IBM Watchers Still Find Plenty to Criticize

Cover Story

Catherine Arnst, with John W. Verity, in New York, Kathy Rebello in Tucson, and bureau reports
Business Week

October 4, 1993

While Louis V. Gerstner Jr. says he's doing what's needed inside IBM to right the computer giant, the huge community of IBM watchers outside remains skeptical. For all his organizational change, analysts, consultants, customers, and competitors say they still can't figure out what course the new CEO is charting.

Just listen to Apple Computer Inc. Chairman John Sculley, the man who, for a while anyway, built Apple into both a technological and marketing powerhouse: "I think Gerstner's doing a terrific job on all the things people would expect him to be good at -- being a professional manager," says Sculley, who recently resigned as Apple's CEO -- after his devotion to new technology put Apple off course. But in the computer industry, he says, you have to do both: be a good manager and keep moving ahead in technology, too. "People in this industry can't wait until IBM gets its house in order. As a consequence IBM has become invisible."

"SYNERGIES"

To be fair, part of Gerstner's strategy is clear: He has repudiated the radical decentralization proposed by his predecessor, John F. Akers: He won't be spinning off any Baby Blues. He says he won't break up the huge IBM sales force by lines of business, either. These moves stem from his basic thesis: Customers want "solutions" to increasingly complex information-systems problems that only a company with IBM's product breadth and global reach can provide. Beyond that, he isn't pronouncing any sweeping vision.

Of course, Gerstner isn't expected to work miracles overnight. And everyone concedes that the former CEO of RJR Nabisco, who had never worked in the computer industry, has to climb a steep learning curve. "If I hadn't had a background in the business, it would have been much, much harder for me to make the right decisions," says Unisys Corp. turnaround CEO James A. Unruh, who was a seven-year veteran of the then-ailing mainframe maker when he took the helm three years ago.

But while Gerstner is learning the ropes, his competitors are working overtime to win IBM's customers. As Hewlett-Packard Co. CEO Lewis E. Platt puts it: "We get up every morning and think about killing them." The bloodlust appears to be paying off: This past summer, two large mail-order companies replaced their IBM mainframes with H-P minicomputers.

Other big buyers could be ripe for the picking as well. In a recent Forrester Research Inc. survey of 50 of the 1,000 largest U.S. companies, 42% said they plan to cut back on IBM purchases, 26% say they are watching the company closely and may reduce purchases later, and only 2% plan to increase their IBM spending. "I give him another two to six months to work out a strategy," remarks Jack M. Cooper, chief information officer of Seagram Co., a big IBM customer. "After that, I think it's absolutely critical that he have a vision."

There's that vision thing again. Although Gerstner says he is fed up with "vision" questions, customers and analysts want to know what technological focus IBM will have going forward. After all, customers don't want to spend millions on equipment that may not have the company's support in a few years.

The most likely move is to make the PowerPC, a new microprocessor family that it is developing with Motorola Inc. and Apple, the core technology -- for everything from handheld PCs to mainframes. But some IBM employees and analysts say that there is still no clear sign that the whole of IBM is behind this effort.

Customers aren't the only ones who are worried about IBM's direction. Investors are still waiting for proof of a turnaround: The shares haven't budged from the low 40s all summer. Not to mention anxious employees. "I think people were hoping for something really bold," says one division manager, who plans to leave IBM shortly. This manager is disturbed that the only outsiders Gerstner has hired on are business managers concerned with cost-cutting. "People are pretty disappointed that he's only fiddling with the bottom line. He has yet to bring in a strong technologist."

POCKETS OF POLITICS

Gerstner has decided not to replace former President Jack D. Kuehler, Akers' technology czar. For now, Gerstner relies on the assessments of longtime IBMers, such as M. Bernard Puckett, named chief strategist in July. But some critics think listening to the veterans could lead to a repetition of past mistakes. "There are a lot of the people who participated in IBM's ruination that are still at the top of the company," says Charles Ferguson, co-author of Computer Wars, a scathing book on IBM's fall from grace.

Gerstner, however, says he's got some ideas of his own. One of the most important is to make IBM the premier solutions company, addressing the specific needs of a bank or hospital, say, with special hardware, software, and services -- even if they aren't all IBM issue. It's not a new idea. In fact, it's a strategy that virtually every major computer company -- including IBM under Akers -- has attempted for most of the past decade, with mixed results, analysts point out.

And even if Gerstner's housecleaning can eliminate the internal problems that foiled Akers' efforts to focus the company on selling solutions, IBM still faces big hurdles. First, while customers may be eager to find somebody to put all the pieces together, they won't necessarily turn to IBM -- or any other single supplier. They have grown more sophisticated along with the technology, and they are not about to go back to the days of trusting everything to one manufacturer. Personal computers taught them the advantage of standardized "open systems" and a free-for-all among suppliers.

IBM still lags in open systems: "It's a definite negative," says Unruh. "It's really hurting them in the market." Even big IBM mainframe customers won't put all their eggs in IBM's basket. Ask George F. Sekely, president of CSX Corp.'s technology unit and an enthusiastic Gerstner fan. Sekely just purchased an Amdahl Corp. mainframe because, he explains, "I believe in competition."

Another problem is the fear that, despite IBM's assurances to the contrary, a company that's in business to sell computers can't really be impartial in selecting the best hardware for a customer "solution." IBM says it has installed non-IBM equipment when it's better for the job, but customers are still leery. Says Sekely: "I wouldn't trust them to do that."

Part of the solutions push will come through Integrated Systems & Services Corp. (ISSC), a unit established in 1991 to expand IBM's presence in systems integration and outsourcing -- which involves taking over a client's entire computing shop. ISSC brought in $ 1.8 billion in revenues last year, and analysts have been heralding the tightly focused unit as a good model of what IBM might become. But competitors say they are not alarmed. W. James Fischer, managing partner for technology services at $ 3 billion Andersen Consulting, says IBM has never been a big player in the systems-integration-consulting business, and nothing much has changed since Gerstner's arrival. "They're spending an awful lot of money to change their image. I see a lot of ISSC ads," says Fischer. "What I haven't seen is a lot of money spent to change how they do services."

Gerstner isn't likely to care what the competition is saying, however. He insists he wants to learn from the customer -- and that could be a problem. Industry insiders say that many of the customers who are getting his ear are IBM's largest accounts, and this could give a skewed perspective. "Sixty percent or more of IBM's business comes from shops that would not consider IBM their primary suppliers," says Peter Burris, International Data Corp. analyst. "He must get out and talk to a wider variety of customers."

Furthermore, some customers suspect Gerstner's major-account tour is rigged by IBM's sales execs to skirt those shops that aren't that happy with the company. The chief information officer at a major financial institution, one of IBM's biggest customers, says he has not been invited to meet with Gerstner. If he were, he would tell Gerstner of the need for "some serious new thinking" at IBM. "I'm really disappointed that he's taking this long to get a handle on the technology." "BE AHEAD." Besides, while customer focus is nice, it doesn't necessarily translate into technology leadership. "That has always been IBM's trap: 'Let's find out what the customer wants,'" says George F. Colony, president of Forrester Research. "You have to be ahead of the customer. The customer can't know what he wants. No customer asked Ken Olsen of DEC for a VAX. No customer asked Tom Watson a former IBM CEO for a 360," he says, referring to a top-selling minicomputer and a mainframe.

So it all circles back to a vision -- something that Olsen and Watson had plenty of. "Everyone who is doing well in this industry has some clear vision of what they are doing," points out Sculley. "The track records of many companies speak for a clear and compelling vision. George Bush didn't have a vision, either." Not a comforting thought for the legions of IBM watchers out there.