Changing Face of IBM

To advance his goals for IBM, CEO Lou Gerstner reshuffles and redirects top management

By Barbara DePompa. With additional reporting by Bruce Caldwell and Jill Gambon.
InformationWeek

January 23, 1995

IBM Chairman and CEO Lou Gerstner, in a Jan. 9 internal memo to employees, detailed a top-level executive reshuffling that signals a significant change in the computer maker's business structure. He is consolidating IBM's worldwide sales force and software operations. More changes are expected as Gerstner moves from a strategy of downsizing and consolidating to one of implementation and growth.

Gerstner named Ned Lautenbach, 51, senior VP of overseas marketing operations, to head IBM's new worldwide sales force. John M. Thompson, 53, a senior VP responsible for mainframe and midrange operations, will head the new software organization. And Nicholas Donofrio, 50, currently general manager of large-scale computing, will run the restructured high-end hardware organization.

As expected, Gerstner's memo confirmed the departure of two longtime IBM leaders. Ellen Hancock resigned as senior VP for software and networking systems, and Robert LaBant resigned as senior VP of IBM's U.S. sales force.

Some corporate users close to IBM were caught flat-footed by the shakeup, especially by the loss of the two veterans. "I was shocked. I just had lunch with them both in December and there was no inkling then that this type of move was in the works," says Max Hopper, recently retired senior VP of AMR Corp., the parent of American Airlines, and a member of IBM's elite customer advisory council.

The moves are the result of Gerstner's desire to better exploit IBM's advantages: its worldwide organization and its hard-won expertise in software and systems. The message to his executive team is clear: It's time to de liver.

Position Open

There are more changes to come, say insiders. One piece still missing from the new top management structure: a replacement for LaBant as IBM's U.S. sales head, reporting to Lautenbach. While candidates from within IBM have been mentioned, "the decision is Lautenbach's and may not come for a few weeks," says a spokesman.

Perhaps more important are the decisions to be made concerning the software organization. James Cannavino, senior VP and director of strategy who currently reports directly to Gerstner, is the subject of contradictory rumors. "Jim has been lobbying for the top software position since the middle of last year," says Mark Stahlman, president of New Media Associates, a consultancy in New York. Thompson's appointment to that position puts Cannavino's long-term status in doubt says Stahlman.

Cannavino, described by associates as a streetwise fighter, has been blamed for IBM's on-again, off-again relationship with Apple Computer Inc. and IBM's falling out with Microsoft Corp. Ironically, Gerstner's restructuring mirrors Cannavino's long-held desire, sources say, to build IBM into two separate businesses: hardware and software.

One top-level software executive in the hot seat is Lee Reiswig, IBM's head of OS/2 development. With market momentum behind OS/2 and Microsoft's release of Windows 95 delayed, analysts maintain that IBM has its first opportunity in years to make a dent in Microsoft's market share. "But first, IBM must win customers' share of mind to win share of market," says Howard Anderson, president of the Yankee Group Inc., a Boston consultancy.

Few realize IBM is the largest software company in the world. While most of it is on the mainframe side, IBM's $11 billion in software revenue is more than twice Microsoft's $4 billion revenue. But IBM has failed to promote a cohesive software strategy, especially on the desktop, or develop applications that fire customers' interests. In fact, the opposite may be true. "I was up until 12:30 a. m. trying to get my kid's programs to run under OS/2," complains James Bradley, chief information officer (CIO) for United HealthCare Corp., a health maintenance organization in Minneapolis. "A typical consumer won't put up with that."

Indeed, Gerstner grew impatient with IBM's negative image in the software market, says Bob Djurdjevic, president of Annex Research in Phoenix. In Gerstner's Jan. 9 memo, he underscored IBM's problem with software. "We haven't always been able to leverage our vast resources to give customers what they are asking for-systems that work together seamlessly and are scalable in a distributed environment."

Thompson, who has been credited with several high-profile successes, first with IBM's popular AS/400 minicomputer and then with the turnaround in the mainframe organization, may be able to make the necessary improvements in IBM's software organization.

Doubt Remains

But some customers are skeptical. "I'm not sure anyone inside IBM can fix its software problems," says one IBM customer from a major New York bank who requested anonymity. "It needs to focus on the PC, local area network, and client-server environment. Frankly, I'm surprised Gerstner didn't go outside IBM for an entrepreneur to run that part of the business."

Some IBMers insist Gerstner did the right thing. "The recent promotions send the message that if you do well, you can expect to be rewarded," says one IBM insider. "The people promoted have done exceedingly well at difficult tasks.''

Lautenbach, for example, was tapped for IBM's global sales post based on his extensive overseas experience, including a stint as head of IBM's now-defunct world trade organization, which included all countries outside North America.

In contrast, LaBant, while credited with improving IBM's midrange computer fortunes in the mid-1980s and being the architect of IBM's latest marketing shift from geographic to an industry focus, didn't have the worldwide sales experience. "The decision was a no-brainer because of Lautenbach's international experience," says one insider.

The new worldwide organization creates a single global sales organization at IBM for the first time in more than 40 years. The concept was applauded by IBM's global customers. "If I want to buy a mainframe for an office in Brussels, and I'm in Cincinnati, I want to deal with one account team. Now IBM has changed its account teams to do just that," says Frank Caccamo, CIO and a VP at Procter &Gamble Co.

Observers believe Hancock and LaBant, widely respected in the industry, will find new jobs soon. In a bulletin board note sent to former employees and colleagues, Hancock says she will miss her friends at IBM: "But since it is now clear to me that I will not run an IBM business, I look forward to new opportunities that will exploit my management experience and knowledge of networking and software." Neither Hancock nor LaBant was available for comment.

Investors responded favorably to Gerstner's management moves. IBM's stock pushed up close to $76 per share the day after the restructuring was announced, a 52-week high, according to analysts.

Customers, IBM executives, and analysts alike agree IBM's chairman did the right thing by targeting two key company challenges, software and global marketing. Now it remains to be seen just how-and by whom-that strategy will be implemented.