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Louis V. Gerstner, Jr. 1942 - 1993-2001 -

 
 IBM CEOs: Leadership ⇔ Challenges ⇔ Transformations in the IT Century

Louis V. Gerstner, Jr. 1942 - 1993-2001 -  
(Highlights – Milestones – Excerpts)

On January 26, 1993, IBM announced that John Akers had decided to retire and that a search committee had been formed to consider outside and internal candidates. The committee was headed by Jim Burke.

The computer wars of the 1990s will have three main classes of contenders. (“Computer Wars” by Ferguson & Morris published in 1993.)
1st group:   the big American and to a much lesser extent, European companies that dominated the first decades of mainframe computing.
2nd group:  integrated Japanese electronics companies - like Fujitsu, Hitachi, Toshiba, and NEC
3rd group:  we call it the 3rd Force. Smaller companies, virtually all of them American, many of them clustered in California’s Silicon Valley.
Microsoft, Intel, Apple, Novell, Sun Microsystems, Adobe, Motorola, HP

Gerstner’s introduction: “I’m the new guy around here. Don’t ask me what the problems are or what the answers are. I don’t know yet.” But Gerstner also said he was a quick study, and he assured those in the audience that he had the courage to take the tough steps.  (“Big Blues” by Paul Caroll published in 1993). 

In “Who Says Elephants Can’t Dance?” by Louis V. Gerstner Jr. published in 2002, (in my mind one of the best business books ever; visitors of the website should read the whole book because the excerpts cannot be a substitute for the whole fascinating story) he describes and explains IBM’s historic turnaround. Highlights and Milestones excerpted from V. Gerstner’s outstanding book are marked as LVG, those excerpted from IBM’s Annual Reports are marked as AR, IOP stands for IBM’s Icons of Progress. .     

So, here I am, ready to tell you the story of the revival of IBM. Of course, this book would never have appeared without the heroes among my IBM colleagues who helped me restore IBM to a position of leadership. In many respects this is their book as much as it is mine. (LVG).

There were many such leaders, but clearly among the most important were: Dennie Welsh and Sam Palmisano who built our services company; John M. Thompson who created the Software Group; Abbey Kohnstamm, who took a cacophony of confused messages and melded them into one of the most powerful brand statements in the world; Nick Donofrio, who was my translator from the world of high tech to the world of management; Jerry York, Rick Thomann, and John Joyce, three great financial executives,  Larry Ricciardi, my colleague of many years, who brought his intellect and counsel to many of our critical decisions; and finally, Tom Bouchard, who as head of Human Resources stood tall and took the heat as we transformed the IBM culture. … There are many more. In fact, there are thousands of IBMers who answered the call, put their shoulders to the wheel, and performed magnificently as we undertook an exhausting - at times frightening, but always exhilarating - journey to restore this extraordinary company. To all of them, I dedicate this book. … I wrote this book without the aid of a coauthor or a ghostwriter (which is why it’s a good bet to be my last book; I had no idea it would be so hard to do).I did have a great deal of help from some longtime IBM colleagues. I want to thank them. (LVG/AR).

“Meeting the IBM Team”: I spoke for 40-45 minutes. I went to summarize my management philosophy and practice, five 90-Days priorities and an assignment for the next 30-Days. I asked if there were any questions. There were none. I walked around and shook everyone’s hand and the meeting ended. (LVG). Everybody interested in IBM, its unique turnaround and return to leadership should read this book carefully and the first meeting of the team attentively. “Whether it was the thoroughness of the press coverage, my experience as a customer, or my own leadership principles, what needed to be done - and what we did - was nearly all there in that 45 minute meeting 4 days before I started my IBM career.” (LVG).

Official election by the IBM Board of Directors: March 30, 1993.  

John Akers and I then met to talk about the company. We talked mostly about people. He had two favorites. He was surprisingly candid about and critical of many of his direct reports. In reviewing my notes from the meeting, I guess I subsequently agreed with 75% of his appraisals. What struck me was why he could be so critical but still keep some of these executives in place. One turned out to be one of my own. The other I let go before a year had passed. I went home with a deepening sense of fear. Could I pull this off? Who was going to help me? (LVG)  

Drinking from a fire hose – on April 1, 1993 I began my IBM career. (LVG).

I will never forget my first impression of an IBM meeting. …During the coffee break I asked Ned Lautenbach, “Who are all these people who are clearly watching but not participating?” He said, “Those are the executives’ AAs.” …AAs had primarily administrative duties and even, at times, secretarial chores. What they didn’t do was interact with customers, learn the guts of the business, or develop leadership competencies. … then ended the day with the head of IBM’s HR department, the legendary Walter Burdick. Burdick hat announced his decision to retire before the completion of the CEO search. Burdick was a powerful force behind the throne, one of IBM’s highest-paid executives for many years and a major player in creating and enforcing the dominant elements of IBM’s culture. His primary interests were structure and process. In fact, after his departure, someone gave me one of the most remarkable documents I have ever seen. Roughly 60 pages, it is entitled “On Being the Administrative Assistant to W. E. Burdick, Vice President, Personnel, Plans, and Programs.” It was written on March 17, 1975, and illustrated some of the suffocating extremes one could find all too easily in the IBM culture. … Burdick and I spent nearly all of our time that day discussing two critical searches under way before I joined IBM: his replacement and CFO. …Nothing was more important for me on that first day than filling these jobs. Trying to do it without a good CFO and HR director is impossible. (LVG). 

I also discovered the power of IBM’s internal messaging system, and so I began to send employees “Dear Colleague” letters. They were a very important part of my management system at IBM. I sent the first one six days after I’d arrived. (LVG)

Next two weeks. … I had asked my brother Dick to come by and talk to me about the company. Dick had been a fast rising star at IBM for many years. At one point he had headed up the powerful A/P region. … He was tragically cut down by undetected Lyme disease at the height of his career. He had gone on medical leave about 6 months before John Akers had left. … In fact his was the most insightful review anyone had given me during those early days. In particular, he argued against the premise that the mainframe was dead and against a seemingly hysterical preoccupation in the company to allocate all its resources to winning the PC war.  … As I think back on the 3 or 4 things that really made a difference in the turnaround of IBM, one of them was repositioning the mainframe. And nobody pointed it out sooner or more clearly than my brother Dick. (LVG)

On April 13 I interviewed Jerry York, then CFO at Chrysler. …It was clear to me that he was tough -very tough- and just what I needed to get at the cost side of IBM. I decided Jerry was the right person. He joined us on May 10. LVG.

