18   A NEW IBM, 1995–2012

Our greatest ally in shaking loose the past, as it turned out, was IBM’s own precipitous collapse. I decided to keep the crisis front and center.… I didn’t want to lose a sense of urgency prematurely.

—LOUIS V. GERSTNER JR., 2002¹

It is also consistent with our DNA that we have paid equal attention to the continual reinvention of IBM itself—most importantly, reexamining and applying our core values to how we run the company.

SAMUEL J. PALMISANO, 2011²

IN THE WINTER of 1994–1995, December and January could never have been more different at IBM in any decade. In December, sales pushes hard to get equipment, software, and services projects purchased, installed, or completed to make their revenue targets. The fourth quarter generated more revenue than any other, because of the twin pressures of making “one’s numbers” and tax laws in many countries concerning purchases of capital goods, such as computers. IBM’s factory employees worked to get all machines that had been tested shipped to customers. Field engineering worked night and day, as well as weekends, to get everything possible installed to make their targets and to reinforce the accounting practice for recognizing revenue. Some salesmen stood vigilant in their offices until after 10 P.M. on December 31 to make sure a customer did not cancel an order at the eleventh hour. Weeks earlier, IBM’s CFO called on Chairman Louis V. “Lou” Gerstner Jr. to review how the year’s numbers should be reported, as the accountants already knew how much money IBM made and had several ways to report it. They were pleased with what they could report to Gerstner in December 1994. Then there was January. It was normal for employees to go on vacation. IBM announces its prior year’s financial results and opines about the year ahead in the third or fourth week of January. December 1994 and January 1995, however, were different from prior years because Gerstner was in a hurry to transform IBM but was not sure if the efforts to “stop the bleeding” had taken hold. He set the tone that 1995 would not be a year to coast when, on January 9, he announced a reorganization of the company.

As we approach the present in IBM’s history, we confront the lack of conventional sources, such as archives, and the fact that corporations work to block information about current operations from seeping out.³ Such are the challenges we face in this chapter and chapters 19 and 20.⁴ Here we describe the transition from crisis management in 1993–1994 to a period of expanding business. We then explore how IBM transformed into a services business. Because sales of hardware as the dominant source of revenue declined in this period, we look at how IBM responded to that circumstance. The 9/11 tragedy was an existential event that could not be ignored. The transition from the end of Gerstner’s tenure to that of a new CEO was far different from what occurred in 1993. How that happened was as much a process of effective management as it was a reflection of old and new corporate norms. We offer an answer to the central question of how IBM transformed so much in such a short period of time. For most scholars and employees, almost all this story is new, as it extends beyond the chronological boundaries of earlier histories of IBM.⁵

TRANSITIONING FROM RECOVERY TO GROWTH

January was a good month for IBM. Only the PC business disappointed. Bill Gates had won the war for the desktop. OS/2 was a lost cause, although many in IBM still did not recognize that fact. Everything else was humming, and the company had billions of dollars. In the fall of 1994, Gerstner was figuring out the next phase in the company’s activities, and that meant hunting for growth. One key decision involved emphasizing services, since someone had to pull together various technologies and integrate them. Customers looked to large IT firms to do that work, and IBM was well positioned to perform the task. Gerstner’s decision increased services revenue during his tenure.

Gerstner arrived at a second conclusion, too: that computing was rapidly becoming more networked and distributed and, when the Internet became an obvious new tool for business to use in 1996–1998, he knew IBM had to be in the middle of that transition. That event called for open standards—contrary to company-proprietary standards—and few existed. Customers wanted to plug anything into anything, hence the need for “open” standards. In a networked world, the PC would decline in importance, because computing could be done on mainframes within a network, not just on a machine sitting on a desk. IBM had to plan for that eventuality. Its marketing campaign, “solutions for a small planet,” built on the notion of IBM providing integrated services. As historian Steven W. Usselman observed, “The new emphasis restored sales and customer service to a preeminence they had not enjoyed since the days of the elder Watson.”⁶ How did IBM do that?

On January 24, 1995, the same day that IBM announced the previous year’s revenues and earnings, Gerstner told employees and the public that, “We are beginning to win in the marketplace.” He also announced changes at IBM. Over the previous year, he had worked out who among the long-term IBM executives were keepers and who needed to go. Worldwide sales and services, already reporting to veteran IBMer Ned C. Lautenbach (b. 1944), now would consist of three parts. Gerstner appointed a general manager for all of North America (United States and Canada), the highly experienced, tough-minded Robert “Bob” Stephenson (1938–2011), who most recently had run IBM’s operations in Asia, and moved David M. Thomas (b. 1950) into Stephenson’s old job, which suited his skills better than running the AS/400 business. In perhaps the most important change, Gerstner appointed Dennie M. Welsh (1943–2004) to run Global Services, which in those days handled the outsourcing business.

