IBM's Comeback Team

CEO Lou Gerstner appears to have accomplished the near-impossible: He's put together a management team that can overcome turf battles and work cohesively. Now can they push Big Blue back to the top of the industry?

By Barbara DePompa. Additional reporting by Bruce Caldwell and Brian Gillooly
InformationWeek

January 09, 1995

Lou Gerstner must have felt like a new general brought in to turn around the fortunes of a once-powerful and now-struggling army when he was named IBM chairman and CEO. And, while he hasn't won back a lot of territory after 22 months on the job, analysts, customers, and insiders agree that Gerstner has produced IBM's first winning strategy in years.

The computer maker is poised to report its first profitable year in the past three, has slashed operating expenses by almost $6 billion, and has won praise for many of its new products and strategies.

Not bad for a former food company executive who, when he took over IBM's reins in April 1993, was criticized for saying that the computer giant didn't need to have a high-tech vision. Instead of worrying about a vision, Gerstner focused on the company's three primary problems: IBM's bloated size and huge expenses had made it hard to show a profit despite $60 billion in revenue; loyal customers were abandoning IBM for other vendors that were more willing to enter into partnerships; and IBM's products lagged behind leading-edge technologies.

The Key To Comeback

The key to IBM's comeback, industry experts agree, is that Gerstner put together a management team that overcame internal disputes and turf battles to push Big Blue back into a leadership position. That team--Gerstner's so-called inner circle--is made up of both battle-hardened IBM veterans and tough-minded, consumer-oriented newcomers. Most are members of IBM's executive committee.

"Lou has created a judicious mix of the very substantial talent we have in this company with a selected outsider here or there," says Jerry York, senior VP and chief financial officer at IBM.

Of its 10 members, two on the management team are new to IBM. The most prominent is York, who was handpicked by Gerstner. The CEO gave the former Chrysler Corp. exec the toughest assignment in the company: Cut the fat. So far, York has trimmed $5.6 billion from IBM's expenses. IBM's goal is to hit $8 billion in cuts in 1996.

York, just named to IBM's board, is feared by many. "He's an insensitive head-chopper," says Lee Conrad, an IBM employee and president of IBM Workers United, a grassroots labor organization in Endicott, N.Y.

But York receives accolades from Wall Street. "York has done a great job. He absolutely deserves to get an A [grade]," says David Wu, an analyst with S.G. Warburg &Co., a brokerage in New York.

Another newcomer is Richard Thoman, senior VP for the IBM PC Co. and the Power Personal Systems division, who followed Gerstner to several companies, including McKinsey, RJR Nabisco, and American Express. Thoman is given credit for IBM's decision to halt sales of PCs with Intel Corp.'s Pentium processor after a flaw was found in the chip's floating-point operations. "He took an uncharacteristic risk, poking a stick in Intel's eye. But it was probably a good one," says Robert Steinerd, a VP at research firm Dataquest Inc. in Framingham, Mass.

While Thoman lacks a technology background, he does have a solid understanding of the consumer market--a view that has been sorely missing in the high-tech industry. Running IBM's desktop operations has put a spotlight on Thoman. In 1995, he faces the challenge of convincing customers of Intel-based systems to switch to systems built with the RISC (reduced-instruction set computing)-based PowerPC chip that IBM jointly developed with Apple and Motorola.

Veteran Players

The core of Gerstner's management team is made up of IBM veterans. Several have become rising stars under Gerstner. The CEO, for example, wants IBM to be a leader in interactive communications and online services in 1995. To accomplish that, Gerstner has turned to Dennie Welsh, general manager of Industry and Global Network Solutions and chairman of Integrated Systems Solutions Corp. (ISSC), an IBM outsourcing and systems integration subsidiary. Welsh is not a member of IBM's executive committee, but he is regarded by many as the most influential manager inside IBM. "His team holds the center of gravity for IBM," says Dataquest's Steinerd.

Welsh started as an engineer on NASA's Apollo space program in 1966. He is credited with building IBM's services organization into a subsidiary with $28 billion under contract in 1994. He was named chairman and CEO of ISSC in 1992. In the fall of 1993, Welsh was asked to integrate all of the North American services organizations and IBM's networking company, Advantis, into ISSC. In May 1994, he was given responsibility for all vertical industries via Industry Solutions, a new marketing organization set up to focus on finance, health care, telecommunications, insurance, and other sectors.

If there were any doubts about Welsh's status, they were quieted in November when he was tapped to head a Gerstner pet project: Global Networks and Network Application Services. The unit will build IBM's worldwide, online, Internet, and interactive services businesses. "IBM's destiny now rests with Dennie," says Sam Albert, a consultant in Scarsdale, N.Y.

Other veterans have won praise for moving IBM closer to the customer, one of Gerstner's top priorities. Robert LaBant, senior VP for marketing and services for the U.S. and Canada, is one of the architects of IBM's decision to shift its marketing and sales organization from largely geographic sales regions to vertical industry-oriented sales organizations.

