Thursday May 31---TheStandard.com----Big Blue After Lou
By Mark Boslet
Lou Gerstner is not one to mince words. Two years ago, while high-tech stars such as Sun Microsystems were putting the "dot in dot-com,"
IBM's characteristically blunt CEO was referring to dot-coms as "fireflies before the storm." A year later, he pronounced them, "dot toast."
Never mind that the new-economy vanguard was then thumbing its nose at IBM, the
icon of the buttoned-down high-tech business establishment. Gerstner pushed Big
Blue's "e-business" offerings to large corporations. He took his struggling blue chip to the woodshed and got it focused on
fundamentals like execution and management accountability.
Now the dot-coms are gone, and Sun, as well as other former highfliers such as Cisco Systems and EMC, are reeling from
the worst downturn in the industry's history. In contrast, IBM is looking strong. Its customers have a renewed attraction to
its solid, high-tech basics: long-term service contracts, computer outsourcing deals, mainframe installations and sales of
foundation software such as databases. Dry, boring stuff, but it puts food on the table - last year's profits reached $8.1 billion
on revenues of $88.4 billion. As Gerstner told analysts last month, "The real e-business leaders know there's no magic dust.
Technology is hard work."
But now, with IBM at a peak, Gerstner is thinking about turning in his business cards. He recently confirmed months-long
speculation that he's transitioning toward retirement and publicly recognized his heir apparent, company COO and President
Sam Palmisano. While the change in leadership comes at a time when IBM has rediscovered prosperity, keeping it in this
shape will require constant tending. Services, along with sales of chips and server software, have driven growth. But IBM's
Unix servers, though much improved, haven't earned the cachet that competitor Sun enjoys. The market for IBM's
mainframe computers is anemic. And the company's PC business may be fighting a losing battle to maintain profitability.
These are significant issues, ones Palmisano will have to address when he replaces one of the industry's most commanding figures, a business leader whose much-chronicled
successes have earned the respect of managers around the world. Industry observers are settling in for the show: The next few years are likely to be pivotal in the history of IBM.
Already almost a century old, IBM is the company that helped pioneer the technology industry, first through business machines and then through computers. When Gerstner arrived
on April 1, 1993, however, "IBM was really floundering," says Jerome York, who was brought in a month later as chief financial officer. "There was this crying out: 'What is our
vision, what is our strategy?'" Profits of $6 billion in 1990 fell to losses of $8.1 billion by 1992, and competitors such as EMC and Hewlett-Packard were chipping away at IBM's
aging mainframe and storage lines. Gerstner had to stop the bleeding.
"I'm not a believer in Gerstner as miracle worker," says Paul Carroll, author of the 1993 book Big Blues: The Unmaking of IBM. But "he's one of these guys that gets stuff done."
Throughout the summer of 1993, that's exactly what Gerstner did, meeting with each operating unit and going detail by detail through each department's business plan. "He's a
tenacious person," recalls York. "It was clear in those meetings from the depth to which he probed."
The result was a plan to reduce $7 billion in expenses. Tens of thousands of IBMers left or lost their jobs, and Gerstner quickly built a reputation for tough-handed authority and
insistence on managerial performance. Those who know Gerstner describe him as brusque, arrogant and egotistical, yet thin-skinned - pretty much the perfect leader to firm up a
huge corporation that had gone soft in the middle.
With the new stability as a foundation, Gerstner began to build. His biggest decision was to kill a plan to break the company into pieces. IBM's critical asset, he argued, was its ability
to be an integrated supplier - a supermarket of high-tech goods. While the company's rebound was led by the revival of its mainframe line, Gerstner recognized early that selling
services would be key. Customers, he noticed, were starting to leave the selection of hardware to the judgment of their consultants.
Another move was to approve the hiring of a separate sales force to revive the lagging software division. Gerstner put more than $1 billion behind the marketing and development of
the high-potential DB2 database, Websphere application server and Tivoli systems-management software, products that have become leaders in their respective markets.
He also latched onto an e-business sales mantra well before industry visionaries such as Bill Gates, doing away with the old-school white-shirt, blue-suit dress code and helping
to reestablish the company's reputation as a leader in new technologies.
"He's been kind of a godfather to the growth business," says John Kelly III, senior VP. "Lou made some big bets. They clearly are paying off."
The result of gerstner's and his team's efforts is that, after years of trailing the high-tech pack, Big Blue is again a technology leader. Its products qualify as state-of-the-art - or at
least close to it. New mainframes came to market in the fourth quarter of 2000 and sparked the best quarterly performance by the mainframe division since 1998. Advanced copper
and silicon germanium chips are attracting eager customers in the computer and communications industries. Its middleware products - communications layers that sit between
operating systems and applications software such as accounting ledgers - are challenging the leadership of BEA Systems and Oracle.
IBM has also been helped in no small way by the corporate hangover from the recent business-to-business software binge. Companies are now seeking technology projects that
promise solid return on investment.
In a situation like this, the company considered the equivalent of the Rock of Gibraltar looks pretty good. For decades, the saying was that no one got fired for buying IBM. "I think
that still definitely rings true," says Randy Mowen, director of data management and e-business architecture at Bekins Van Lines. "I think they are much more focused on customer
retention and support."
Bekins is adding to a Web-based system that uses IBM software and mainframe hardware to track product shipments and van deliveries. A decade ago, mainframes cost tens of
millions of dollars and required dedicated rooms with water-cooled air conditioning. Today's zSeries 900 mainframes are air cooled and start at $750,000. They also run some of the
latest software, such as Linux. "Who would have thought you'd run an open-system operating system on big iron?" Mowen asks. "That's keeping up with the times."