The person I relied on most during those early days was Paul Rizzo. When I arrived Paul was responsible for the program of federalism - breaking up the company into individual, autonomous units. … For me, asking Paul to stay on was an easy decision, and I’m grateful he did. Over the next year he was a tower of strength, a wise mentor, and an insightful partner in evaluating strategy and people - another important hero of the IBM turnaround. LVG.

Out to the Field: IBM EMEA was a giant organization operating in 44 countries with >90.000 employees. Revenue had peaked at 27B$ in 1990 and had declined since. GP margin on HW had dropped from 56% in 1990 to 38% in 1992. When EMEA executives summarized their action program for the company, number one was: “Use country as prime point of optimization.” I returned home with a healthy appreciation of what I had been warned to expect: powerful geographic fiefdoms with duplicate infrastructure in each country. Of the 90.000 EMEA employees 23.000 were in support functions. I also came away with an understanding that these were enormously talented people, a team as deeply committed and competent as I had ever seen in any organization. LVG.

As our strategy people worked on fleshing-out short and long-term plans, I turned my attention to three areas that, if not fundamentally changed, would disable any hope of a strategy built around integration: organization, brand image, and compensation. Remaking the Organization: IBM is arguably the most complex organization anywhere in the world outside government. The company evolved over the years in 2 directions: powerful geographical units that dealt with IBM’s global reach, and powerful product divisions that dealt with the underlying technological forces. Missing from this was a customer view. IBM seemed to be incapable of taking a global customer view or a technology view driven by customer requirements. In Europe alone we had 142 different financial systems. Customer data could not be tracked across the company. Breaking up the Fiefdoms: I declared war on the geographic fiefdoms. I decided we would organize the company around global industry teams. With this model in mind, I asked Ned Lautenbach to build a customer-oriented organization. It was a painful and sometimes tumultuous process. By mid-1995 we were ready to implement it. We broke our customer base into 12 groups: 11 industries and a final category covering SMBs. The response from the country managers:  “It will never work. You will destroy the company.” LVG.

As Paul Rizzo had said in our secret meeting in Washington, D.C. IBM’s sustainability at least in the short term depended heavily on the mainframe. More than 90% of the company’s profits came from these large “servers” and the software that ran on them. The fate of the mainframe was the fate of IBM, and, at the time, both were sinking like stones. LVG.

I reaffirmed an important decision that had been made a number of months before I’d arrived. A bold move to a totally different technical architecture for the System /390: to move from what was known as a bipolar to CMOS technology. It would permit substantial price reductions in the S/390 without commensurate loss in gross profit, thus improving dramatically the competitiveness of the S/390 versus alternative products. If the project failed, the 390 was dead. But it didn’t fail. The technical wizards from labs in Europe and the United States who pulled it off deserve a place among the heroes of the new IBM. LVG.

Operation Bear Hug: In late April we had a meeting of the Corporate Management Board (CMB). This was the group of 50 top executives with whom I had met in March, the day I was announced as the new CEO. I shared with them my observations after 3 weeks on the job. I announced Operation Bear Hug. Each of the 50 members of the senior management team was to visit a minimum of 5 of our biggest customers during the next 3 months. The executives were to listen, to show the customer that we cared, and to implement holding actions as appropriate. Each of their direct reports (a total more than 200 executives) was to do the same. For each Bear Hug visit, I asked that a one-to-two page report be sent to me and anyone else who could solve that customer’s problems. Bear Hug became a first step in IBM’s cultural change. LVG.

The First Strategy Conference: On Sunday, May 16, I convened a two-day internal meeting on corporate strategy at a conference center in Chantilly, Virginia. There were 26 senior IBM executives present. I was totally exhausted at the end. It was truly like drinking from a fire hose. I was truly confused, and that may have been the real low point of my first year at IBM.I walked out of that room with an awful feeling in the pit of my stomach that Murphy and Burke had been wrong - IBM needed a technological wizard to figure out all this stuff! I didn’t have much time to feel sorry for myself because that evening we began what may have been the most important meeting of my entire IBM career: The Customer Meeting at Chantilly: Nearly 175 CIOs of the largest US companies were coming to hear what was new at IBM. They represented many of the most important customers IBM had - and they could make or break us. On Tuesday night, I met with several CIOs at dinner, and they shared the same perspective I had heard in Europe. They were angry at IBM - perturbed that we had let the myth that “the mainframe was dead” grow and prosper. The PC bigots convinced the media that the world’s great IT infrastructure - the back offices that ran banks, airlines, utilities, and the like - could somehow be moved to desktop computers. These CIOs knew this line of thinking wasn’t true, and they were angry at IBM for not defending their position. They were upset about some other things, too, like the mainframe pricing for both HW and SW. They were irritated by the bureaucracy at IBM and by how difficult it was to get integration - of a solution or across geographies. Early the next morning, I threw out my prepared speech and decided to speak extemporaneously. I stood before my most important customers and started talking from the heart. I said I agreed with the CIOs that we had failed in our responsibility to define its role in a PC world, that our prices were high, and that there was no question that we were bureaucratic. I shared with them some of my bad experiences with IBM as communicated to me by my CIOs when I was at American Express and RJR Nabisco.   I laid out my expectations: … Finally I made the big mainframe pricing announcement. The price of a unit of mainframe processing moved from 63.000$ that month to less than 2.500$ seven years later, an incredible 96% decline. Mainframe software/price performance improved, on average 20% p.a. for the next 6 years.  This program, probably more than any other, saved IBM. IBM mainframe capacity shipped to customers had declined 15% in 1993. 1994 it had grown 41%, 1995 60% followed by 1996 47% in 1997 29% 1998 63% 1999 6% 2000 25% and 2001 34%.  LVG.