Customers See Difference

Customers are noticing the difference at IBM. Rick Kish, VP of information technology for retailer Waldenbooks in Stamford, Conn., received bids from five manufacturers for a companywide point-of-sales system. But IBM bent over backwards to win the contract. "In the past, IBM would pitch what it had and then explain why it thought it could meet my needs," Kish says. "Now our rep asks what we need, and tells me, 'IBM will make it happen.' "

But customers and analysts also agree that IBM is using technology to its advantage. By consolidating manufacturing operations and partnerships with companies such as Unisys, Apple, and Motorola, IBM is bringing technologies to market faster-as evidenced by the PowerPC and CMOS (complementary metal oxide semiconductor)-based mainframes.

IBM veteran Jim McGroddy, IBM's senior VP of research, is considered the catalyst behind that push. "McGroddy is making sure IBM's divisions have closer contact with the research teams to take advantage of the resources," says IBM's Ben Barnes, VP of marketing for IBM's Power Parallel Systems in Somers, N.Y.

IBM still faces difficult challenges. Its PC Co. fell to fourth place in sales in 1994, and IBM's relationship with Apple regarding the PowerPC has been strained because the two companies have not been able to agree on the future direction of operating system licensing. Analysts say the key to a successful IBM desktop strategy is for Big Blue to develop a strong relationship with Apple that will result in a computer that runs both Mac and OS/2 applications seamlessly. "They will both go down together unless they can learn to work together," says Bob Djurdjevic, president of Annex Research Inc. in Phoenix.

If they don't succeed, IBM will lose out to its one-time partner Microsoft Corp. and its Windows software in the battle for the desktop. Some outsiders blame Jim Cannavino, IBM's senior VP of strategy and development, for much of IBM's poor relationship with Microsoft. But IBM executives led by Cannavino are still eager to battle Microsoft in the software arena, even though about 40 million copies of Windows were shipped in 1994 compared to 3 million copies of OS/2.

Some analysts believe IBM already has lost the battle. "IBM should forget about OS/2 and help standardize Unix," says Steve Milunovich, an analyst with brokerage Morgan Stanley Group Inc. in New York.

Round-the-clock

But others, including Lee Reiswig, head of OS/2 software development at IBM, disagree. The computer maker is working round-the-clock and shipping 100,000 copies of OS/2 per week. "IBM has to show momentum since the ship date for Windows 95 keeps slipping," says one IBM insider who requested anonymity.

The challenges in other parts of IBM are just as tough. For example, while mainframes are enjoying a resurgence in sales, many question how long it will last. Some predict a downturn by early 1996, as microprocessor-based servers become commodities. That will put a lot of pressure on John Thompson, head of IBM's primary hardware products (not including the PS/2). Patrick Toole could feel the heat as well. Toole, senior VP and group executive for storage systems, microelectronics, operations, and environmental affairs, must help IBM find a way to address open systems-based disk arrays.

Ellen Hancock, considered an influential IBM veteran with about $9 billion of IBM's revenue under her direction, has the challenge of shaping IBM's networking and software strategy in 1995. Another longtime IBM executive, Ned Lautenbach, a senior VP, is charged with making sure IBM's overseas operations fall in line with Gerstner's goals.

Still, most of this lies in the future. Today, IBM's earnings and sales are up across most product lines. After nine months IBM's earnings were $1.7 billion, compared with a loss of $464 million a year ago. The best estimates for fiscal 1994 put revenue at about $63.2 billion, up from $62.7 in fiscal 1993. Earnings are estimated to reach $4.50 per s hare, up from a loss of $14 per share in fiscal 1993.

The Tricky Part

IBM's turnaround has made speculation about its future and top executives a popular topic again. Gerstner's challenge now is "to keep fast-track people on board and on track," says Howard Anderson, head of the Yankee Group Inc., a consultancy in Boston. Many IBM executives say Bob Timpson is another rising star. Formerly general manager of finance and banking, Timpson is now IBM's general manager in China, which is considered a desirable position. Insiders say he may be next in line to head IBM's Asia-Pacific operations. "He's getting his ticket stamped in foreign markets," Steinerd says.

Also among IBM's top players is Bob Howe, who made the unusual move from general manager of the company's consulting group--equal in status to Welsh--to working for Welsh as general manager of finance. Howe sees this turnabout as a golden opportunity. "I wanted to run a business, and financial services is 10 times bigger than consulting," he says. As GM of finance, Howe oversees an estimated $3.8 billion in annual revenue.

And at this level, it's easy to make mistakes. Anderson cites Mike Maples, the director of software strategy for IBM before he joined Microsoft in 1988 to become executive VP-worldwide products group. "Mike Maples wasn't considered a superstar at IBM. Now he's worth $20 million in Microsoft stock," says Anderson.

Gerstner and his executive management team may be able to make their own millions if they can keep the company on track. Gerstner should have enough time. He is only 53, and IBM chairmen traditionally serve until they reach age 60.