Earlier this month, Pathmark Stores extended a 10-year outsourcing contract with Big Blue for another five years. "We were already married to these guys," says Frank Vitrano,
chief financial officer. "They do a good job of protecting your investment." Under the expanded deal, IBM will manage Pathmark's data center, software applications and PCs.
"From a supermarket [industry] perspective, they are a major player," Vitrano says.
First-quarter 2001 results reflect the improved focus and brisker pace. While Gerstner has yet to keep his vow of double-digit revenue growth, quarterly net income rose 15
percent to $1.75 billion, and revenue increased 9 percent - respectable despite easy financial comparisons from last year's Y2K-induced slowdown. In contrast, Cisco posted a
$2.69 billion loss, and Sun's revenue rose only 2 percent.
Gerstner's foresight about the company's potential in the services sector has certainly borne out. IBM's Global Services supplied a big piece of the quarterly growth. The $8.5 billion
business accounted for 40 percent of total sales and nearly half of profits.
Gerstner hasn't used the same deftness in planning his succession. He rather awkwardly named his favored heir, Palmisano, during a televised appearance on Lou Dobbs'
Moneyline instead of at a carefully scripted annual meeting or company forum. He then vaguely added that the transition will begin in "a very short period of time."
The deadline could be soon. Gerstner's contract runs out March 1, when he turns 60, an age when IBM CEOs often hire full-time caddies. Insiders say Gerstner will be gone in a
year, two at the most. But unlike General Electric, where chief Jack Welch spent years training a handful of competing managers, IBM has been slow to start its management
makeover. "You can't just trot someone out in a quarter," says Geoffrey Moore, author of the high-tech classic Crossing the Chasm. "It's critical that you orchestrate these major
transitions."
Gerstner argues that he spent the past 24 months putting together the company's future team of managers. But Palmisano, 49, remains largely unknown outside IBM. And until the
announcement 10 days ago, IBM appeared in no hurry to change this. Big customers and technology partners say he hasn't been by to meet them. And while Palmisano delivered a
keynote address this January at the LinuxWorld trade show in New York, he has since kept a low profile.
Inside the company, the story is different. Palmisano is already taking on a bigger role. "If you want to get something serious done, everyone points to Palmisano," especially when it
comes to strategic alliances and other key decisions, says Vivek Ranadive, CEO of IBM partner Tibco Software. "He's the chosen one."
Palmisano has led many of the company's key businesses. In 1996, he was appointed to revitalize the lagging PC business. Products had been slow to market, and sales were
lackluster. He reassigned executives, cut down on meetings and got results. By the end of the year, IBM's business had gained market share for the first time in the 1990s.
In 1998, the 6-foot-2-inch golden boy moved to IBM's services business, where he continued to build the organization and cemented his reputation as a "big producer." When
Apple Computer ousted CEO Gil Amelio, Palmisano made the short list of possible replacements. Compared with his CEO, Palmisano is warmer, friendlier, and he's more
connected to IBM's past (he was a close friend of former IBM CEO John Akers). "From the minute you meet him you say, 'This is a guy I'd like to have a beer with after work,'"
says former IBMer York.
It doesn't appear likely that Palmisano will be eaten alive, either. "If you're on Lou's team, you're a forceful personality," says Steve Mills, a 28-year IBM veteran and senior VP of
its software group. "The wallflowers don't do very well here."
He'll need the big stick. One of his challenges will be keeping IBM's collection of independent businesses in line; they're a cohesive unit today, but a power vacuum could lead to
rapid balkanization. "Lou casts a very big shadow," Ranadive says. "It will be very, very hard for some period of time to step in and do something different."
Some course corrections are going to be necessary, however. The zSeries launch sparked the best mainframe sales performance since 1998, but mainframe revenue still was down
12 percent in 2000 as the market slumped. Similarly, IBM's Unix servers have improved, but they have yet to occupy the hearts and minds of technology buyers the way Sun's do.
In fact, Sun VP Shahim Kahn claims his top-of-the-line Starfire computers have displaced 50 IBM mainframes over the past 12 months.
Competitors charge that the company's supermarket approach can be a drawback to many potential clients. IBM tries to be "all things to all people," says Sun VP George Paolini,
and this confuses customers and slows innovation. "I make a joke that they never met an operating system they didn't like, and they adopt them all," he says.
IBM's PC business is also struggling to maintain profitability after scaling back operations in 1999, and the company's new Shark storage gear has yet to measure up to offerings
from market leader EMC.
Critics have also attacked IBM's accounting. The company decreased contributions to its pension plan, in effect boosting earnings, raising concerns that the plan may someday be
underfunded. IBM has repeatedly defended its accounting methods.
The company's transformation hasn't come easily. It has, in fact, been hard work - the roll-up-your-sleeves, nose-to-the-grindstone, pencil-to-the-paper kind of work that a
turnaround specialist like Gerstner understands and preaches.
When Gerstner talks of the company's due reward for its efforts, he gets positively visionary. There's been a dramatic change in industry leadership, he says. The era of the PC -
and of Intel and Microsoft - is giving way to a networked world and a new high-tech leader. IBM, he says, is back on top.
Give the guy his due, but you don't have to look further than the history of Big Blue itself to know that success can be fleeting in high tech, where a company can quickly fall victim to
the merciless whims of the marketplace.
A smooth management succession is a must if IBM wants to retain its new title as the leading implementer of cutting-edge technology. Palmisano will have to consolidate his
position inside the company and spend more time on the road - after all, the one thing Fortune 1000 executives like more than saving money is pressing the flesh. And he'll have to
make the 1,001 judgment calls that make or break a company.
If he's Gerstner's kind of man, then Palmisano's a get-it-done guy. And if the boss has picked right, he's also a guy who understands that the hard work of technology never ends. |
