Who Says Elephants Can't Dance?
BY LOUIS V. GERSTNER
Learn from one of the best turnaround leaders of all time, Lou Gerstner of IBM. If your company or division is in crisis mode, take a page from Gerstner’s playbook on what to do at the helm of a quickly sinking ship. Gerstner’s approach for leading IBM back from the brink can be applied in many scenarios. Understand the importance of cash and how to free up more of it. Tackle a toxic culture with robust communication and do away with ineffective practices. Reinvigorate employees with a market-driven strategy and a sense of urgency to beat competitors. The case of IBM's turnaround and Gerstner's leadership shows that the winning strategy and the culture behind its execution are equally important .
TOP 20 INSIGHTS
According to Gerstner, free cash flow is the most important measure of a business. He learned this as the head of RJR Nabisco, when billions in assets were offloaded to pay debts. He applied the same to IBM to stabilize finances.
IBM had been so successful that it felt like a bubble: there was little focus on how customer needs or competitors were evolving. To change this dynamic, Gerstner became a microphone for customer complaints and let the marketplace – instead of the whims of executives – dictate all activities.
Gerstner initially saw IBM’s financials and thought the company’s chance of survival was no more than 20%. To prevent demise, he slashed expenses through consolidation of functions, sold high-value items like real estate and fine art, and ultimately layoffs.
Gerstner’s toughest challenges were “soft” problems like morale, company culture, and values.
A culture without internal politics frees up employees to focus more on customers and competitors rather than their colleagues. This was a key step to rebuild IBM’s market position. Gerstner publicly crucified turf battles and backstabbing.
Formal presentations can be distracting and unproductive. In one of Gerstner’s initial meetings with a senior executive, he politely clicked off the screen and said, “Let’s just talk about your business.” This led to a more transparent discussion of the situation.
While it’s essential to obtain the right market position, don't ignore the value of a rigorous and strategic R&D team. This was crucial to IBM’s success. A billion-dollar investment in new technology for a key product pulled them through the downturn and allowed them to slash prices and retain the same margin.
Look to your customers for potential hires; they have major insights into your company's blind spots. Gerstner gained credibility with customers when he said he had been a customer himself longer than he would be CEO of IBM, and therefore echoed their main concerns.
When competitors have gained significant ground on one of your products, consider dramatic price cuts as a last-ditch effort. Over seven years, IBM decreased the price of its mainframe from $63,000 to $2,500 a month – a decline of 96%. Miraculously, this led to growth in volume of about 50% each year over the next three years.
If you think your team is out of touch with customers, mandate actions to get everyone back on track. Gerstner required 50 of IBM's most senior employees and their direct reports to visit five of their biggest customers in three months, then report back to him with a two-page memo.
Restore a greater sense of ownership among mid-level staff and empower them to make decisions. Gerstner abolished IBM’s famed “Management Committee,” a body of senior executives who met biweekly to review all big decisions. The Management Committee diffused responsibility and leadership.
Don’t just bend your business model to conform to what’s popular or what might deliver short-term wins. Many urged Gerstner to break up IBM into individual business units, the popular structure of the time. Gerstner saw beyond that hype and envisioned IBM as an integrator for customers. This move ultimately saved IBM.
Beware of leaders who spin grand visions without the right basics. During an early keynote address, while reporters clamored for Gerstner to deliver a vision, he instead harped on the need to focus on profitability and the correct economics before a change in direction.
Consider making promotions from within. Gerstner says, "I think it would have been absolutely naïve…if I had come into a company as complex as IBM with a plan to import a band of outsiders…"
A CEO's responsibility during a crisis is not to directly change employee behavior, but rather to communicate that a crisis exists and how it will come to an end.
Communications from the CEO, especially during a crisis, should be as direct as possible. Rather than assume that the message will "trickle-down," Gerstner composed emails directly to employees, which became known as "Dear Colleague" letters.
A more creative delivery of your message can lead to better persuasion. A marketing executive at IBM made the case for consolidation to one ad agency, given the proliferation of logos and branding across business units. When her colleagues entered the meeting, they found every wall adorned with the advertising, packaging, and marketing collateral of all of IBM’s agencies.
Compensation policies can reinforce company culture and lead to complacency among staff. Gerstner boosted employee performance and scrapped old rules like no layoffs and flat raises, then replaced them with variable rewards based on performance.
If competitors are picked off your best performers during your crisis, try offer very lucrative stock options to your rising stars. This sends the message that you value them while also keep them invested to stick around for the long term.