Robert “Bob” Dies (b. 1945?), also a highly respected executive within IBM, took over sales operations. Gerstner retained Nick Donofrio (b. 1947), a long-serving, respected engineering executive, and John Thompson (b. 1949) on his senior management team to run other hardware parts of the business. He kept two holdovers from the Akers period: Irving Wladawsky-Berger (b. 1945), an imaginative and articulate technology executive, to run the technical side of the mainframe product line, and a sales executive, Sam Palmisano (b. 1951), to head the PC business. Palmisano would eventually replace Gerstner as chairman. In late 1995, Gerstner brought in Bruce Harreld (b. 1951) as his senior vice president of strategy. This last appointment brought to IBM a high level of professionalism in the development of business strategy. In September, York left IBM, having concluded that his work in cost cutting was over. G. Richard “Rick” Thoman (b. 1945) took his place, becoming the first CFO in IBM’s history with international experience. All these executives had to increase sales of hardware, software, and services. In the mid-1990s, IBMers viewed software largely as a PC opportunity, a footrace with Microsoft. Hardware seemed the least mysterious, while services remained an opportunity to be developed.

The year 1995 thus brought a shift in activities and attitudes from defense to offense, from cost cutting to increasing business. That year, IBM generated $70 billion in revenue, growing the fastest and the most in a decade, while earnings per share doubled. The number of employees increased slightly, while the value of the stock rose by 24 percent. Of IBM’s revenues, 57 percent came from a combination of PCs, software, and services. These were IBM’s potential growth areas for the second half of the 1990s and the early years of the new millennium. The arc of IBM’s expansion during the second five-year term of Gerstner’s leadership had been set.

IBM’s mood turned more positive, which one could see in the tone of Gerstner’s messages to employees. All IBM CEOs routinely sent a note to employees when they announced quarterly earnings to congratulate them on a job well done or to urge them to do better. So what did Gerstner’s messages in the late 1990s look like? An example was his second-quarter earnings announcement, made on July 18, 1995, which documented more growth in revenue and profits:

Clearly, we’re moving in the right direction and accelerating our pace in getting technology solutions from lab to market, in helping customers integrate their information systems, in developing network products and services, in understanding and serving critical markets, and in our willingness to become a multi-dimensional company that delivers value to customers.⁷

But he did not let them off:

That said, let me add a cautionary word or two. We’re seeing signs that demand may be slowing somewhat in the U.S. Several key European markets remain sluggish, and the gains we realized in the second half of 1994 will make our 1995 year-to-year comparisons more difficult.… This is hardly the time to ease up. We must hone our strategies, implement them even faster, and continue our focus on both growth and productivity.⁸

In January 1997, in another announcement to employees, Gerstner heralded “record revenues along with very strong profits.… We’re growing, our turnaround continues, and we’re rolling into 1997 with new momentum.” Mainframes, services, even PC and storage products did well around the world with the exception of Europe. Again, Gerstner had a charge to the troops: “We have a strategy and the resources to lead. What we must demonstrate now is the will, the commitment and the personal dedication to take the strategy to the streets of the marketplace and win. If any team can do it—this one can.”⁹ Not since Watson Jr. had a CEO communicated so much with employees.

In early 1999, Gerstner broadcast a message over IBM’s internal communications network to 305 locations around the world. After recapping a successful year of growth in 1998 across all lines of business, he opined that the value of the company had increased by $68 billion, but he shared worries for 1999: “distress in Asia and Latin America; the first full year of commerce with the Euro,” and major transitions in important product lines such as servers, software, and disk drives. The company, indeed the world, was knee-deep in preparing for “the biggest ‘X factor’ of them all,” the year 2000, or Y2K. Gerstner and other IT CEOs were commenting about Y2K; IBM was busy selling billions of dollars of services to prepare customers for that transition.

Y2K was an odd problem few outside of computer circles had heard about. When people wrote software in the 1950s to 1980s, whenever they had to have a place in the program for a date, say 1988, and have the software conduct calculations based on that or future dates in the twentieth century, programmers provided that capability. What they did not do was accommodate a date change to the 2000s, believing that whatever software they wrote would be replaced long before that. This proved incorrect, as old programs were still working in the mid-1990s. Technologists began worrying, then panicking, that such software might not work on January 1, 2000. Dates might revert back to 1900 or worse. Government regulators around the globe ordered banks, stock markets, and other critical institutions to update their software to work in a post-1999 world. All got the job done; only a few minor problems surfaced. The hysteria built up in 1998 and 1999 did not result in the end of the world as predicted, but in the mid-1990s nobody knew that. Fixing the problem would be easy but time consuming. IBM prepared a combination of over 800,000 reports, proposals, and projects to address Y2K. It seemed every bank and financial institution was fixing Y2K. Competition to help increased, too. Gerstner urged personal leadership, “charting the direction for our customers and our industry,” based “on the reality of our performance.”¹⁰

IBM’S TRANSFORMATION INTO A SERVICES AND CONSULTING FIRM

How do you change a company’s business? A vast body of literature addresses this question, but how did IBM do it? It is easy to view IBM’s history of the 1990s and beyond as a series of product introductions, stories of eccentric, even badly behaving, executives, and dramatic accounts of customer service. Several factors continued to make IBM iconic. It was a big company, employing hundreds of thousands of people, who called on businesses in over 150 countries to sell general-purpose technologies that changed how societies and economies worked.

