Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change Read online

  Who Says Elephants

  Can’t Dance?

  Leading a Great

  Enterprise Through

  Dramatic Change

  Louis V.

  Gerstner, Jr.

  This book is dedicated to the thousands of IBMers who never gave up on their company, their colleagues, and themselves. They are the real heroes of the reinvention of IBM.

  Contents

  Foreword

  vii

  Introduction

  1

  PART I-GRABBING HOLD

  7

  1 The Courtship

  9

  2 The Announcement

  18

  3 Drinking from a Fire Hose

  29

  4 Out to the Field

  41

  5 Operation Bear Hug

  49

  6 Stop the Bleeding (and Hold the Vision)

  56

  7 Creating the Leadership Team

  73

  8 Creating a Global Enterprise

  83

  9 Reviving the Brand

  88

  10 Resetting the Corporate Compensation Philosophy

  93

  11 Back on the Beach

  103

  PART II-STRATEGY

  111

  12 A Brief History of IBM

  113

  13 Making the Big Bets

  121

  14 Services—the Key to Integration

  128

  15 Building the World’s Already Biggest Software Business

  136

  16 Opening the Company Store

  146

  17 Unstacking the Stack and Focusing the Portfolio

  153

  18 The Emergence of e-business

  165

  19 Reflections on Strategy

  176

  PART III-CULTURE

  179

  20 On Corporate Culture

  181

  21 An Inside-Out World

  189

  22 Leading by Principles

  200

  PART IV-LESSONS LEARNED

  217

  23 Focus—You Have to Know (and Love) Your Business

  219

  24 Execution—Strategy Goes Only So Far

  229

  25 Leadership Is Personal

  235

  26 Elephants Can Dance

  242

  27 IBM—a Farewell

  253

  APPENDICES

  259

  Appendix A—The Future of e-business

  261

  Appendix B—Financial Overview

  277

  Index

  287

  ABOUT THE AUTHOR

  CREDITS

  COVER

  COPYRIGHT

  ABOUT THE PUBLISHER

  Foreword

  I have never said to myself, “Gee, I think I want to write a book.” I am not a book writer. Until now I haven’t had the time or the inclination to lean back and reflect on my thirty-five years in business. I haven’t had the patience it takes to sit down for a long time and create a book. Throughout my business life I have been wary of telling others how to manage their enterprises based on my personal experiences.

  And, frankly, I wasn’t sure if anyone would be interested in reading my thoughts. I read a lot of books, but not many about business. After a twelve-hour day at the office, who would want to go home and read about someone else’s career at the office?

  I have always believed you cannot run a successful enterprise from behind a desk. That’s why, during my nine years as Chief Executive Officer of International Business Machines Corporation, I have flown more than I million miles and met with untold thousands of IBM customers, business partners, and employees. Over the past two years, after people began speculating that my retirement might be just around the corner, I thought I’d get a lot of big-picture questions that outgoing CEOs get about the economy, the world, and the future. Instead, I have been surprised by how many times—at big meetings and small ones, and even at private sessions with CEOs and heads of state—I was asked: “How did you save IBM?” “What was it like when you got there?” “What were the problems?” “What specific things did

  viii / LOUIS V. GERSTNER, JR.

  you do to bring the company back to life?” “What did you learn from the experience?”

  They wanted to know, many of them said, because their own companies, organizations, or governments faced some of the same issues IBM had encountered during its very, very public near collapse in the early 1990s. Businesspeople outside the United States, confron-ted with the need to transform tradition-bound enterprises into tough and nimble players in a world economy, seemed particularly interested in the subject.

  More recently, after I had announced my intention to retire, I was amused to read an editorial in an American newspaper, USA Today, that said, in effect, it hoped Gerstner was going to do something more useful than write a book and play golf. Nice thought, but since the announcement, I got thousands of letters and e-mails, and the most frequent sentiment was, again, that I should tell what I had learned from my tenure at IBM. (I was also invited to appear in a TV

  commercial with golf pros Jack Nicklaus and Gary Player.) You might say that I concluded, a little reluctantly, that the easiest way for me to fulfill all this “popular demand” was to write a book and to hold off on serious golf for the time being.

  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. There were many such leaders, but clearly among the most important were Dennie Welsh and Sam Palmisano, who built our services company; John Thompson, who created our Software Group; Abby 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 Thoman, and John Joyce, three great financial executives who instilled a level of productivity, discipline, and probing analysis into a company that

  WHO SAYS ELEPHANTS CAN’T DANCE? / ix appeared to value these quite lightly when I arrived; 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 this is going to be my last book; I had no idea it would be so hard to do). I am responsible for any mistakes or confusion the reader may endure. The views expressed are mine and are not necessarily those of the IBM Corporation or any other IBMer.

