PMO Case Study #3

http://www.ibm.com/developerworks/rational/library/2071.html

Gerstner – IBM

Gerstner is credited with saving IBM from going out of business in the early 1990s. In his

memoir, Who Says Elephants Can’t Dance?, he describes his arrival at the company in April

1993, when an active plan was in place to disaggregate the company. The prevailing wisdom of

the time held that IBM’s core mainframe business was headed for obsolescence. The company’s

own management was in the process of allowing its various divisions to rebrand and manage

themselves — the so-called “Baby Blues.”

Gerstner reversed this plan, realizing from his previous experiences at RJR and American

Express that there remained a vital need for a broad-based information technology integrator. His

decision to keep the company together was the defining decision of his tenure. The subsequent

refocusing on the IT services business (which grew to nearly 50% of the IBM’s revenues), the

embrace of the Internet as a business phenomenon, and a broad effort to revive the company’s

culture are widely seen as having resulted in one of the most remarkable turnarounds in business

history.

In his memoir, Gerstner described the turnaround as difficult and often wrenching for an IBM

culture that had become insular and balkanized. After he arrived, over 100,000 employees were

laid off from a company that had maintained a lifetime employment practice from its inception.

Layoffs and other tough management measures continued in the first two years of Gerstner’s

tenure, but the company was saved, and business success has continued to grow steadily since

then.

Gerstner was named a Knight Commander of the British Empire and given a KBE on the

recommendation of former United Kingdom Prime Minister, Tony Blair, The award was for his

services to UK education and his contribution to the Internet. In 2008, Gerstner received the

Legend in Leadership Award from the Yale School of Management.

Upon his departure from IBM, Gerstner received a 10-year consultancy contract worth up to $2

million annually, plus expenses and full use of IBM facilities and services, such as office, cars,

aircraft and financial planning. He is only required to work one month out of the year. [2]

Following his success in IBM, Gerstner has also become a mentor to Howard Stringer, CEO of

Sony Corporation to turnaround the Japanese corporation. [3]

 

 

 

Who Says Elephants Can’t Dance? is an account of IBM’s historic turnaround as told by Louis V.

Gerstner, Jr., the chairman and CEO of IBM from April 1993 until March 2002. Lou Gerstner

led IBM from the brink of bankruptcy and mainframe obscurity back into the forefront of the

technology business. After a brief foreword and introduction in which Gerstner provides his pre-

IBM background, he jumps right into the story of his IBM experience. The book is divided into

five parts: “Grabbing Hold,” “Strategy,” “Culture,” “Lessons Learned,” and “Observations.”

Part I, “Grabbing Hold,” is the story of how Gerstner wrestled with the idea of taking the IBM

job (he turned it down at first), followed by highlights from his first year on the job. It provides

an interesting insider’s view of the CEO recruiting process for a Fortune 50 company and

describes how Gerstner addressed IBM’s severe financial crisis in the early ’90s and managed to

keep the company solvent. It also reveals just how precarious IBM’s financial position was

during that time, which many readers (including myself) might not have known. Still, although

Part I is quite interesting, the real meat of the book is in the subsequent parts.

After stepping back to provide a brief history of IBM, Part II (“Strategy”) dives more deeply into

how Gerstner repositioned IBM’s corporate strategy to keep the company together and pull off a

successful turnaround. When Gerstner came on board, the conventional wisdom, from both

industry pundits as well as many IBM insiders, was that the only way to save IBM from eventual

disaster was to break it apart. But Gerstner looked beyond this advice and opted to preserve the

real strength he believed IBM brought to customers. His decision to keep the company together

and “teach the elephant to dance” was “the first strategic decision, and, I believe, the most

important decision I ever made — not just at IBM, but in my entire business career,” Gerstner

writes.

Fixing IBM: “All about execution”

What Gerstner realized is that IBM had a unique and unequaled capability to “apply complex

technologies to solve business challenges.” It was this unique value proposition that would

enable him to bring IBM back from near extinction. But to accomplish this, IBM needed not only

a corporate makeover, but also a complete facelift and some liposuction as well! Gerstner likens

his arrival at IBM to stepping through a time warp and arriving back in the ’50s. A massive,

difficult, and painful reengineering feat was required to get the insular IBM to focus on bringing

value to the customer in the marketplace. Ultimately, though, this led to the “new” IBM. It also

gave rise to a hilarious statement that the book credits to a senior IBM executive: “Reengineering

is like starting a fire on your head and putting it out with a hammer.”

