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Gerstner legacy
spawns
imitators
Fiorina borrows from his
playbook
BY THERESE POLETTI
Mercury News
NEW YORK -- When Lou Gerstner took over as
chief executive of IBM in April 1993, many IBMers
were fearful or skeptical. Big Blue was drowning in
red ink. Gerstner, who came to IBM from tobacco
giant RJR Holdings, was an outsider and knew little
about the computer industry.
``When Lou came, we were already in a state of
shock,'' said Irving Wladawsky-Berger, now vice
president of IBM's technology and strategy server
group. ``We were losing money and things were not
in a good state. I don't think we knew what to think.''
Now, almost nine years later, as Gerstner prepares
for his retirement as CEO on March 1, he has pulled
off one of the great turnarounds in corporate history.
Hewlett-Packard CEO Carly Fiorina is trying to
mimic Gerstner's playbook. Fiorina, another outsider,
is trying to turn around another lumbering computer
giant that has lost its way. Indeed, HP's bid to buy
Compaq Computer is an explicit attempt to take on
IBM.
In interviews last week at IBM's sprawling campus in
Somers, N.Y., where I.M. Pei-designed glass
pyramids shine atop each of the four main buildings,
several executives talked about Gerstner's legacy and
how he remade IBM. Gerstner, who is based at
IBM's new corporate headquarters building in nearby
Armonk, declined to be interviewed for this story.
IBM is now the world's largest computer services
company, has the second-biggest software business
after Microsoft and is right behind Sun Microsystems
in high-end corporate servers.
IBM's research labs, including those in San Jose, are
busy commercializing and licensing their discoveries
both within IBM and to other companies. IBM's chip
factories, which previously only developed chips for
IBM, now sells customized chips for a variety of
companies, including Nintendo, Apple Computer,
Boeing and Sony.
One of Gerstner's first moves was to put a halt to the
decentralization occurring at IBM. The company was
already in the process of spinning off its printer
business, and the personal computer division
operated with its own research and development,
sales force, customer service and balance sheet.
Gerstner's theory was that IBM would be better off as
a unified company, sharing core assets like research
throughout all its product divisions and presenting
one sales team to the customer for a suite of products.
``Unless we were all pulling in the right direction,
executing the same play, we were not going to make
it,'' said Wladawsky-Berger. ``There was a lot of
dissension and divisions arguing with each other.''
Even as he tried to unify the company, Gerstner
decided to shed non-core businesses, such as the
Global Network telecommunications business, which
IBM sold to AT&T for $5 billion.
In his first few months, he slashed 40,000 jobs to
stanch IBM's multibillion-dollar losses, closed plants
and factories. Thousands more employees were cut
or they left through attrition in 1994. He also
launched a major advertising campaign to position
IBM's image as a ``solutions'' provider and a leader
in the nascent arena of ``e-business.''
When Fiorina joined HP in July 1999, she borrowed
many of Gerstner's tactics and brought them to HP,
which like IBM had an ingrained paternal culture,
competing division chiefs and sluggish growth in its
core business.
Fiorina combined 83 different units at HP into six. A
star saleswoman at her previous employer, Lucent
Technologies, Fiorina traveled the world courting
HP's major customers.
Fiorina also began a big advertising campaign, with
herself as the star and a one-word slogan: ``Invent.''
She emphasized ``e-services'' and boosted the role of
HP Labs.
Finally, in September, Fiorina unveiled an ambitious
plan to buy Compaq for about $25 billion in stock.
Fiorina argues the merger will make HP a
powerhouse to rival IBM.
Fiorina has declined recent interview requests.
But in an October interview, Fiorina compared her
efforts to remake HP to IBM's transformation. ``Think
about what it took to rebuild IBM,'' she said. ``Think
about the `valley of death' that IBM went through.''
For all the change Gerstner wrought, he had a quiet
style. In his first few months, he refused to articulate
a plan for Big Blue, getting much attention when he
said the last thing IBM needed was a vision.
From the outside, he appeared to be simply cutting
costs in line with IBM's lower revenues, but at the
same time, he was quietly learning his way around
the computer industry and getting IBMers to rethink
their role.
``He really made us focus on the customer,'' said
Ginni Rometty, general manager of the Americas for
IBM's Global Services business.