The Financials: Sinking Fast.  At the end of May I saw April’s results, and they were sobering. Profit had declined another 400M$ for a total decline of 800M$ for the first 4 months. The only part of the company that was growing was services, but it was a relatively small segment and not very profitable. … There was not one budget but two or three because each element of the IBM organization matrix insisted on its own budget. LVG.

Stop the Bleeding (and Hold the Vision): By July 1993 the pressure to act was acute. I was ready to make four critical decisions: Keep the company together; Change our fundamental economic model; Reengineer how we did business; Sell underproductive assets in order to raise cash; and, I decided I would not disclose any of the other strategic initiatives that were forming in my head during the summer of 1993. LVG.

So keeping IBM together 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. I didn’t know then exactly how we were going to deliver on the potential of that unified enterprise, but I knew that if IBM could serve as the foremost integrator of technologies, we’d be delivering extraordinary value. Changing Our Economic Model: Expenses were a major problem. Unfortunately this necessitated, among other things, reducing our employment by 35.000 people, in addition to the 45.000 people whom John Akers had already laid off in 1992. That meant additional pain for everyone, but this was a matter of survival, not choice.

In July we announced that we would cut our annual dividend to shareholders from 2.16$ to 1$. LVG.

Hold the Vision: I’ve had a lot of experience turning around troubled companies, and one of the first things I learned was that whatever hard or painful things you have to do, do them quickly and make sure everyone knows what you are doing and why. I believe in getting the problem behind me quickly and moving on. We made the announcement the morning of July 27. This was basically my coming-out event - my first public discussion of what I had learned and planned to do at IBM. I worked hard on what I would say, but given IBM’s longtime image of starchy formality, I decided to speak without notes or even a podium. No props. Nothing to lean on. Just me and what I had to say.
I said something at the press conference that turned out to be the most quotable statement I ever made. “What I’d like to do now is put these announcements in some sort of perspective for you. There’s been a lot of speculation as to when I’m going to deliver a vision of IBM, and what I’d like to say to all of you is that the last thing IBM needs right now is a vision.” You could almost hear the reporters blink. I went on:
“What IBM needs right now is a series of very tough-minded, market-driven, highly effective strategies for each of its businesses - strategies that deliver performance in the marketplace and shareholder value. And that’s what we are working on.” “Now the number-one priority is to restore the company to profitability. I mean, if you’re going to have a vision for a company, the first frame of that vision better be that you’re making money and that the company has got its economics correct.” “And so we are committed to make this company profitable, and that’s what today’s actions are about.” “The second priority for the company is to win the battle in the customers’ premises. And we’re going to do a lot of things in that regard, and again, they’re not visions - they’re people making things happen to serve customers.” “Third in the marketplace, we are moving to be much more aggressive in the client/server arena. Now, we do more client/server solutions than anybody else in the world, but we have been sort of typecast as the ‘mainframe company.’ Well, we are going to do even more in client/server.” “Fourth, we are going to continue to be, in fact, the only full-service provider in the industry, what our customers are telling us 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 key strategic decisions that were already made before that eventful day were extraordinary significant in the turnaround of IBM. Keep the company together and not spin off the pieces; reinvest in 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. (LVG.)

When I arrived at IBM, I wasn’t taking too much for granted, but I did expect I’d find the best internal IT systems in the world. This might have been my greatest shock. We were spending 4B$ a year on this line item alone, yet we didn’t have the basic information we needed to run our business. The systems were antiquated and couldn’t communicate with one another. We had hundreds of data centers and networks scattered around the world; many of them were largely dormant or being used inefficiently. We saved 2B$ in IT expenses by the end of 1995. We went from 155 data centers to 16, and consolidated 31 internal communications networks into a single one. LVG.

On Corporate Culture: 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. … A sense of integrity, of responsibility, flows through the veins of IBM in a way I’ve never seen in any other company. … Watson’s sensible connection to the customer was forgotten, and the dress code marched on. … Consider “superior customer service”: it became largely administrative. Consider “excellence in everything we do”: It resulted in a stultifying culture and a spider’s web of checks, approvals, and validation that slowed down decision making to a crawl. Perhaps most powerful of all the Beliefs - and most corrupted - was “respect for the individual.” To an outsider “respect for individual” had devolved to mean a couple of things Watson certainly did not have in mind. For one, it helped spawn a culture of entitlement, where “the individual” didn’t have to do anything to earn respect - he or she expected rich benefits and lifetime employment simply by virtue of having been hired. Or that’s the way it appeared to me at first. Later I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes. And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them. “Respect for the individual” also came to mean that an IBMer could do pretty much anything he or she wanted to do, within the broad HR and legal rulebooks with little or no accountability. If you were a poor performer, and we terminated you, we weren’t respecting your individuality because we hadn’t trained you for whatever it was you were expected to do. If your boss told you to do something you didn’t agree, you could ignore the order. These were very serious problems.  … Tough as that was, we had to suck it up and take on the task of changing the culture, given what was at stake. I knew it would take at least 5 years (In that I underestimated). And I knew the leader of the revolution had to be me - I had to commit to thousands of hours of personal activity to pull off the change. I would have to be up-front and outspoken about what I was doing. I needed to get my leadership team to join me. We all had to talk openly and directly about culture, behavior and beliefs - we could not be subtle. … LVG.  

We needed something more, something prescriptive. In September 1993 I wrote out 8 principles that I thought ought to be the underpinnings of IBM’s new culture and sent them to all IBM employees worldwide in a special mailing. 1. The market is the driving force behind everything we do. 2. At our core, we are a technology company with an overriding commitment to quality. 3. Our primary measure of success are customer satisfaction and shareholder value. 4. We operate as an entrepreneurial organization with a minimum of bureaucracy and a never-ending focus on productivity. 5. We never lose sight of our strategic vision. 6. We think and act with a sense of urgency. 7. Outstanding, dedicated people make it all happen, particularly when they work together as a team. 8. We are sensitive to the needs of all employees and to the communities in which we operate. … The 8 principles were an important first step - not only in defining the priorities of the New IBM, but in attacking the whole idea of management by process. That first step would be of little value if we couldn’t find a way to instill these principles into the DNA of IBM’s people. LVG.