In Gerstner’s own words, “fixing IBM was all about execution” and required “an enormous sense

of urgency.” His whole approach was to drive the company from the customer’s view and “turn

IBM into a market-driven rather than an internally focused, process-driven enterprise.” And it

worked. It was all about execution — and honest ways to measure its effectiveness. Before

Gerstner arrived, IBM had a tendency to fool itself with bogus indices and data (e.g., customer

satisfaction numbers generated from hand-picked samples; subjective product milestones, etc.),

but he changed all that. “People do what you inspect, not what you expect,” he explains.

 

 

I couldn’t help thinking that perhaps Gerstner took a peek at Rational’s mission statement and

Five Field Measures to craft his IBM strategy, but then I know these things work because they

are based on sound general business principles. As a new IBM employee, I was very encouraged

by Gerstner’s maniacal attention to customers’ notions of success and his single-minded focus on

responding to marketplace needs. If his market-driven approach to doing business really does

pervade the “new” IBM culture, then it will be no surprise if IBM ends up dominating the

technology landscape in this century, just as it did in most of the last one.

 

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Culture is everything

Part III (Culture) was particularly interesting to me because one of the main reasons I wanted to

work for Rational was the company culture, and I was concerned about its compatibility with

IBM’s culture. Many Rational tech reps (myself included) say they have enjoyed working at

Rational because the company culture empowers individuals to make a difference. Fortunately,

company culture was another of Gerstner’s main targets for change:

Until I came to IBM, I probably would have told you that culture was just one among several

important elements in any organization’s makeup and success — along with vision, strategy,

marketing, financials, and the like. I came to see, in my time at IBM, that culture isn’t just one

aspect of the game; it is the game. In the end, an organization is nothing more than the collective

capacity of its people to create value.

Gerstner’s most important and proudest accomplishment was to institute a culture that brought

IBM closer to its customers by inspiring employees to drive toward customer-defined success.

Now, the company’s strong customer focus will allow Rational to continue pursuing the same

mission that has guided us for more than twenty years.

 

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by Louis V. Gerstner, Jr. Harper Business, 2002 ISBN: 0-06-052379-4

Author of this article – Dennis Elenburg

Wisdom and Insights

There are nuggets of wisdom throughout the last two sections of the book. In “Lessons Learned”

and “Observations,” Gerstner points out that some integrator, fundamentally acting in a service

role, controls every major industry. This was the basis for building IBM Global Services.

 

 

Another shrewd Gerstner insight is that every major industry is built around open standards. It

was this realization that led IBM Software to enable and build on open standards in a network-

centric world, and Gerstner provides a compelling argument for abandoning proprietary

development and embracing software standards (e.g., J2EE and Web Services). In fact, Gerstner

argues that the most valuable technology companies are OEM suppliers who leverage their

technology wherever possible; therefore, IBM must actively license its technology in order to be

successful. The book’s three appendices contain, respectively, some interesting e-mail

correspondence, Gerstner’s vision of e-business (including the IBM IT On Demand, autonomic,

and grid computing initiatives), and a financial overview of IBM from 1992 to 2002.

The latter clearly demonstrates that Gerstner got results. Although many people criticized IBM

for selecting a non-technical CEO, based on IBM’s performance during his reign (and the insight

he reveals in this book), Gerstner was definitely the right person for the job. His reinvention of

IBM was one of the most dramatic corporate turnarounds of the twentieth century, and the

numbers in Appendix C of this book will certainly shut the mouths of any would-be critics.

Before opening this book, I had assumed it was Gerstner’s autobiography and would highlight

not only his IBM career, but also his years at the consulting firm McKinsey and Company and

his executive tenure at American Express and RJR Nabisco. I also assumed that, as is typical of

many books by high-profile executives, the book was ghostwritten in part. Gerstner dismisses

both of these assumptions in the foreword. Not only did he write the book himself, he claims, but

also the book deals (as the subtitle “Inside IBM’s Historic Turnaround” suggests) almost

exclusively with Gerstner’s IBM years.

Under other circumstances I might regard this book as just another well written and interesting

memoir from a captain of capitalism; both Rational employees and Rational customers now have

a stake in the success of IBM and will gain a better understanding and appreciation of the

company by reading this book.

For further reading about IBM’s past, I also recommend:

 The Maverick and His Machine: Thomas Watson, Sr. and the Making of IBM by Kevin

Maney (John Wiley and Sons, 2003).

 Father Son and Co.: My Life at IBM and Beyond, by Thomas J. Watson Jr. and Peter

Petre (Bantam Books, 1990).

 

Dennis is a Technical Representative on IBM Rational’s Dallas sales team, joined the company

in 2000. Prior to that he spent several years consulting for various telecom companies in North

Texas and worked at Coopers and Lybrand (before the company’s merger with

PriceWaterhouse), as well as at EDS. He holds a BA in Physics from Austin College.