There were also deeper trends affecting IBM’s destiny that transcended any one CEO, division president, or employee. The most important of them ultimately surfaced where IBM earned its revenue and profits. Figure 18.1 displays the core of IBM’s reality from 1980 to the present, a period of over 35 years. The data transcended the careers of most IBMers, the terms of all CEOs and senior executives, boards of directors, most customer managers who worked with IBM, the entire careers of most IBMers, reporters’ time on the IBM beat, and even the careers of individuals whose purpose in life was to “watch” IBM and report their findings to Wall Street, IBM’s customers, and the press. The chart reflects what happened at IBM over the better part of four decades.

Figure 18.1

IBM’s revenue by segment, 1980–2015. Courtesy of James Spohr.

As trends rumble slowly over the decades, they increase momentum or slow, a process called cycles or long-term trajectories. They leave us with a sense that they are the result of forces beyond human control, as happens with the ebb and flow of earth’s ice ages. As this book has demonstrated so far, however, these trends are more the result of actions taken by IBMers, their customers, competitors, and officials. The result of everything anyone did, or that commentators focused on, boils down to the three trends reflected in figure 18.1. It is a snapshot of what they chose to do. When IBM’s CEOs took steps to set IBM on a path for future growth, they kept such trends in mind. The chart shows that the lion’s share of IBM’s revenue in 1980 came from the lease and sale of hardware (no surprise) but that over many decades both the dollar amount of revenue from these businesses and their contribution as a percentage of IBM’s sales declined steadily. Blips up and down were considered serious and interesting when they occurred but did not alter the long-term trend. The shaded area above the hardware data accounts for software revenue from products such as those used in mainframes and PCs, and additionally, in the 1990s and beyond, for networking and Internet-related products. That revenue grew as a dollar amount and as a percentage of IBM’s total revenue. The volume expanded so much that in the new century both IBM and its rivals thought of the company as either the largest or second-largest software firm.

However, services made up IBM’s largest sector. By 2005, it overwhelmed revenues from hardware, yet the company’s image still was that of a computer company. Services revenue grew right through 2011. In chapter 19, I discuss why IBM’s total revenue declined beginning in 2012, but even then, the trend of greater contribution from services held. Income from product purchase financing was trivial; it was a service customers could use to finance purchases of equipment, much like a bank, or an airline when it sold airplanes to IBM and then leased them back to improve their own balance sheets. Observers point out that IBM entered the IT services and consulting business in a substantial way in the 1990s, but that would not have been possible had IBM not started down that path earlier, because it takes years to develop offerings, discover what customers would pay for and need, develop contractual terms, accumulate necessary skills, and determine how to make a profit from that business.¹¹

Across 35 years, IBM transformed as profoundly in what it sold as it did when it moved from selling tabulating equipment to selling computers. Why the slow rate of transition? IBM was a much larger firm in the 1980s and beyond than in the 1950s and 1960s. The transition imposed itself on the company, customers, and competitors through newly emerging, complex technologies, from the PC to the Internet. However, the transition also occurred as conscious decisions made year after year by IBM’s leadership, who moved in that direction as new opportunities presented themselves. At a tactical level, decisions mattered. For example, when Gerstner revived the mainframe in the mid-1990s, hardware revenues rose until the end of the century, after which they declined following Y2K investments in new hardware and economic recessions in various parts of the world.

IBM’s start into services was not smooth. Its computer outsourcing deals of the mid-1980s were not always profitable, leading IBM to alter terms and conditions as it learned the business, especially about outsourcing. Observers commented that IBM still had deep pockets and vast resources that Gerstner could tap into, but it appeared that much of these resources were lodged in the services side of the business, its R&D capabilities, and in an experienced sales force working with customers. Gerstner’s software business remained a fledgling operation, although it received much attention during his tenure, while hardware received too much. So the headline for the 1990s and early the following decade should be that IBM had become a services powerhouse. For employees living through this transition, it must have felt as if an automotive manufacturer had converted from a company that built cars to one that only repaired them. In such an analogy, only the customers would possibly be the same, and they, too, would have scratched their heads figuring out how to leverage new technologies and service requirements.