In his speeches and talks with investors, Gerstner
would emphasize that he might not know about the
``speeds and feeds'' that the IBM sales force loved to
push, but as a former IBM customer, he said IBM had
lost its way and he knew what he wanted it to do.
Customers didn't really care about the latest, greatest,
fastest box, he argued. They just wanted a system that
could reliably run their business. Gerstner began to
move the company away from its bread-and-butter --
the mainframe computer -- and focus it on providing
computer services.
Support business
IBM already had a large support and maintenance
business. And a few years before Gerstner arrived, it
had started to build an outsourcing business, where
IBM would take over a customer's computer
operation, set it up and run it.
As Gerstner started to integrate all the separate parts
of IBM, he and other executives saw that IBM could
use its vast expertise in everything from
supercomputers to PCs to help companies plan and
build a computing infrastructure -- something that
became more important as the Internet revolution took
hold.
IBM Global Services is now a $35 billion business,
a little more than a third of the company's total
revenue of $86 billion last year.
Gerstner also built up IBM's software business
through several big acquisitions, including Lotus
Development and Tivoli Systems, and with big bets
on industry-standard technologies like Sun's Java
programming language and the Linux operating
system.
Services and IBM's software business have become
IBM's growth engines, offsetting the slower-growing
hardware businesses. IBM's total employee base is
now up again at about 320,000, up from the low point
in his reign of 219,000 in 1994.
Fiorina is trying to grow HP's own services business
to better compete with IBM and capture some of the
same growth.
Fiorina's first attempt to boost HP's services
business, a September 2000 bid for
PricewaterhouseCoopers' consulting business for $18
billion, fell apart over price. A more recent deal to
buy bankrupt Comdisco's disaster recovery business
was one-upped by competitors, with SunGard Data
Systems winning the final bid.
And the proposed purchase of Compaq, which would
vault HP into No. 3 in computer services, has come
under fire from some independent analysts and from
the children of HP's founders, who control more than
18 percent of the stock.
In contrast to HP's attempts to boost services through
acquisitions, Rometty said most of IBM's services
growth was organic, coming through hiring and
retraining the computer giant's massive and
experienced staff.
IBM also grew by adding new outsourcing contracts
and acquiring the staffers of its customers. IBM did a
``handful'' of acquisitions but they have been small
and aimed at filling in skill gaps.
`Execution guy'
Analysts said that it's appropriate that Gerstner is
handing over the reins to his No. 2 executive, Sam
Palmisano, who helped grow IBM's services
business. ``Palmisano's reputation is as a cost cutter
and execution guy,'' said Steve Milunovich, a Merrill
Lynch analyst, in a note to clients. ``We're
comfortable he can keep IBM on the correct strategic
path.''
And observers noted that Fiorina might do well to
study Gerstner more closely.
Fund manager David Katz of Matrix Asset
Management said that Gerstner had all the qualities of
a great leader.
``Gerstner is a great executor and operator and a
financial person and a visionary,'' said Katz, who
owns shares of HP but not IBM. ``Carly is one of
these four: She is a visionary. But she doesn't seem to
impress the investment community as a financial
person or a great operator.''
David Yoffie, a professor at Harvard Business
School who has written case studies on IBM, said
Gerstner and Fiorina have major differences in
approach.
Take acquisitions. When IBM's initially hostile
takeover of Lotus did not fare as well as expected,
Gerstner decided to do fewer acquisitions, Yoffie
said.
``He seemed to learn his lesson that the right way to
grow his business was not by buying but by growing
organically,'' said Yoffie. ``Carly is more impatient
than Gerstner and is not oriented towards organic
growth. She wants to get big fast.''
In addition, the professor said, ``Gerstner did not set
high expectations. He wrote off almost $10 billion
and really tried to restructure and reposition the
company rather than try and get big faster.''
``Carly came in and made all kinds of promises
which she is now trying to live up to,'' Yoffie said.
``She has IBM envy. She is trying to replicate what it
took IBM 15 years to do.''
But like Gerstner, Fiorina has never promised to turn
around HP overnight.
``I said to the board . . .this was a three-year process,
to get through the magnitude of the change we're
talking about,'' Fiorina told the Mercury News in an
interview last summer.
Contact Therese Poletti at tpoletti@sjmercury.com
or at (415) 477-2510. |