The largest sale we made in the first year was IBM’s Federal Systems Company which did major projects primarily for the US government.

Only a handful of people understand how precariously close IBM came to running out of cash in 1993. Whether we would have had to file for bankruptcy, I can’t say. (LVG).

Pay for Performance: We made 4 major changes to our compensation system: This was all about pay for performance, not loyalty or tenure. We made 3 big changes to the IBM Stock Options Program. LVG.

IBM introduced the 1993: Scalable POWERparallel System, the first in a family of microprocessor-based supercomputers using RISC System/6000 technology. IBM pioneers the breakthrough scalable parallel system technology of joining smaller, mass-produced computer processors rather than relying on one larger, custom-designed processor.

The company announces in November that the IBM ThinkPad 750 will fly aboard the Space Shuttle Endeavor during the mission to refurbish the Hubble Space Telescope.

The first year ended on a very sad note: the death of Tom Watson, Jr., in December 1993. I had seen Tom only one more time after he had ridden to work with me that morning in April 1993. He expressed his delight that I had decided to keep the company (he again called it “my company”) together. LVG..

IBM Annual Report for 1993 signed by LVG: Revenue/Net loss in B$. Number of employees 1992 versus 1993 64,523/62,716; -6,865/-7,987. 301,542/256.207. “I also want to recognize those who left IBM over the past few years. It’s too easy to talk only of numbers and headcount and restructuring charges. We lost a pioneer of the first order when Tom Watson, Jr., died in December. … Three decades ago, he said: ‘We should never tolerate meaningless tasks, or taboos, or an inefficient method simply because it’s always been done that way. The IBM way, as far as I’m concerned, is whatever way is most efficient, no matter how it was done in the past.’”     

In the spring of 1994 I convened my first senior management meeting at a hotel in Westchester County, New York. We had some 420 people there from around the world, representing every part of the company. I had one goal more important than anything else: to motivate this group to focus its talents end efforts outside the company, not on one another. The centerpiece of my remarks began with 2 charts: one for customer satisfaction: we were 11th in the industry!  One for market share: showing a loss of more than half our share since 1985 in an industry that was expanding rapidly. …
We’ve got to generate some collective anger here about what our competitors say about us … It’s got to be in our guts, not our heads. They are coming into our house and taking our children’s and our grandchildren’s college money. “One hundred and twenty-five thousand IBMers are gone. They lost their jobs. Who did it to them? … These guys came in and beat us. …This is going to be a performance-based culture. …. I’m looking for people who make things happen, not who watch and debate things happening…. Required Behavioral Change … [read page 206.] IBM Leadership Competencies [read page 210.]” … Since people don’t do what you expect but what you inspect, I needed to create a way to measure results … Win; Execute; Team.  … Every year as part of our annual planning, all IBMers made these three “Personal Business Commitments.” (PBCs). LVG.  

Making the Big Bets: Remember that the 1994 time frame I’m describing falls just prior to the Internet revolution. … Our bet was this: Over the next decade, customers would increasingly value companies that could provide solutions - solutions that integrated technology from various suppliers and, more important, integrated technology into the processes of an enterprise.  The second force we bet on was the emergence of a networked model of computing that would replace the PC-dominated world of 1994. A Services-Led Model: I believed that the industry’s disaggregation into thousands of niche players would make IT Services a huge growth segment of the industry overall. All of the industry growth analyses and projections supported this. For IBM, this clearly suggested that we should grow our services business, … A Networked Model: The second big bet we placed was that stand-alone computing would give way to networks. Implications of a Post-PC World: further implications of a networked world: the PC would be pushed off center stage; the PC would be one - but only one - of many network access devices; … The difficult task of managing all of that free-flowing digital information certainly was not going to be done on desktop-computers. Those workloads would have to be handled by large-scale systems - meaning huge demand for computing infrastructure products, in addition to networking gear. Finally, this new landscape would change who made technology buying decisions. The big bet we made was on another kind of services - services that would address customer needs that frankly didn’t exist during the 1960s, 1970s, and 1980s, prior to the Big Bang of rampant industry disaggregation. LVG.

Enter Dennie Welsh. As with all things in life, luck plays a big part. I got lucky twice at IBM.  LVG.

“Dennie Welsh WAS the REAL HEIR APPARENT to Lou Gerstner to become chairman of IBM. Unfortunately he became incapacitated due to illness and was forced to retire. Lou thought very highly of him and thought he was actually a very good businessman and an extraordinarily highly ethical man.” Wall Street Journal”

The first time was a meeting in 1993 with Dennie, a long-term IBMer, who was running the services organization. The second time was the arrival of the Internet and the big bet we made on the networked world. Coincidentally, Dennie had a strong hand in that. When I arrived at IBM, Dennie was running a wholly owned IBM subsidiary named the Integrated Systems Services Corporation. ISSC was our services and network operations unit in the US - a promising but minor part of IBM’s portfolio. In fact, it wasn’t even a stand-alone business in IBM. It was a sub-unit of the sales force. LVG.

The first campaign debuted in 1994 under the theme “Solutions for a Small Planet” The campaign reaffirmed important messages: IBM was global, and we were staying together as a world-class integrator. The campaign humanized our brand. “Solutions for a Small Planet” was followed by a campaign that coined the term “e-business” and helped establish IBM as the leader of the most important trend in the industry at that time. Abby Kohnstamm had made something great and impactful happen. Abby was another hero of the turnaround. LVG.

By 1994, IBM had 5-6% of the PC operating systems business. Microsoft Windows 3.0 had won the hearts and minds of PC users and controlled the market. 

The highest levels of IBM executives were almost obsessed with the effort to unwind the decisions of the 1980s and take back control of the OS from Microsoft (and to a lesser extent gain control of the microprocessor from Intel).  The pro-OS/2 argument was based on technical superiority. … What my colleagues seemed unwilling or unable to accept was that the war was already over and was a resounding defeat - 90% market share for Windows to OS/2’s 5-6%. The last gasp was the introduction of a product called OS/2 Warp in 1994, but in my mind the exit strategy was a foregone conclusion. All that remained was to figure out how to withdraw. LVG.

