LOUIS V. GERSTNER, JR.

tently growing 20-plus-percent a quarter, we knew we could do even better if we had more people. But we capped our hiring at about these levels simply because we thought we’d overextend our ability to hire and train qualified people.

Finally, we had to learn how to be disciplined—how to negotiate profitable contracts, price our skills, assess risk, and walk away from bad contracts and bad deals.

For all of these reasons, I’ve said repeatedly that this is the kind of capability you can’t simply acquire (though our competitors keep trying). The bet you’re really making is on your own commitment to invest both the years and the capital, then build the experience and discipline it takes to succeed.

The Future

As I write this chapter in the spring of 2002, the IBM services business is suffering the same slowdown affecting most of the high-tech sector. I am confident this performance slump is temporary because I have never seen a business with such an astounding capacity for self-renewal. Every time the industry moves in a new direction, the IT services opportunity is reinvented. Even in an economic downturn, many services—outsourcing is the leading example—hold strong appeal as customers look for ways to reduce expenses.

When IBM made its commitment to services, we were playing a bit of a hunch. Today, when I make the statement that this industry, and our company, will be services-led for the foreseeable future, that’s no hunch. Since the financial restructuring of IBM began in 1993, services generated roughly 80 percent of all the company’s revenue growth—more than $20 billion of the $25 billion total through 2001.

I can’t finish a chapter on the IBM services business without making one additional comment. Early on, when Dennie Welsh was first WHO SAYS ELEPHANTS CAN’T DANCE? / 135

building his services unit, he went to my predecessor and told him he had to have IBM’s number-one sales leader, a person with stature and charisma, a deal-closer extraordinaire. Sam Palmisano, the man who eventually succeeded me as CEO, was running part of IBM’s Asian operations at the time. He got the call and became president of ISSC. Not only did Sam take the business to another level, but he was a strong role model for many executives who needed to understand that a significant part of our future was in services.

15

Building the World’s

Already

Biggest Software Business

I
f we were right about the end of one computing era and the arrival of the next, we needed answers to important questions: Where would the value shift in that new environment?

Where would the strategic high ground be? What would dominate customers’ attention (and spending) the way the PC had during the prior phase?

Certainly networking gear, to keep oceans of digital content moving at high speed and high bandwidth, would be in high demand. To handle the explosion in transactions, customers would need increased server and storage capacity. To design and implement networked solutions, they would need a range of services.

But the linchpin seemed to be software. I’m not referring to the software of the prior era—desktop operating systems and productivity applications sold in shrink-wrapped boxes. The software that would matter in the future would have a very different set of characteristics.

WHO SAYS ELEPHANTS CAN’T DANCE? / 137

For starters, it would have to be based on open standards that every competitor could use and build on. Why? Because the networked world would have to connect hundreds of millions, eventually billions, of devices and systems. Customers would never permit one company’s technology to control all of those connected elements, even if the technology were capable of it.

I’m not a technologist, so I’m not going to try to explain the Internet’s underpinnings. Suffice it to say that the Internet is built on a set of open technical specifications called protocols. Once computer systems adhere to those specs, they can connect and become part of the Net.

This was basically client/server’s utopian promise—seamless connectivity. Of course, it didn’t work. Now, the Internet offered to fulfill that promise, and on a global scale.

Diamond in the Rough

In 1993 very few people—even knowledgeable business executives—would have correctly answered the following question: “What is the biggest software company in the world?” I suspect nearly all would have answered “Microsoft.” In fact, IBM sold more software in 1993 than did anyone else.

Why the misperception? It was due mainly to the fact that IBM

never thought of itself as a software company, did not talk about itself as a software company, did not have a software strategy, and did not even have a unified software organization.

Software, to IBM, was simply one part of a hardware-based offering. Since every computer needs an operating system, and most need databases and transaction processing capability, IBM built many of these software assets but never viewed them as a unique business.

Rather, they were buried inside IBM hardware or sold as an add-on feature. And critically, none of this software worked with computers made by manufacturers other than IBM.

138 / LOUIS V. GERSTNER, JR.

So, problem number one: We didn’t have a software mentality, much less a real software business. Problem number two: Most of what we had was built for the mainframe world at a time when the bulk of the customer investment was being made in smaller, distributed systems. Problem number three: a troubled child named OS/2.

My consumer packaged goods background helps me understand the emotional attachment companies have for their products. But the situation is different, and far more intense, in the IT industry. I didn’t fully understand this when I came to IBM, but I learned in a hurry when I was thrust into our own religious war—the fight for desktop superiority, pitting IBM’s OS/2 operating system against Microsoft’s Windows. It was draining tens of millions of dollars, absorbing huge chunks of senior management’s time, and making a mockery of our image. And in the finest IBM fashion, we were going to fight to the bitter end.

IBM had always designed its own operating software to run on its hardware. However, when the PC came along, IBM’s lack of real commitment to that market resulted in the company’s asking Microsoft to provide the operating system for the first IBM Personal Computer. Microsoft seized that miscalculation and artfully built the most powerful franchise in computing.