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IBM's outsider: A look back at Lou

Big Blue needed more than a talented executive when it hired Lou Gerstner in 1993. It needed an outsider. How did the former head of RJR Nabisco turn things around?

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
IBM needed more than just a talented executive when it hired Lou Gerstner in 1993. It needed an outsider.

In his nine-year tenure as CEO of Big Blue, Gerstner lifted IBM out of disarray and restored it to its place as a computing powerhouse. The company is not only profitable now, its strategy of pursuing large, multiyear service contracts has become a model for Hewlett-Packard and other competitors.

Many of the reforms, though, were possible because he had no history with IBM. In fact, he had no history with tech. Before his move to Big Blue, Gerstner had been CEO at RJR Nabisco and president of American Express.

So, like Napoleon with mainland France, Gerstner was able to view IBM's problems unemotionally. That gave him room to revamp management, lay off employees when necessary, and carve out new strategies without personal turmoil.

Gerstner's legacy was thrown into the limelight this week when he announced he would step down March 1. Sam Palmisano, IBM's president, will take over.

"It took Gerstner, who was dispassionate and who was not an IBM lifer, to do that," said Sam Albert, a 30-year IBM veteran and now president of Sam Albert Associates, a consulting firm. "Of all the things he did--it was to breathe a certain degree of reality into the company. He then was also the one to say, 'No other company can do what team IBM can do.'"

Gartner analyst Tom Bittman said, "What Gerstner did was pretty simple." But they were also "pretty fundamental changes, and he stuck to them...and it worked."

Although IBM was the largest computing company in the world when Gerstner took over in March 1993, it needed help. A stark contrast exists between IBM now and IBM then.

In 2001, the company reported revenue of $85.9 billion and net income of $7.7 billion. In 1993, the company's revenue came to $62.7 billion, but it reported a net loss of $8.1 billion. IBM also reported net losses in 1991 and 1992.

The company also was losing market share in a number of key areas. In 1994, for instance, Compaq Computer, the first company to successfully clone the IBM PC, dethroned Big Blue as the world's largest PC maker.

Part of the problem lay in the corporate culture, according to various sources. IBM prided itself on innovation and had long allowed executives and employees fairly free rein. "Think," after all, was the company's motto.

IBM employees strove for the new, and often disdained using technology from outside sources. In addition, the company promised lifetime employment. Instead of laying people off, it would perform "surplus actions," which amounted to eliminating a job but then re-creating it in some other part of the company.

"There weren't controls on spending," Albert recalled.

While these values and attributes can be extremely beneficial, the circumstances at the time conspired to make IBM a fairly sclerotic organization. One former IBM engineer, who requested anonymity, recalled that few employees ever questioned a supervisor's instructions during the era of lifetime employment. Questions, as well as subtle grumbling, began only after the layoffs.

It was also an imperial place. Another former IBMer recalled how in the early '90s the company repainted entire buildings at its North Carolina campus in anticipation of a visit from then CEO John Akers.

One of Gerstner's first major acts was to bring fiscal responsibility to the company. He forced IBM managers to set financial goals and to meet them. He removed those who didn't. He eliminated some products while establishing other new categories inside IBM, and he advocated selling products as bundles that solved business problems. Massive layoffs also took place in 1993.

Management was also overhauled. Jerry York, then an executive at Chrysler, came in as IBM's CFO in 1993. Gerstner also recruited associates he had worked with before, such as Abby Kohnstamm, currently senior vice president of marketing, and Lawrence Ricciardi, currently senior vice president and general counsel.

After putting the house in order, Gerstner helped IBM turn its focus from hardware such as mainframes to more complete offerings that included software and service. Those packages now run the gamut from PCs to supercomputers. The approach is fronted by IBM Global Services and has become one of IBM's best ways of selling products.

"He got IBM to stop acting like a bunch of islands and start acting like a continent," Albert said. "Lou recognized if you wanted a total solution, you had to go to IBM."

To that end, Gerstner established IBM's software group and led the company to acquisitions of Lotus Development and Tivoli. He also launched Big Blue's Global Services unit and its Technology group, which manufactures semiconductors and hard drives. And the company recently began embracing Linux. Gerstner's efforts have helped IBM's stock price soar.

"It's important to see the PC company as a provider of clients and that clients are part of a solution," said Roger Kay, an analyst at IDC. "IBM has slowly come around to that in their solutions-provisions business."

There were, however, failures under Gerstner's watch. OS2 was one. The operating system, despite being heralded as more advanced than Windows 95, never kept up in market share. And there were oversights, analysts said.

"Such a focus on responsibility caused misses such as making decisions on Unix," Bittman said. "If you look at IBM from 1995 to 2000, it wasn't serious. It was allowing Sun (Microsystems) and HP to beat it. That was a big mistake, because the whole world knew Unix would be an important platform. It allowed Sun to come up in the world."

Gerstner's IBM should also have seen Microsoft as more of a strategic threat, analysts said.

"I think that IBM should have been 10 times more aggressive on moving (its) middleware products downstream on Intel hardware to small and medium businesses," Bittman said.

The company has also continued to lose market share, and though it has raked in revenue on services, servers and storage, its PC business continues to disappoint. IBM slipped to fourth place in worldwide PC market share during the fourth quarter, from a near tie with HP for third place in the third quarter. Overall, IBM's PC shipments in the fourth quarter were down about 22 percent year over year, according to IDC.

Gerstner was one of the first to talk of a post-PC era. That has yet to occur.