Toward the end of 1994 I decided to pull together all of IBM’s software assets under a single executive and ask him to build a distinct, stand-alone software business. John Thompson had attracted my attention very early as one of the most thoughtful and capable managers at IBM. I asked him to take up the task of creating a new business from scratch. Over the next 2 years John and his colleagues recruited and trained 5.000 software specialists; they became the backbone of a new sales function in IBM that eventually reached 10.000 by the year 2000. John reduced the 30 labs to 8 and consolidated 60 brands to 6. Thus we launched a massive, multi-year effort to rewrite all of our critical software, not only to be network-enabled but to run on Sun, HP, Microsoft, and other platforms. LVG.

The people running our competition were, without doubt, the next generation of hyper-capitalists: Bill Gates, Steve Jobs, Larry Ellison, and Scott McNealy. The guys were hungry. It was awe-inspiring the way they ran their companies, the people they attracted, how they paid them, their work ethic - young, aggressive, flexible, willing to work around the clock. LVG.

In 1993 the IBM PC Company lost a billion dollars, in 1994 it was profitable, but not by much, maybe 50 M$. (“ThinkPad – A Different shade of  Blue” by Deborah Dell and Gerry Purdy published in 2000).

The Cornell Theory Center receives the world's fastest, most powerful general purpose computer: a massively parallel IBM Scalable POWERparallel Systems SP2, capable of performing 136 billion calculations per second. CERN, the European Laboratory for Particle Physics, takes delivery of the most powerful IBM supercomputer ever ordered in Europe: a 64-node, AIX-based IBM Scalable POWERparallel Systems SP2.

IBM Annual Report for 1994 signed by LVG: “We earned $3 billion – our first profitable year since 1990 and, compared with 1993, a profit swing of $11 billion. Last year we also achieved our first revenue growth since 1990. Total revenue was $64.1 billion, up 6 percent after the sale of the Federal Systems Co. We reduced annual expenses by $3.5 billion, or 15 percent. … We finished 1994 with more than $10 billion in cash. Our cashflow was exceptionally strong. … I think it’s fair to say, however, that the question about IBM is no longer one of survival.”  

New York Times, January 9, 1995: I.B.M. to Announce Changes In Executive Ranks … aimed at creating greater awareness of its software business and reconfirming its strategy to be a global competitor, industry executives said yesterday. Ellen Hancock resigned. LaBant expected to resign soon.  

In March 1995, Cannavino decided to take an early retirement.

John [Thompson] came to me with a bold idea to accomplish two objectives: fill a hole in our middleware portfolio, plant a flag firmly in the world of collaborative, rather than stand-alone computing. His idea: to acquire Lotus Development Corporation. I called Manzi on Monday, June 5, 1995 to inform him that we were initiating a hostile takeover. In a law office on Friday night, we shook hands over the final price: 3,2 B$. By Sunday the boards on both sides had approved the deal. In one week we had wrapped up the biggest software deal in history. This was also the first hostile takeover enacted by IBM. There were approx. 2 million Notes “seats” installed in customer locations when the deal closed, in July 1995. That grew to 90 million at the end of 2001. Perhaps most important, the hostile acquisition sent a clear signal inside and outside IBM that we were out of survival-mode status and serious about reclaiming a position of influence in the industry. LVG.

Around Labor Day 1995, Jerome York informs Gerstner about his departure. Gerstner wanted to keep him. LVG.

In October 1995, BusinessWeek published a cover story headlined “Gerstner’s Growth Plan: Yes, the CEO does have a vision. It’s called network-centric computing.”

IBM unveils 12 new models of the System/390 Parallel Enterprise Server, which all use complementary metal oxide silicon (CMOS) based processors. IBM ships more mainframe computing power in 1995 than in any year before.

In a landmark speech at COMDEX '95 in Las Vegas, IBM Chairman Louis V. Gerstner, Jr., outlines IBM's vision of network-centric computing before an audience of 7,000 people: "The implications of network - centric computing go on and on. It will transform every business, organization and institution in the world. It will create winners and losers. It will change the way we do business, the way we teach our children, communicate and interact as individuals."

The day after Gerstner’s keynote, Microsoft’s Bill Gates gave a keynote presentation extolling the merits of essentially a desktop-centric future. Gates was wrong and almost missed the internet-revolution.

We saved 2B$ in IT expenses by the end of 1995. We went from 155 data centers to 16, and consolidated 31 internal communications networks into a single one. LVG.

IBM Annual Report for 1995 signed by LVG: Revenue 1993/1994/1995 in B$: 62.7/64.1/71.9. Net Earnings 1993/1994/1995 in B$:
-8.1/3.0/4.2. Total Expenses as a Percentage of Revenue 1993/1994/1995: 38.3/32.0/28.2.

The DB2 Universal Database, the industry's first fully scalable, Web-ready database management system, is announced. It is called "universal" because it can sort and query alphanumeric data as well as text documents, images, audio, video and other complex objects In 1996, some 70 percent of the world's business information is managed by IBM databases.

About 9 months after the Lotus acquisition, and again at the urging of John Thompson, we made another big software acquisition - Tivoli Systems - that leapfrogged us into the market for distributed systems management products (more gorpy, but very critical middleware). Tivoli was a 50M$ company when we bought it. Its revenues, augmented by some business we transferred from IBM, are now in excess of 1B$. LVG.

IBM introduces its third generation of microprocessor-based mainframes, the S/390 Parallel Enterprise Server. With twice the performance of IBM's previous high-end S/390 CMOS servers, it can be linked to other S/390 systems to deliver more than 10,000 MIPS. Shipments of mainframe power grow 50 percent during the year.

In April 1996, in one of Stephenson’s most forward-looking decisions, he appointed Sam Palmisano, a forty-four year old executive, to run the PC company. 

July 2, 1996, IBM announced that it had reached an agreement with the Department of Justice that would phase out all remaining restrictions placed on IBM from the 1956 Consent Decree within five years. Most of the provisions were terminated on that day, including computer services.  

At the 1996 Centennial Olympic Games in Atlanta, Georgia, IBM demonstrates the largest integrated information technology system ever seen by a mass audience.