How did IBM move from being the computer industry’s leading supplier of hardware to being one of the largest services firms? While IBM had a heritage of providing free services and software prior to 1969, its expanded role reflected an overall increase in demand by customers for such services, such as the “integration” Gerstner spoke about so frequently in the 1990s. By the early 1980s, major services involved IT support activities, such as installing or repairing malfunctioning software or machines, connecting and integrating systems, application software and data files, and consulting, such as writing software and implementing it or designing processes that operated with products from multiple vendors but that also resulted in new procedures and practices. IBMers built on prior experiences and knowledge. Worldwide revenue from these software and services activities grew to $31 billion. IBM was not alone in these emerging markets. In 1982, providers of services included Computer Sciences Corporation (CSC), with $420 million in revenues, Electronic Data Systems (EDS), with $250 million, Burroughs Corporation, at $232 million, and Arthur Andersen and Company, generating $187 million, as well as IBM with $195 million.¹²

After termination of the U.S. antitrust suit in 1982, IBM began expanding its services business to include outsourcing, time sharing, and its more traditional IT services. In the late 1990s, the Internet created additional opportunities for services, and time sharing appeared in new form by 2005, called the “cloud.” Since then, outsourcing to the cloud has remained a growing opportunity for Microsoft, Google, IBM, and others. Demand for global IT services continued to grow. In 2003, it generated $570 billion for all vendors, growing even faster than IBM’s own services business. In 2011, worldwide revenue reached $848 billion.¹³

In the Akers period, IBM ran data centers for a few firms, such as Kodak and Hibernia National Bank (both beginning in 1989). Such events gave the firm confidence to start thinking more broadly about developing a worldwide services strategy in 1991. Step one involved converting the Systems Services Division into the Integrated Systems Solution Corporation (ISSC), part of Akers’s “Baby Blues” strategy of splitting the company into pieces. ISSC took responsibility for systems integration, writing software for customers, and running data centers. IBM created the Consulting Group, nestled within the sales organization, with 1,500 consultants to provide traditional management consulting, such as strategy (especially with high IT content) and process reengineering in 29 countries. IBM recruited many hundreds of new employees into this business from Ernst & Young, Booz Allen Hamilton, Nolan Norton, and McKinsey, among others. While a hodgepodge of consulting methodologies and corporate cultures came with them, IBM’s customers welcomed the company’s new offerings.

The Consulting Group corralled into its fold all the ad hoc consulting practices scattered about the company. Many long-term IBMers were purged from the group, literally out of the company.¹⁴ For a couple of years, a guerrilla war took place at the lowest rungs of the new organization among IBMers who felt they could work in a services culture and those who came in convinced they could not. There were exceptions, of course, among the new arrivals. For example, North American Consulting Group general manager Michael Albrecht (b. 1940) blended new hires and long-time IBMers into a large and effective business. He had been a salesman and manager at IBM between 1965 and 1974, left to run the IT department at Michigan Gas, became a management consultant at Nolan Norton, and then returned to IBM in 1990. His experiences taught him the wisdom of blending sales and consulting together, since he knew IBM was large, his realm of authority relatively small, and that he would have to integrate with the sales organization if his employees were to succeed. Other consulting GMs did the same.

ISSC kept adding IT customers, including large U.S. retailer Sears, Roebuck and Company, United Technologies, and State of California, for instance, and began long-lasting relationships with health providers and users of medical computing. Contracts frequently ran into the tens of millions of dollars for many years, often a decade, while an increasing number also were so small that IBM’s cost of obtaining new consulting projects began increasing. IBM’s services business expanded into Central Europe, the United Kingdom, Japan, and Canada.¹⁵ Through the 1990s, IBM’s services business grew rapidly. Hardware maintenance, long a core service business, reliably brought in between $6 billion and $7 billion each year. That level of revenue remained impressive because during the 1990s IBM’s hardware continued to improve, resulting in less maintenance needed per machine.¹⁶ Maintenance revenue did not decline, because so many new machines were installed.

All services combined totaled roughly 20 percent of IBM’s revenue in 1991. To build on its early momentum, in 1995 Gerstner created the IBM Global Services Division (GSD). In 1998, its consultants generated a third of IBM’s revenue, but IBM needed a stronger industry-centric focus for consulting, and to jump-start that, in 2002 it acquired the consulting arm of its auditing firm, PriceWaterhouseCoopers Global Management Consulting and Technology Services (PwC). At the time, all major auditing firms were splitting apart their auditing and consulting practices largely because of regulatory requirements on both sides of the Atlantic, so PwC put its consulting arm up for sale. IBM bought it for $3.5 billion in stock and cash, a bargain given that in 2000 H-P had tried to acquire it for $17 billion. IBM’s acquisition doubled its consulting staff, bringing 30,000 consultants into IBM overnight. Virginia M. “Ginni” Rometty (b. 1957), a future IBM CEO, then in charge of IBM’s consulting services, led the acquisition effort and essentially turned over to the new hires operation of IBM’s management consulting business. She assigned Frank Roney (also a recent hire into the company a few years earlier) operational responsibility for integrating PwC into IBM. Services revenue expanded rapidly, from $36.4 billion in 2002 to $55 billion in 2014. Consulting’s contribution to IBM’s revenue increased from nearly 45 percent in 2002 to over half in 2006 and then to almost 60 percent in 2014.¹⁷

