Out of One Big Blue, Many Little Blues

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Chairman John Akers thinks shock therapy will get IBM moving

John W. Verity in New York
Business Week

December 9, 1991

Over the past several years, IBM has announced a startling series of changes that were supposed to help the computer giant adapt to a radically shifting marketplace. The changes were earthshaking for a company that had known only monopoly profits, industry dominance, and incredible growth for at least three decades: shedding some 54,000 employees through a half-dozen early-retirement programs, reorganizing itself in the U. S., shutting factories and spinning out marginal businesses such as typewriters, and investing several hundred million dollars in dozens of competitors.

All those moves, jolting as they were, didn't come close to getting IBM back on track. It needed even more of a shakeup. And now, Chairman John F. Akers has unveiled a series of changes that are supposed to remake IBM. The centerpiece: a still vague but thorough reorganization that will grant managers new autonomy while stepping up the pressure on them.

SHOCK THERAPY

The strategy is a risky one, since many of IBM's competitors, particularly the Japanese, are massive monoliths. But by breaking the company into distinct business units, Akers is handing managers more responsibility for controlling costs and developing strategies for a market composed of an increasingly varied array of products and services. And if the managers can't generate enough profits, it will be easier for Akers to prune the division.

Akers launched his shock therapy on Nov. 25 by sidelining George Conrades, general manager of IBM's U. S. business, and replacing him with Robert J. LaBant, most recently head of IBM's minicomputer business. Conrades had been one of two likely successors to Akers. Now, the sole credible candidate is Conrades' ex-rival and new boss, Senior Vice-President C. Michael Armstrong.

The next day, Akers sketched out dramatic plans to reshape IBM into a set of wholly owned but more or less autonomous marketing, service, product development, and manufacturing companies. Each will report its own financial results, retain its own board of directors, and be managed with an eye for maximum return on assets. In addition, IBM said it will rid itself of 20,000 more workers in 1992. Even before the $ 3 billion charge IBM will have to take, analysts had expected 1991 earnings to be 58% below last year's $ 10.50 a share. But the payroll cuts and other changes should provide savings of about $ 1 billion in 1992 and about $ 2 billion a year from then on, says the company. That would boost gross margins, which have sagged to about 51.5% this year from 57% as recently as 1988. That's why IBM's stock rose 2 3/4, to 97 7/8, on the news.

The reorganization could amount to no less than a revolution in the way IBM does business. ''What we're seeing is the beginning of the dismantling of the IBM company,'' says Rick Martin, a former IBMer and computer analyst at Prudential Securities Inc. Details are still sketchy -- senior executives will learn more on Dec. 4 and 5, and Wall Street will get the skinny on Dec. 9 -- but it's already clear that unit managers will have far more latitude than before. In return, they'll have to be far more attentive to the bottom line.

The key is the shift in IBM's focus to return on assets. That's the measure that supermarket managers look at -- and like it or not, the computer industry has become the same kind of low-margin, commodity-oriented business.

Within that discipline, managers will have unprecedented freedom of action. Managers in the personal-computer division, for instance, will now be able to get into mail-order sales. IBM's marketing managers could bundle components from other manufacturers together with IBM gear and sell the packages to their increasingly demanding customers.

There's a downside to that flexibility. IBM's emphasis on return on assets, says Martin, signals that the company, after getting its new autonomous business units established, is likely to divest those that don't live up to its goals.

The business units that stand to gain the most are the ones that face the most competition -- PCs and workstations. IBM's personal computers have had to carry overhead from mainframes, even as they competed with PC clones from highly focused competitors such as Dell Computer Corp. and AST Research Inc. ''Clearly, they've got to get the overhead out of the low-margin product divisions,'' says James L. Cassell, a former IBMer who tracks the company at Gartner Group, a Stamford (Conn.) consulting company. By the same token, mainframes would have to carry more of their own overhead, which might end the vicious discounting IBM has employed against Amdahl Corp. and Hitachi Data Systems.

TRUE TEST

The moves are by no means a guarantee of success. ''This addresses the expense side of the equation, but the big unknown is revenue growth,'' says Stephen Cohen, an analyst at Soundview Financial Group Inc., a Gartner Group affiliate. IBM revenues this year will suffer their first decline in decades, to an estimated $ 65 billion, from $ 69 billion last year. Wonders Cohen: ''Will the restructuring result in IBM speeding up development cycles and bringing out more competitive products?''

That, in the end, is Akers' true test. It's his last-ditch effort to save the company from seemingly endless decline. With his retirement looming in 1994, he doesn't want to be remembered as the man who presided over IBM's decline into mediocrity.

GRAPHIC: Photograph, SHUFFLED, AKERS HAS SIDELINED CONRADES, ONCE A CANDIDATE FOR THE TOP SPOT PHOTOGRAPHS BY SHONNA VALESKA; LUC NOVOVITCH/GAMMA-LIAISON