Our executives  first unveiled “e-business” during a Wall Street briefing in November 1996. Many months later our advertising agency, Ogilvy & Mather developed a memorable TV advertising campaign featuring black-and-white office dramas. The commercials were an immediate hit.

IBM Annual Report for 1996 signed by LVG: Revenue 1994/1995/1996 in B$: 64.1/71.9/75.9. Net Earnings 1994/1995/1996 in B$: 3.0/4.2/5.4. Our industry is about to crack the trillion-dollar mark. We see the industry growing by about $400 billion – to $1.2 trillion in the next four years. About half of that growth - $200 billion – will be driven by network computing.  

May 11, 1997: IBM supercomputer Deep Blue was a chess-playing computer developed by IBM. On May 11, 1997, the machine won a six-game match by two wins to one with three draws against world champion Garry Kasparov.

I asked Dennie Welsh, who ran just a US services unit, to create a unified organization - still under the wing of the sales force - and introduce 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 sill 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. LVG.

By 1997 we’d declared the IBM turnaround complete. (LVG).

IBM Annual Report for 1997 signed by LVG: Revenue 1996/1997 in B$: 75.9/78.5. Net Earnings 1996/1997 in B$: 5.4/6.0. As you may know, I’ve committed to remain IBM’s chairman and CEO for at least another five years. I’ve done so for two reasons. First, the job I came here to do isn’t complete. Second, I could not, frankly, think of anything else that would be nearly as much fun. LVG.

In 1998 the frenzy eventually produced a bid of 5B$ from AT&T; that was an extraordinary price for a business that produced a relatively tiny percentage of IBM’s profits. For IBM it was a strategic coup. We got out of a business whose value was going to deteriorate very quickly. We avoided the huge capital investment to maintain the network. And we exited from another part of the stack that was not strategically vital. LVG.

The head of IBM Software group Steve Mills called his three top men into his office to discuss how they should “Webify” the company’s top enterprise software tools. The conversation led to the advent of the IBM WebSphere Application Server, released in early 1998. The rise of the WebSphere brand—beginning with the WebSphere Application Server in 1998—parallels the evolution of the web itself from static pages, sites and content to today’s landscape of dynamic services, programs and real-time processing of all kinds of data and media. Application servers, with WebSphere Application Server as a leading example, are how the web has been transformed into a platform for actual computing. (IBM Icons of Progress).

IBM Annual Report for 1998 signed by LVG: Revenue 1997/1998 in B$: 78.5/81.7. Net Income 1997/1998 in B$: 6.0/6.3. We expect the overall information technology industry to grow at an annual rate of 10 percent, to $1.6 trillion by 2002. The Internet isn’t just creating new businesses. It is creating new business models. IBM Global Services has grown in just eight years from a $4 billion to a $24 billion business. IBM PC business debuted in 1981. Indeed, IBM’s own PC business was an important turnaround story in 1998. But the PC’s reign as the driver of customer buying decisions and the primary platform for application development is over. In all those respects, it has been supplanted by the network. The explosion of “Information appliances” will bring computing to millions of new users – perhaps a billion people – faster and more affordably than the PC could ever have taken us. We are only at the beginning. … We call this pervasive computing. … the flip side … heavyweight computing systems …Deep Computing … The year 2000 problem is important, and it’s being addressed. But a lot of work remains to be done – fast.      

The Watershed Event – Gerstner’s New Game Plan: in 1999, after achieving financial stability and with a U.S. pension plan that was overfunded by $7 billion, IBM’s senior vice president of human resources sent an e-mail to all U.S. employees advising them that effective July 1 IBM was converting its U.S. defined-benefit pension plan to a cash-balance plan. (“A view from beneath the dancing elephant – rediscovering IBM’s corporate constitution” by Peter E. Greulich published in 2014, p. 67ff).

IBM was one of the first companies to form Y2K compliance teams within its services unit. It already has spent $575 million fixing its own Y2K problems. (“IBM Redux – Lou Gerstner & The Business Turnaround of the Decade” by Doug Garr published in 1999)

From 1994 to 1999, the total savings from these reengineering projects was 9,5B$. Since the reengineering work began, we’ve achieved more than 14B$ in overall savings. Hardware development was reduced from 4 years to an average of 16 months - and for some products it’s far faster. We improved on-time product delivery rates from 30% in 1995 to 95% in 2001. LVG.

In 1999 we exited application development but saved the very few pieces of software that IBM had successfully developed/marketed in the past. LVG.

The Microdrive: IBM introduced the microdrive in 1999, the smallest hard drive to date, with a capacity of 170 MB on a single, 1-inch platter. Hitachi, which later bought IBM’s hard drive business, expanded the microdrive to 8 GB by 2006.

The company rolls out the S/390 G6 Server as the world's most powerful commercial enterprise server. The S/390 G6 family's largest system can deliver more than 1,600 MIPS capacity.

IBM is the #1 worldwide server vendor with 23% market share (measured by revenue), according to International Data Corporation (IDC).

IBM's AS/400 is the world's most popular multi-user, commercial business computer with more than 700,000 systems installed in over 150 countries.

IBM's S/390 G5 Server: new record for Internet performance, posting a rating of 21,591 hits per second – 50% increase over the previous record.

His travel schedule would put CEOs with less mettle in a constant state of exhaustion, not to mention jet lag. Jerry York, a man who is known for taking on heavy workloads, is struck by Gerstner’s energy and his thirst and capacity for work. Gerstner’s passion for hard work and his willingness to lead are coupled with his aggressive, forceful, very direct style. (“IBM REDUX: Lou Gerstner & the business turnaround of the decade” by Doug Garr, published in 1999, p. 338.)     