IBM’s transformation into a services business was a remarkable achievement, one hardly discussed by observers of IBM’s history of the 1990s and the early part of the following decade. Gerstner acknowledged in his memoirs the disaggregation of the IT industry into thousands of vendors working in niche markets, concluding that customers were calling for someone to integrate these offerings. However, his vision and that of others in the early 1990s focused largely on IT integration. By the end of the century, it was evident that integrating IT into industry-centric and business processes would be at least as attractive an opportunity for IBM, hence the acquisition of PwC’s industry practices. As opportunities changed, so did IBM’s services. Outsourcing was the fastest and largest piece of the business; it played to IBM’s IT strengths. The second largest was its business consulting services, the capability reinforced by PwC. As a percentage of the total services business, technical services and networking support shrank but then remained stable, as did the roughly equal in size maintenance business. The beauty of the shift from hardware to software and services was that the latter two segments always enjoyed higher profit margins than machines did. The impact is worth understanding. In 2000, services turned in pretax income of $4.5 billion. Just eight years later, that segment generated $7.3 billion. Software performed well, too, going from $2.8 billion in pretax income to $7.1 billion. Hardware shrank from $2.7 billion to $1.6 billion.¹⁸

In IBM’s parlance, the firm had shifted from “components to infrastructure to business value,” a strategy launched in the 1980s and continued into the new century. The mix changed largely because of acquisitions of software and consulting firms and by disposing of less-profitable hardware segments, such as printers, PCs, and disk drives. The high drama of good storytelling about the role of individuals is important, but, stripped bare, IBM’s success depended at least as much on its cold analysis of market conditions and purposeful implementation of strategies based on understanding markets. Gerstner augmented the disciplined approach already started earlier, and his successors continued to do the same. A point to reinforce is that IBM entered the management consulting business several years before Gerstner came to IBM. J. Bruce Harreld’s (b.1950) arrival in 1995 reinforced a direction already under way, adding discipline to it.

Much of the credit for the early start also has to go to Robert M. “Bob” Howe, who IBM recruited from Booz Allen Hamilton in 1991 to run the IBM Consulting Group. A character by IBM standards, he frequently wore red suspenders and—shocking to some—took off his suit jacket in the middle of a public presentation. He knew his audience of IBMers was conservative and therefore enjoyed using blunt, sometimes crude, language to differentiate the culture he was attempting build within his own organization. He created a business that went from almost zero to $250 million in annual revenue by the time he changed roles in 1994. From almost no employees, he ended 1994 with 3,500. His organization nestled in Dennie Welsh’s larger services empire. Before IBM’s acquisition of PwC, both men were also responsible for aligning management consulting and some IT services offerings by industry. In July 1994, they reorganized these businesses into 12 industry specialties, such as for finance, manufacturing, health, and telecommunications; Howe took over the financial arm. It was that early experience of going to market by industry that helped convince senior executives eight years later that they needed to expand that approach, which is how they arrived at the conclusion that buying a large, industry-centric consultancy like PwC made sense.

Other individuals made a difference, too. Dennie M. Welsh (1943–2004), Howe’s manager, worked at IBM for 33 years, following service as a U.S. Army pilot (1964–1966). An engineer by training, he spent his early years at IBM working on such projects as the NASA Apollo and Shuttle space programs, later managing the U.S. government’s GPS development, the technology that made it possible for people today to get driving directions from their smartphones. During the Cold War, it was an extraordinarily important tool used by the U.S. military and intelligence agencies. Highly regarded, smart, and effective as a technology manager, Welsh rose quickly through the ranks in the 1970s and 1980s. In 1983, he took over many of IBM’s commercial systems integration projects, and two years later he became vice president and general manager of IBM’s important semiconductor laboratory in Manassas, Virginia. Welsh continued to manage many of IBM’s contracts with the U.S. military. He became IBM’s president of ISSC in 1991. When Gerstner created IBM Global Services Division (GSD) in the mid-1990s, he tapped Welsh to run it. Its initial business centered on outsourcing, a business Welsh understood. Just as important, he increased IBM’s consulting and services capabilities. Consultants in Global Services remember him as an effective, enthusiastic leader of 90,000 IBMers, or about 40 percent of IBM’s workforce. Disarming with his southern Tennessee drawl, no executive at IBM had as much knowledge about integrating hardware and software as Welsh, and IBM’s largest customers welcomed his consultants.

Besides being IBM’s first high-profile services executive, Welsh was one of the earliest in the modern period to suggest that IBM do in the private sector what he and FSD had done in the public sector. He had risen high enough in the company by the time Gerstner came to IBM to have access to the new chairman. He persuaded him to expand the services business. Gerstner took credit for coming up with the idea, but he also implied in his memoirs that when there was a strategic initiative under consideration, someone did the homework to figure out its elements. Harreld, for example, had that as his job, but before he arrived individual executives had to lobby for their ideas. Welsh’s contribution was to make IBM move aggressively into IT services. Timing and good staff work were always crucial. In IBM’s case, on July 2, 1996, the company announced that the U.S. Department of Justice had agreed to rescind a number of terms of the 1956 consent decree, the most important of which was the prohibition against offering computer services. Welsh could now leverage the company’s knowledge of so many products and types of computing. IBM quickly became the world’s biggest provider of computer services, but in 1998 Welsh had to take medical leave, and he retired in 1999. On January 1, 2004, he passed away at the age of 61, a sad ending to what had been a long career during which he had pushed IBM onto a services course. Samuel J. “Sam” Palmisano, a rising star at IBM who came up in sales, took charge of the services business, successfully expanded it, added process reengineering to its capabilities, and enhanced its networking services through partnerships with telecommunications firms. The services business expanded globally. By the end of the century, Global Services employed 140,000 people.