If you're unsure about a business model for your startup, consider Gerstner's assertion that "service businesses are much more difficult to manage [than product businesses]." There is a greater risk that you'll fall short of customer expectations and more ambiguity in the delivery of the service versus a product.
Surviving a crisis requires bold leadership, a strategy for the future, tough decisions, and the ability to motivate and inspire others to come along with you. IBM's turnaround leader Louis Gerstner implemented these tactics and more, making calls to keep IBM together, dramatically reduce prices, enter the new realm of services, and reorganize around industries rather than geographies. Learn his reasonings and how he kept IBM afloat after giving the business no more than a 20% chance of making it through their downturn. An even bigger challenge was the culture clash that stormed as he imbued IBM with new values of competitiveness and customer-focus in place of complacency and staunch traditionalism. Learn his communication philosophy and the nine strategies he chose to motivate others.
STRATEGIC BETS IBM STAYS TOGETHER
From the beginning, Gerstner’s vision in a united IBM with a strong services arm was at the forefront of his leadership. One of the first decisions he made upon coming into IBM was the decision to keep IBM together rather than sell off the individual business units. Industry analysts suggested that IBM would be able to best realize shareholder value by breaking apart and showing their cards with their more valuable units. However, in a world where there were endless companies offering “puzzle pieces” but few players willing and able to be the “integrator,” Gerstner knew IBM would meet a valuable need by staying together and playing that role. He was confident in his position because of his previous experience being an IBM customer as head of American Express and later RJR Nabisco.When his tenure started, there was a flurry of activity cleaning up financials and working with investment bankers to prepare for individual IPOs. He quickly put an end to that and began making a series of tough decisions to stop the "hemorrhaging of cash" and maintain a quickly-eroding market share.
SLASH PRICES AND CUT COSTS TO STAY IN THE GAME
IBM had been a pioneer and the dominant player in the "mainframe" world for years. Come 1992, however, the space was much more competitive and IBM was struggling. It seemed unthinkable to lower prices at a time when the business was already losing so much money. But Gerstner was convinced this was the only way. What he saw that others did not was that IBM was “milking” a dying product line. The days of premium pricing on their mainframe were dwindling, and it was a matter of time before competitors inched them out. The only way to stay in the game was to participate in the price war. Luckily, IBM also had a trick up its sleeve to maintain profitability through the price changes. Several years prior, IBM had made a billion-dollar investment in new "technical architecture" for its mainframe product. IBM’s size and many years in the business enabled them to make this crucial investment that greatly increased the product’s profitability relative to competitors.“If this enormously complex project could be pulled off, it would permit substantial price reductions in the S/390 without commensurate loss in gross profit.”Thankfully, the bet on cutting prices and using the new CMOS technology was successful. Mainframe volume grew dramatically after these decisions.Many credit this pair of decisions – cutting prices and investing in CMOS – with protecting IBM through their near-collapse. Though the choice to invest in CMOS was made before Gerstner's arrival, his decision to lower prices and weather a short-term decline in revenue ensured the long-term future of the business.Surviving in 1993 also meant making some tough calls regarding expense cuts and layoffs. While IBM had a rumored policy of "no layoffs," thousands of employees had in fact left IBM since 1990. Difficult decisions were made, and the number of employees declined by approximately 25% between 1992 and 1994, falling from 301,500 in 1992 to 256,200 in 1993 and then 219,800 in 1994. Interestingly, IBM also owned millions of dollars of fine art and valuable real estate, which were sold in the early 1990s as a means of survival.
BECOMING A SERVICES PLAYER
Gerstner's background as an IBM customer informed his decisions both to keep the company together and to invest heavily in becoming a services player. While customers were faced with an endless supply of technology solutions, no one was effectively stepping up to the plate to help them put it all together, solving their business problems with technology solutions. Gerstner wanted to take them there, shoulder to shoulder with Dennie Welsh, who’s heading up IBM’s Integrated Systems Services Corporation. Welsh was the one to initially come to Gerstner with the vision for a services company. The type of service offering he pitched to Gerstner fit precisely with the strategy both to remain an integrated IBM as well as matched the need for holistic technology solutions that Gerstner had experienced as a CEO in other industries. However exciting, both men agreed it would be an uphill battle working against IBM culture to implement the new strategy. Despite all the extra effort it required, the move to make IBM a services leader paid off. In 1992, services revenue was $7.4 billion. In 2001, it was $30 billion.