Lou Gerstner has what every great communicator needs and wants, a powerful presence. When he walks into a room, everyone knows he is in their midst. When he talks, people listen. As a public speaker, he is able to distill large amounts of information easily and pass on that information to an audience in simple phrases and ideas. He has been called “a tightly coiled package of high-voltage brainpower.” Lou Gerstner’s tough, suffer-no-fools personality keeps everyone alert. People who have gotten to know Lou Gerstner say he is uptight, intense, abrupt, impatient, ambitious, and driven. A demanding boss, he expects results yesterday. He is above all orderly and a stickler for detail. He plans his highly regimented schedule down to the minute. Unlike some other business leaders, Gerstner can live without being in the company of celebrities. At work, he is no nine-to-fiver, unlike John Akers, who prided himself on knocking off promptly at quitting time. “Lou Gerstner is a voracious reader,” says Jim Cannavino, the former IBM senior vice president for strategy. “He takes suitcases of stuff home with him. On Monday it’s all underlined in red. It’s amazing. Nothing is off his radar screen.” Gerstner expects everyone at IBM to work as hard as he does, if not harder. He is a firm believer in the words on a sign on his desk: “A desk is a dangerous place from which to view the world.” In November 1996, for example, he raced around Europe, hitting four countries in seven days. He had already logged 542 flights in the corporate jet and over 400,000 air miles. But it’s not only the hard work that appeals to him. He loves the thrill of the game. Lou Gerstner doesn’t let people get into his head. He remains private, enigmatic. He can be short-tempered and overbearing. But whether people like him or not seems unimportant to him. He understands the need to set goals and never to waver in pursuing them. He doesn’t mind being described as tough. He knows he’s tough, and he doesn’t care if everyone else knows it too. He had to deal energetically with recalcitrant personnel as well. One such person was Hans-Olaf Henkel, the 54-year old Paris-based chairman and president of IBM Europe. “Are you done?” asked the interviewer. Gerstner: No, we’re never done. That’s my point. … And when you think you’re done, you’re in trouble. (“Saving Big Blue – Leadership Lessons & Turnaround Tactics of IBM’s Lou Gerstner” by Robert Slater published in 1999.)      

IBM Annual Report for 1999 signed by LVG: Revenue 1998/1999 in B$: 81.7/87.5. Net Income 1998/1999 in B$: 6.3/7.7. We faced some big unknowns – economic crises in Asia and Latin America, the Euro conversion and, of course, Y2K. Underlying it all, making the uncertainties even more uncertain, was the tectonic plate shift of e-business. One conservative estimate is that the e-business opportunity will approach $600 billion by 2003. Will the overall information technology (I/T) industry grows at around 11 percent, the e-business portion is growing much faster – around 22 percent. Number of acquisitions 95-99: 72.   

IBM introduces the IBM eServer, a new generation of servers featuring mainframe-class reliability and scalability, broad support of open standards for the development of new applications, and capacity on demand for managing the unprecedented needs of e-business. The new servers feature technology from IBM's high-end servers applied across the entire product line.

Linux; The Era of Open Innovation IBM’s decision to support Linux brought the power of open source innovation to IBM servers, systems and solutions. In 2000, IBM announced it would invest $1 billion in Linux. (IBM Icons of Progress).

Within six years, IBM became the world leader in providing services and products for customers to transform their businesses into “e-businesses.”

By the year 2000, IBM’s business had grown from US$64 billion (in 1994) to more than US$88 billion, and net income had nearly tripled. Said Gerstner, “We found our voice, our confidence, and our ability once again to drive the industry agenda. (IBM Icons of Progress).

IBM Annual Report for 2000 signed by LVG: Revenue 1999/2000 in B$: 87.5/88.4. Net Income 1999/2000 after adjustment in B$: 7.7/8.1. Six-Year Performance Revenue 1994/2000 in B$: 64,1/88.4. Net Income 1994/2000 in B$: 3.0/8.1. Total expense as a percentage of revenue (after adjustment): 44.5/23.6. Sam Palmisano was named president, chief operating officer and a director of IBM in September. John Thompson, elected vice chairman.  

Within 24 hours after the attacks on the World Trade Center towers in New York on September 11, 2001, IBM chairman and CEO Lou Gerstner and IBM president and COO Sam Palmisano pledged US$5 million in technology, services and cash in support of relief and recovery efforts, and mobilized IBM to help. IOP.

In October, IBM announces the eServer p690 ("Regatta") as the world's most powerful UNIX server, crowning a five-year effort to deliver a new class of UNIX system that incorporates microprocessor breakthroughs and mainframe technologies. When tackling the most complex problems, multiple p690 servers can be linked together to create supercomputers powered by more than 1,000 processors.

Power 4. The First Multi-Core, 1GHz Processor. In 2001, IBM retooled the IBM RS/6000 and IBM AS/400 (IBM eServer pSeries and iSeries) systems by updating their core processors. The new processor was called POWER4, and it was the first multi-core, 1GHz processor in history.

1992: services was a 7.4 B$ business (excluding maintenance). 2001: it had risen to a 30 B$ business and accounted for roughly half or our workforce. I would guess there are few companies that have ever grown a multibillion-dollar business at this pace. Before I stepped away in March 2002, we were number 1 in the world in IT Services, hardware, enterprise software (excluding PCs) and custom-designed, high-performance computer chips. The IBM workforce increased in size by about 100.000 people. LVG.

Since the financial restructuring of IBM began in 1993, services generated roughly 80% of all the company’s revenue growth - more than 20B$ of the 25B$ total through 2001.