However, a problem began to develop in the late 1990s and early the following decade: customers increasingly wanted industry-specific consulting and IT services, while much of what IBM was offering was still IT-centric. The company began nurturing industry-specific services within the Consulting Group, but the effort proved insufficient, a problem the PwC consultants were supposed to fix. Over the next few years, some PwC people decided that life in a publicly traded company was not for them, others migrated to other jobs at IBM, and new hires came into the firm. In the decade following its purchase, the PwC contingent proved just big enough (30,000 people in a 300,000+ employee company) to nudge IBM into acting in more industry-specific ways. Goods and services offerings, advertisements, marketing materials, and technical and managerial R&D became more industry-specific. IBM remained at its core an IT firm, but it slowly gained expertise in services aimed at specific industries. These included manufacturing, large retail, banking (finance), insurance, telecommunications, government (mostly the U.S. government and European national governments), and medical industries. These industries had long been extensive users of computing, and of Dennie Welsh’s IT services. These customers (by then, fashionably called “clients” by IBMers) provided connections and insights when, after 2010, IBM offered products and services in artificial intelligence (such as Watson Computer) and “Big-Data” analytics.

RISE OF SOFTWARE, DECLINE OF HARDWARE

Software and hardware remained the second and third legs of IBM’s business. While operated through individual divisions devoted to each type of offering, and with services prepared to merge the two as integration projects, these two legs remained crucial and visible to customers and IBMers alike. The software business consisted of more than simply operating systems for mainframes and the continuing war with Microsoft over OS/2, which Gerstner finally quit fighting. While software contributed greater portions of IBM’s revenue, few in IBM or the computer industry gave it as much thought as they believed the company did for hardware. The majority of employees, observers, rivals, and customers kept thinking of IBM as a hardware vendor, relegating software to a peripheral part of the computer business. Software sales were an afterthought until after 1993, when IBM responded to the “open source” debate, the continuing problems with Microsoft, the continued rapid expansion of networking by its customers, the rise of competitors serving that market, and the wider use of the Internet—all developments that took place during the 1990s. When IBMers focused on software, many did so too narrowly. The view from Corporate was that “IBM’s executives were almost obsessed with the effort to unwind the decisions of the 1980s and take back control of the operating system from Microsoft.”¹⁹

So, after the OS/2 war, Gerstner turned his attention to IBM’s otherwise fragmented and disorganized approach to software. The changes that soon came remained in effect for over a decade. First, IBM gathered into one organization all of its software activities. What John M. Thompson (b. 1942), the new GM for this collection of goods, found in 1995 when he took control of it was horrible. As his manager explained, “IBM had 4,000 software products, all of which were branded with separate names … made in more than thirty different laboratories around the world. There was no management system, no model for how a software company should run, and no skills in selling software as a separate product.”²⁰ Thompson proved a good choice. A Canadian, he had joined IBM in 1966 as a systems engineer, the same role in which future CEO Rometty began 16 years later. In 1986, he took over IBM Canada as its president and chief executive officer, and in 1991 he became the corporate vice president responsible for helping to put together IBM’s services strategy. Two years later, he took over the mainframe and midrange computer business. Then, in 1995, Gerstner put him in charge of the IBM Software Group, a position he held until 2002, when he was elected vice chairman of the IBM board, the company’s second in command under Palmisano. Creative and decisive, he succeeded in all of his assignments.

Thompson’s software group quickly hired and trained over 5,000 people to sell software. By 2000, Thompson had 10,000 people selling and supporting software. He reduced the number of software development labs from 30 to 8 and the number of brands from 60 to 6. Yet the range of competitors remained broad, from Microsoft to others aiming products at mainframes, notably SAP, PeopleSoft, and JD Edwards. Many others sold software to manage databases, transactions, utilities, and so forth, called “middleware.” These sat between the extremes of small PC software packages and high-level applications sold by the likes of SAP. Much of IBM’s software needed to be rewritten so as not to be proprietary in order to work on non-IBM platforms, such as those sold by H-P, Sun, and Microsoft, as part of IBM’s newly embraced open systems approach.

In 1995, the software group proposed acquiring Lotus Development Corporation to fill a gap in IBM’s middleware offerings. IBM needed a network offering, and Lotus Notes was an ideal product to meet that need. Thompson and his management team realized that this popular product, used for e-mail and online file management in a networked environment, would require a hostile takeover. IBM had never done that before. Gerstner earlier had personally tried and failed to buy Apple, so one could forgive him for being cautious about buying another high-profile company. Thompson, however, pushed for it. Gerstner had to learn about the company from scratch because, as one executive witnessing the takeover put it, “Lotus was just a flower to Lou.”²¹ In May, the board of directors approved the hostile takeover, with a maximum bid of $65 a share.