REORGANIZING AROUND GLOBAL INDUSTRIES
The vision that Gerstner had for IBM would not have been able to take hold without several other efforts taking place in the background. One of these critical pieces was "organization," or how IBM was structured, including who is responsible for which products, services, or geographic territories and who reports to whom.Attempting to reorganize any company is a gigantic feat, but even more so in the case of IBM due to its complexity. Three areas of complexity were at play: customers, technology, and employees. Given IBM’s offerings, it could serve any type of organization on the planet, from startups and corporations to non-governmental organizations and schools. There was no clear customer segmentation. Also, given the fact that it was a technology company in the early 1990s, it was operating in an industry that was constantly changing. As new technology popped up, new competitors and standards did too. And lastly, IBM was complex with regard to its employees. While most companies have a corporate headquarters that gives direction to distributed locations like franchises, retail stores, or factories, all of IBM’s hundreds of thousands of employees were smart, opinionated, and highly educated professionals.Nevertheless, if Gerstner’s transformation was to take place, a dramatic reorganization was needed. IBM was currently structured according to geography, with each major geographic leader holding powerful sway over what went on in his or her territory. This fractured view meant that “IBM seemed to be incapable of taking a global customer view or a technology view driven by customer requirements.” Instead, it was individual country leaders who had the say.“I declared war on the geographic fiefdoms,” says Gerstner.Gerstner set out to organize IBM instead according to global industry teams. First, they segmented customers into thirteen industry groups. Then, Gerstner reallocated all current customer accounts away from geographic heads and to the global industry heads, ensuring each group had adequate budget and personnel. This did not go over with the “old guard” without a hitch. Many refused to relinquish control and directed their staff to do the same. In all, the geographic reorganization took about three years to implement successfully.
CULTURE CHANGE AND COMMUNICATION
Gerstner inherited a culture of traditional values. Employees wore white shirts and dark ties and received generous benefits. Part of moving upwards at IBM required becoming an administrative assistant to top executives for a time, sitting at the back of meetings and taking notes while at the beck and call of your boss. Other odd practices were in place, too, like the fact that almost anyone could veto any proposal along its way to fruition. One simply had to state that they were "non-concurring," and a project would be stopped in its tracks.A phenomenon of working at a company that had enjoyed long-term market dominance for some time was that the culture had become inoculated from many of the pressures of competitors and surviving in a typical marketplace. Customer needs were easily ignored, employees were more focused on internal politics than in beating back competitors, and performance ratings and their implications were weak.Gerstner implemented clear practices to begin setting new expectations. Foremost, he took a policy of direct communication. In his early days, he conducted a world tour of IBM operations, meeting with leaders, staff, and customers, listening to their input and fielding their complaints. He began a series of “Dear Colleague” email communications where he laid out principles and values for doing business and working at IBM. Especially in the dark early days when IBM’s future was tenuous, he stood by the belief that it was the CEO’s job to communicate both the existence of a crisis and how it would end.“No institutional transformation takes place, I believe, without a multi-year commitment by the CEO to put himself or herself constantly in front of employees and speak in plain, simple, compelling language that drives conviction and action throughout the organization.”It might be tempting to defer this sort of messaging to the heads of subsidiary businesses or the like, but Gerstner states that in some cases, this communication philosophy required him to "seize the microphone from the business unit heads." In a time of such tumultuous change, the only way to ensure a consistent message across the board was for it to come from one person. In addition, creating a high-performance culture was a top priority for Gerstner, and he understood that people are motivated in different ways. Working under this assumption, here is a list of the different angles and a preliminary list of actions one could consider when hoping to incentivize employees in new ways and change organizational behavior:
Money – Offer competitive pay, raises, bonuses, or stock options.
Advancement – Offer promotions, titles, and special appointments.
Recognition – Simply note a job well done, whether publicly or privately.
Fear/Anger – Let your true colors show, to a degree.
Learning – Establish in-house trainings, sponsor degrees, and create university partnerships.
Impact – Assign employees to projects with outsize impact.
Productivity – Highlight the specific output of a given project.
Threat of Extinction – Communicate the implications of not succeeding, i.e., going out of business or being fired.
Inspiration – Focus on the “light at the end of the tunnel,” or the inspirational vision, as a means of motivation.Gerstner's keen use of human psychology and his willingness to take on IBM’s culture contributed to his success at IBM just as much as his unifying services strategy.