IBM Annual Report for 2001 signed by LVG: Revenue 2000/2001 in B$: 88.4/85.9. Net income 2000/2001 in B$: 8.1/7.7. This is my last annual letter to you. By the time you read this, Sam Palmisano will be our new Chief Executive Officer, the eighth in IBM’s history. The new industry model: Innovate or Integrate. To survive, you will have to do one or the other really well. To lead, you have to do both. The new business model: service-led. The new computing model: infrastructure plus ubiquity. The new marketplace model: an open playing field. This is a very different place from the one, I joined nine years ago. Farewell statements: with e-business, we caught the wave early. We bet the company on the networked world, and that will serve IBM well for years. But I am sure that Sam will face, during his long and illustrious career, another major shift. When it comes, I hope he throws out everything Gerstner ever did. Adjusting to the market’s evolution is why IBM is succeeding – just as an inability to do so was once IBM’s fundamental failure. I am confident that, with Sam Palmisano’s leadership, the best is yet to come. Thanks to the IBM customers who rooted for us to come back from the brink. Thanks to our shareholders,…  to a smart, committed board of directors, … to the many IBM executives …
And thanks – 320.000 thanks – to all my colleagues in this magnificent company. … I am proud to have served and worked with all of you. I’m grateful for all that you’ve taught me, and for sharing with me the business opportunity of a lifetime. And now – go get’em.
Louis V. Gerstner Jr. Sixteen decisions that transformed IBM: keeping IBM together; revitalizing IBM R&D; transforming our critical processes and becoming e-business; what the Lotus acquisition taught us; we fought for an open world - the end of proprietary computing at IBM; we decided our products would set the standard not on planet IBM, but on planet earth; we grew a business from the ground up – the birth of IBM Global Services; we put down roots in Asia capturing new markets; we brought the marketplace into our labs bringing customer focus to our technical community; we shared the crown jewels building the OEM business; we didn’t give up on the mainframe – a return to enterprise computing; we majored on middleware building our software business; we found our voice reinvigorating the IBM brand and evangelizing e-business; we loosened our tie changing corporate culture; we remembered our middle name building a reputation in innovation; we never abandoned our values – our responsibility to the communities in which we work and live. Seven shifts that that will transform the future (yours, and ours). Dear fellow investor letter signed by Sam Palmisano: I can’t close my first letter to IBM’s shareholder without a word about the person I succeed in this job, and the legacy that he leaves to all of his colleagues and to anyone with a stake in the success of this company. So I’ll just say this: When all’s said and done, Lou Gerstner is the man who recreated IBM. … About the only person who didn’t have doubts (about almost anything, it seemed!) was Lou. From his first day, he said IBM was going to get back on top. … Lou did one more thing. He made all of us in IBM winners again. … The work has already started. In fact, it never stops.                          

LVG continued: As I write this [published 2002], IBM’s SoftwareGroup is one of the most powerful software companies in the world and is positioned as the leading software company in networked computing. With revenues of 13B$ (second only to Microsoft) and pre-tax profits of about 3 B$ (growing at a double-digit rate) we are number one or two in every segment of the market in which we participate. The IBM software story is a wonderful microcosm of the overall turnaround that took place at the company over the past decade. The catalyst to drive this transformation was an external event - the arrival of the Internet.

Our stock split twice and increased in value by 800%.

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. The company was brimming with talented people who had unique experience.

Lessons learned and observations: … Focus - You Have to Know (and Love) Your Business: … Steely-Eyed Strategies … Good Strategy: Long on Detail: … Execution - Strategy Goes Only So Far: Execution - getting the task done, making it happen - is the most unappreciated skill of an effective business leader. I will let you in on a dirty little secret of consulting: It is extremely difficult to develop a unique strategy for a company; and if the strategy is truly different from what others in the industry are doing, it is probably highly risky. The reason for this is that industries are defined and bounded by economic models, explicit customer expectations, and competitive structures that are known to all and impossible to change in a short period of time. Thus it is very hard to develop a unique strategy and even harder should you develop one to keep it proprietary. … More often than not, every competitor basically fights with the same weapons. In most industries 5 or 6 success factors that drive performance can be identified. It is difficult if not impossible, to redefine what it takes to be successful in that industry.… So, execution is really the critical part of a successful strategy. Getting it done, getting it done right, getting it done better than the next person is
far more important than dreaming up new visions of the future. All of the great companies in the world out-execute their competitors day in and day out in the marketplace, in their manufacturing plants, in their logistics, in their inventory turns - in just about everything they do. Rarely do great companies have a proprietary position that insulates them from the constant hand-to-hand combat of competition…. Strategic clarity:
Remember: “If you don’t know where you are going, any road will get you there.” Companies that out-execute their competitors have communicated crystal-clear messages to all their employees: “This is our mission.” “This is our strategy.” “This is how you carry out your job.”… Manuals play a role in early training activities, but they have limited value in the heat of the battle. Superb execution is more about values and commitments. Too many companies send conflicting signals to their employees. …

Leadership Is Personal: Leadership in my opinion is the most important element of institutional transformation. Great institutions are not managed; they are led.… Passion. As a student going through Harvard Business School, I would never have guessed that passion would be the single most important element of personal leadership. I don’t recall the word ever been spoken during my classroom time at Harvard.  Who wants to work for a manager who is a pessimist? Who always sees the glass as half empty? Who is always pointing out the weaknesses in your company or institution? Who criticizes and finds fault much quicker than finding excitement or promise? We all love to work for winners and be part of winning. When IBM’s Board of Directors considered who would succeed me, passion was high on their list of necessary attributes. Sam Palmisano, my successor, is an extraordinary executive - a man of many talents. However, he would never have had my recommendation, despite these many talents, if he didn’t have a deep passion for IBM, for what it stands for, for what it can be, for what it can do. He has an emotional, 24-hour-a-day attachment to winning and to achieving ever increasing levels of success.  Integrity: All of the great leaders I have known may be tough (in fact, all of them were tough-minded, which is very different from some people’s description of “tough”).However, all of them were, at the same time, fair.

Revenue 1993/2001 B$: 62.7/85.9. Net Income 1993/2001 B$: -8.1/7.7. EPS 1993/2001 $: -3,55/4,35. Employees 1993/2001 in 1000: 256.2/319.9. Stock Price 1993/2001 $: 14.12/120.96: Rev. B$ 1992/2001: HW w/o Technology 33.8/25.7; Services 15.0/35.0; SW 11.1/12.9; Technology 0.0/8.0.

Portfolio.com assembled a portfolio of professors of Business Schools April 30, 2009 Portfolio's Best American CEOs of All Time: 1. Henry Ford, 2. J. P. Morgan, 3. Sam Walton, 4. Alfred P. Sloan, 5. Lou Gerstner, 6. John D. Rockefeller, 7. Steve Jobs, 8. Jeff Bezos, 9. Andrew Carnegie, 10. Bill Gates, 11. Michael Bloomberg, 12. Ray Kroc, 13. Andy Grove, 14. Walt Disney, 15. Reuben Mark, 16. Warren Buffett, 17. Katharina Graham, 18. Lee Iacocca, 19. Herb Kelleher, 20. Oprah Winfrey