Gerstner and his team began developing their game plan, messages to the world, and how to execute the takeover. When IBM bid $60 per share, senior executives at Lotus pushed back. Gerstner told the press he was making the bid because Lotus would not consider a friendly takeover, which was never quite true. IBM won. Lotus’s senior executives lost control of their company, although many were kept on as part of the takeover to get new releases of their products out the door—which was crucial for IBM and its customers, too. Key to the deal was keeping the legendary Lotus product developer Ray Ozzie (b. 1955) in the belief that otherwise there would not be a new release of Lotus Notes. Without that new release, and retaining other crucial people, IBM would have acquired a hollow firm of little value. An intense week of negotiations and of lawyers writing agreements culminated in a deal that included keeping key personnel and defining the role Lotus would play in IBM. IBM acquired Lotus for $3.5 billion, or $64 a share. Jim Manzi (b. 1951), head of Lotus, became a senior vice president reporting to Gerstner to run his old company. On June 11, 1995, everyone signed the necessary paperwork.

The takeover was a big event. IBM acquired an essential product for its emerging software strategy. More important, IBMers learned lessons about how to take over a software firm that would inform the over 100 software acquisitions it would make in the next two decades. Lotus and IBM software people initially viewed each other with suspicion. It did not help that the Lotus people were housed in their own building in Cambridge, Massachusetts, while IBM’s were scattered around the world. Nevertheless, for a few years, IBM honored its agreement to allow Lotus management to run its own operation. By the end of the century, however, Lotus had been integrated into the wider IBM software world; its name was retired in 2013. Ozzie remained at IBM for two years, completing the highly successful Lotus Notes 4.0. Notes did well from its earliest days with IBM because of its access to the larger firm’s customers. In 1995, Lotus had 4.5 million users. By early 1998, that number had grown to 20 million, including all of IBM’s employees.²²

Nine months after acquiring Lotus Development, Thompson suggested a second acquisition, Tivoli Systems. Senior IBMers were more willing now to take that on. It proved a success, giving IBM new products in the distributed systems arena. Tivoli generated about $50 million in sales annually when it was acquired by IBM, but this had risen to over $1 billion per year by the start of the new century. IBM’s total annual software revenue climbed to $13 billion by the end of 2001, spinning off an attractive $3 billion in pretax profits. It did not hurt that the Internet’s wide adoption in the late 1990s energized corporate sales and that IBM was able to reorganize to sell software. By the end of the century, IBM had moved into the networked world, branding its offerings as “e-business.” All parts of IBM participated: software, hardware, and consulting.

By 2001, IBM had its software organization well structured, with revenue and profit targets, and a broad set of products and strategies. IBM employees sold directly to the company’s largest customers, as they had for decades, but they concurrently cultivated a worldwide network of 24,000 business partners, who sold to all other enterprises and public agencies. The Software Group organized into five lines of business: application and integration middleware (such as WebSphere); data management (such as DB2 and IMS), largely for mainframes; pervasive computing, which sold middleware enabling software; Lotus, which provided peer-to-peer communications (such as e-mail) and other collaborative tools for sharing data and files; and Tivoli, to provide systems management software. To put the Software Group into context, the other major pieces of IBM included Global Services (outsourcing and technical services), sales, marketing, hardware manufacturing, component technology manufacturing (but separate from computers), financing, research, and an assortment of internal support organizations. That structure remained essentially intact past 2010, although IBM constantly tinkered with divisions within each group in response to changing markets and products.

What happened to outsourcing, which had motivated many of the early movers to consulting, technical services, and new software tools and products? That business had grown steadily during and after Dennie Welsh’s tenure. While in the early 1990s companies outsourced IT as a way of lowering or controlling the growth in costs for computing, by 2001 they had changed the kind of outsourcing they wanted. By then, a third of companies were outsourcing some IT functions because they did not have enough staff to operate or develop uses (applications) their users wanted, such as to mitigate Y2K issues or to add new software applications. A quarter of IBM’s customers did not have the right skills or time to hire or train those who did. Nearly a quarter believed someone else could develop these skills more quickly. By 2001, only 4 percent of companies outsourced to save money. The world of IT was changing so quickly and expanding so rapidly that outsourcing seemed a reasonable response. In surveys conducted by IBM, usually the top five functions outsourced ranked from most to least were application development, website development, website hosting, network design/infrastructure build-out, and application integration—all classic activities of highly networked organizations in the thick of embracing the Internet.

Software loomed ever larger in importance at IBM. In the 1990s, open systems were rapidly becoming the new norm. Networking was expanding to everyone and to every computing device, and that was before the Internet and smartphones really made their presence felt as one of the key technological developments of the early years of the new millennium. Gerstner may have seemed harsh to his managers in 1993 and 1994 when he accused them of not having a “software mentality.” It was true. IBMers still fixated on “boxes,” hardware, mainframes, and, to a certain extent, PCs. Once Gerstner ended the OS/2 war with Microsoft, he still faced down a fragmented software business. With the company set on a new course on the twin trajectories of networking and open systems, IBM entered the post-Gerstner era able and willing to acquire specialized software firms by industry and technology that could be blended together with consulting.

