Frank Dzubeck: Gerstner leaves solid business, impressive legacy at IBM

Ten years ago, IBM Corp. was a company riding on its reputation for providing legacy computers and communications to enterprise IT users. But Big Blue was late to the game with minicomputers, fumbled the transition to client/server computing, missed the ascendance of IP as a communications interoperability protocol and had invested billions of dollars in research and development, PC microprocessor technology and operating systems with minimal product market share. The past caught up to IBM in the form of declining revenue, earnings and stock price.

Until the arrival of Lou Gerstner in 1993 as CEO, IBM’s organizational and product changes were calculated, slow and methodical. Gerstner brought to IBM a new way of conducting business that accelerated change at the expense of the intrinsic IBM icons of corporate culture, geographical principalities and personnel ego. If results are an indicator of success, IBM has been reinvented, revitalized and wildly successful over the past decade.

Gerstner’s tenure at IBM can be best described by the phrase “In like a lion, out like a lamb.” As an industry outsider, Gerstner first had to get an education in the state of IBM’s businesses, assets, personnel and – most importantly – customer and investment-banker opinions as to what was wrong or right within the company. Next, he had to identify which key executives had the technology and skills required to adapt to his way of conducting business. Simultaneously, Gerstner brought in key lieutenants to become his “appendages” in the company’s day-to-day operation. The next task was to consolidate assets, reduce personnel and expenses, and identify key technologies and/or operations that could be turned into productive revenue-generating vehicles.

The results were dramatic. IBM corporate strategy was refocused on the customer rather than products and technology. Layers of management were trimmed from the organization chart. Decisions were removed from committees and placed in the hands of executives responsible for the divisional balance sheets. Advertising created a new, younger image for the corporation across the globe. Key growth areas such as software and services were targeted for investment.

Emphasis was placed on new business areas, such as Open Standards, the Internet, e-business, Java, Linux, voice-enablement software and wireless computing. Pension, medical and other personnel benefit plans were reengineered to save money. Salaries and stock options were more equitably distributed. Lastly, the decision was made to reinvest excess cash in company stock on a significant and continual basis rather than to grow via mergers and acquisitions.

All this action occurred in Gerstner’s first five years at IBM. The next five years produced little change. Investment analysts began to compare IBM stock growth with that of a bond rather than a typical stock.

IBM is radically different today than in 1993. The concept of quarterly stock buy-back has driven the stock price up 800 per cent over the past decade. The company has shifted away from hardware and software to services (40 per cent of current revenue.) Because of this shift, IBM has more employees than in 1993 but less overhead. Big Blue is no longer in the communications systems business but in the communications component business. IBM is still the worldwide leader in patent grants, but now the patent portfolio produces revenue through licenses and products.

Unequivocally, Lou Gerstner has left his imprint on IBM. But that imprint is not a vision for the future. The past five years of riskless status quo can’t be a realistic vision of the future for a technology company.

When Gerstner steps down this month, Sam Palmisano will take over as CEO. Palmisano’s business acumen, coupled with his mentor Denny Welsh’s leadership talents, let IBM grow from an upstart player in the services industry to the dominant force, producing US$40 billion in revenue. That growth orientation, coupled with Palmisano’s years of experience in risk management, indicate investment growth may be IBM’s new mantra rather than management of earnings per share. Whatever the case, the future of IBM will be based on a sound financial and organizational business footing prepared by Gerstner.

Dzubeck is president of Communications Network Architects, an industry analysis firm in Washington, D.C. He can be reached at [email protected].

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