  I did have a great deal of help from some longtime IBM colleagues.

  They include Jon Iwata, Mark Harris, and Mike Wing, who made substantial contributions. Michele Andrle managed production of every draft and redraft deftly and patiently—an unbelievable amount of stitching and restitching. I want to thank them and everyone else who helped me.

  Introduction


  T his is not my autobiography. I can’t think of anyone other than my children who might want to read that book (and I’m not 100 percent sure they would, either). However, in the spirit of trying to provide some contextual background for my views, what follows is a brief historical perspective.

  I was born on March 1, 1942, in Mineola, New York—the county seat of Nassau County, Long Island.

  My father started work as a milk-truck driver and ultimately became a dispatcher at the F&M Schaeffer Brewing Company. My mother was a secretary, sold real estate, and eventually became an administrator at a community college. Along with three brothers—one older, two younger—I lived in the same house in Mineola until I left for college, in 1959.

  We were a warm, tightly knit, Catholic, middle-class family.

  Whatever I have done well in life has been a result of my parents’

  influence. My father was a very private man with a great love of learning and inner strength that needed no approbation or reinforcement from broader audiences. My mother was enormously disciplined, hard-working, and ambitious for all her children. She drove us toward excellence, accomplishment, and success.

  Education was a high priority in the Gerstner household. My parents remortgaged their house every four years to pay for schooling. I attended public grade school, then Chaminade, a Catholic high school in Mineola. I graduated in 1959 and was almost on my way to

  2 / LOUIS V. GERSTNER, JR.

  Notre Dame when Dartmouth College offered me a substantial scholarship. It was a major benefit for our family finances, so I packed off for Dartmouth in September 1959, without ever having set foot on its campus.

  Four years later I graduated with a degree in engineering science.

  I immediately went to Harvard Business School for two years. (Back then one could leave undergraduate school and go directly to business school, a practice that has since, for the most part, been abandoned by business schools.)

  Then, at the tender age of 23, I emerged from Harvard and went into business.

  I joined the management consulting firm of McKinsey & Company in New York City in June 1965. My first assignment was to conduct an executive compensation study for the Socony Mobil Oil Co. I’ll never forget my first day on that project. I knew nothing about executive compensation, and absolutely nothing about the oil industry.

  Thank goodness I was the low man on the totem pole, but in the McKinsey world one was expected to get up to speed in a hurry.

  Within days I was out meeting with senior executives decades older than I was.

  Over the next nine years I advanced to the level of senior partner at McKinsey. I was responsible for its finance practice and was a member of its senior leadership committee. I was the partner in charge of three major clients, two of which were financial services companies.

  The most important thing I learned at McKinsey was the detailed process of understanding the underpinnings of a company. McKinsey was obsessive about deep analysis of a company’s marketplace, its competitive position, and its strategic direction.

  When I reached my early thirties, it became clear to me that I didn’t want to stay in consulting as a career. Although I enjoyed the intellectual challenge, the fast pace, and the interaction with top-ranking senior people, I found myself increasingly frustrated playing the role of an advisor to the decision makers. I remember saying to

  WHO SAYS ELEPHANTS CAN’T DANCE? / 3

  myself, “I no longer want to be the person who walks into the room and presents a report to a person sitting at the other end of the table; I want to be the person sitting in that chair—the one who makes the decisions and carries out the actions.”

  Like many other successful McKinsey partners, I had gotten a number of offers to join my clients over the years, but none of the proposals seemed attractive enough to make me want to leave. In 1977, however, I received and accepted an offer from American Express, which was my largest client at that time, to join it as the head of its Travel Related Services Group (basically, the American Express Card, Traveler’s Checks, and Travel Office businesses). I stayed at American Express for eleven years, and it was a time of great fun and personal satisfaction. Our team grew Travel Related Services earnings at a compounded rate of 17 percent over a decade; expanded the number of cards issued from 8 million to nearly 31 million, and built whole new businesses around the Corporate Card, merchandise sales, and credit card processing industries.

  I also learned a great deal. Early on I discovered, to my dismay, that the open exchange of ideas—in a sense, the free-for-all of problem solving in the absence of hierarchy that I had learned at McKinsey—doesn’t work so easily in a large, hierarchical-based organization. I well remember stumbling in my first months when I reached out to people whom I considered knowledgeable on a subject regardless of whether they were two or three levels down from me in the organization. My team went into semi-revolt! Thus began a lifelong process of trying to build organizations that allow for hierarchy but at the same time bring people together for problem solving, regardless of where they are positioned within the organization.

  It was also at American Express that I developed a sense of the strategic value of information technology. Think about what the American Express Card represents. It is a gigantic e-business, although we never thought about it in those terms in the 1970s. Millions of people travel the world with a sliver of plastic, charging goods and

  4 / LOUIS V. GERSTNER, JR.

  services in many countries. Every month they receive a single bill listing those transactions, all translated into a single currency. Concurrently merchants are paid around the globe for transactions completed by hundreds, if not thousands, of people whom they do not know and may never see again. All of this is done for the most part electronically, with massive data processing centers worldwide.

  The technology imperative of this business was something I wrestled with for many years.

  This was also when I first discovered the “old IBM.” I’ll never forget the day one of my division managers called and said that he had recently installed an Amdahl computer in a large data center that had historically been 100-percent IBM equipped. He said that his IBM representative had arrived that morning and told him that IBM was withdrawing all support for his massive data processing center as a result of the Amdahl decision. I was flabbergasted. Given that American Express was at that time one of IBM’s largest customers, I could not believe that a vendor had reacted with this degree of arrogance. I placed a call immediately to the office of the chief executive of IBM to ask if he knew about and condoned this behavior.

  I was unable to reach him and was shunted off to an AA (administrative assistant) who took my message and said he would pass it on. Cooler (or, should I say, smarter) heads prevailed at IBM and the incident passed. Nevertheless, it did not go out of my memory.

  I left American Express on April 1, 1989, to accept what some in the media called at the time the “beauty contest” of the decade. RJR

  Nabisco, a huge packaged-goods company that had been formed a few years earlier through the merger of Nabisco and R. J. Reynolds Tobacco Company, was rated the ninth-most-admired company in America when the headhunters called me. The organization had just gone through one of the wildest adventures in modern American business history: an extraordinary bidding contest among various investment firms to take the company private through a leveraged

  WHO SAYS ELEPHANTS CAN’T DANCE? / 5

  buyout (LBO). The winning bid was made by the venture capital firm of Kohlberg Kravis Roberts & Co. (KKR). Soon afterward, KKR sought me out to become chief executive of the now private and heavily indebted company.

  For the next four years I became immersed in a whole new set of challenges. While I understood well from my American Express days the ongoing demands of a consumer products company, I really spent most of my time at RJR Nabisco managing an extraordinarily complex and overburdened balance sheet. The LBO bubble of the 1980s burst shortly
after the RJR Nabisco transaction, sending a tidal wave of trouble over this deal. In hindsight, KKR paid too much for the company, and the next four years became a race to refinance the balance sheet, while trying to keep some semblance of order in the many individual businesses of the company. It was a wild scene.

  We had to sell $11 billion worth of assets in the first twelve months.

  We had debt that paid interest rates as high as 21 percent a year. We had lender and creditor committees galore and, of course, the cleanup from the profligate spending of the prior management. (For example, when I arrived we had thirty-two professional athletes on our payroll—all part of “Team Nabisco.”)

  That was a difficult time for me. I love building businesses, not disassembling them. However, we all have an opportunity to learn in everything we do. I came away from this experience with a profound appreciation of the importance of cash in corporate performance—“free cash flow” as the single most important measure of corporate soundness and performance.

  I also came away with a greater sense of the relationship between management and owners. I had experienced this at McKinsey, which was a private company owned by its partners. The importance of managers being aligned with shareholders—not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company—became a critical part of the management philosophy I brought to IBM.

  6 / LOUIS V. GERSTNER, JR.

  By 1992 it was clear to all that while RJR Nabisco itself was doing quite well, the LBO was not going to produce the financial returns the owners had expected. It was clear to me that KKR was headed for the exit, so it made sense for me to do the same. This book, which starts on the next page, picks up my story from there.

  PART 1

  Grabbing Hold

  1

  The Courtship

  O n December 14, 1992, I had just returned from one of those always well-intentioned but rarely stimulating charity dinners that are part of a New York City CEO’s life, including mine as CEO of RJR Nabisco. I had not been in my Fifth Avenue apartment more than five minutes when my phone rang with a call from the concierge desk downstairs. It was nearly 10 P.M. The concierge said, “Mr. Burke wants to see you as soon as possible this evening.”