Figure 18.2

Dennie Welsh, IBM’s services leader during IBM’s transformation into a services firm. Photo courtesy of IBM Corporate Archives.

Under Sam Palmisano between 2002 and 2007, many dozens of small firms came into the IBM fold, although none as spectacular as Lotus and Tivoli. Both those acquisitions became important components of IBM’s software tool kit in that decade because they had already created demand for their products before IBM acquired them. Each enhanced IBM’s products for both large and midrange computer systems. IBMers found it easier to acquire a company than to integrate it into the firm’s operations, because of differing cultures and insufficient appreciation of one another’s capabilities and roles. IBM’s senior leaders stayed the course, expanding software capabilities.

A key decision senior software executives made, which was implemented by Gerstner’s successors, involved exiting the application software business. These programs did something specific, such as factory production planning or accounting. IBM shifted instead to software that provided companies and governments with their general digital plumbing. Database software and e-mail are examples. These kinds of software could reside on all manner of hardware and networks, including within the Internet. Markets for these products were larger than for packages that were more specialized. During the first decade of the twenty-first century, IBM’s strategists, technologists, consultants, sales personnel, and customers began thinking of new uses for computing.

Next, in 2012–2014, IBM developed capabilities and offerings involving mobile computing, increased deployment of analytical tools, management of large bodies of data (Big Data), and software security. Since 2014, cognitive computing (use of artificial intelligence and the ability of a machine to learn from its own experiences) has also been part of the mix; it is discussed in chapter 19. Those initiatives were rooted in software but could not have surfaced on their own without the shift made in the 1990s to more universal uses of software (open source) and the increased generation of revenue that resulted. Sales provided the economic and managerial rationale for moving further down the software path. IBM’s announcements of new products and reorganizations related to them characterized much of its activities since the mid-1990s, but the bigger transformations involved the incremental shifts in emphasis culminating in the long-term shift out of the hardware business while IBM kept introducing new mainframes and its highly successful midrange AS/400, PCs, and laptops into the new century.²³ A remaining unanswered question at the dawn of the new century was the same one Akers and Gerstner had asked: What should IBM do about its hardware business?

In the midst of that mystery, it was time for Gerstner to retire, as he had reached the age of 60, when IBM’s senior executives customarily retired. IBMers, customers, industry observers, Wall Street, and the media asked: Who will be next? Would IBM’s board look outside the firm for a new leader? After all, it had done well in finding Gerstner, lionized as one of the great turnaround executives. His picture appeared on the cover of major business publications with a smile or mischievous look of delight. Or, would the board promote someone from within? To hire another outsider might be seen as refreshing but could also indicate that maybe IBM’s senior leadership problems had yet to be solved and that the company’s recovery had not been completed. To appoint someone already at IBM had its benefits also, as a signal to the world that IBM had fixed its problems, that it again had a strong bench of qualified leaders, that IBM’s business direction was solid and confident, and that someone from inside could manage from the first day, thanks to their knowledge of the firm. Gerstner and the board felt good about promoting from within.

They chose Sam Palmisano, who had a good run managing the PC company in 1997–1998, Global Business Service in 1998–1999, as head of the computer hardware business in 1999, and earlier in having gained a reputation as an amenable, effective sales manager and more recently in IBM’s outsourcing business, which became part of GBS. Palmisano had joined IBM in sales right out of college in 1973, came up in the business through its various transitions from the large-account culture of the 1970s, and sat on top of enough parts of IBM in the 1990s and early the following decade to understand the company’s various parts and where it was going. He was well liked and had avoided making enemies. The product of an Italian-American family raised in Baltimore, his father owned an automotive body shop. His son did well, graduating from Johns Hopkins University, where he played football and majored in history. He was also a bit of a musician, playing saxophone. He was smart, had a reputation for doing his homework, and could “sell upward,” impressing management above him.

IBM’s board approved Palmisano’s appointment as chief operating officer (COO) in October 2000. He moved closer to total control of IBM in March 2002, when the board promoted him to chief executive officer (CEO), and finally as chairman on January 1, 2003. The board expanded his authority as Gerstner relinquished his, all to signal to the world a rational, calm transition, what investors, customers, the media, and employees wanted. At the other end of Palmisano’s tenure as CEO, he did the same for the incoming Ginni Rometty. Palmisano faced the task of resolving IBM’s hardware conundrum. He needed to maintain the arc of IBM’s now successful business, which Gerstner had developed. He faced the challenge of figuring out how to expand IBM’s iconic role in modern economies, harking back to the glory years of the Watson family, with which he was familiar. On his watch, IBM bought PwC (2002) and 25 software companies, slowly nurtured cloud computing, updated outsourcing, and expanded what it called “e-business” initiatives already launched in the face of the rapidly expanding use of the Internet.²⁴ It seemed things were going well, and he maintained a low profile during the first couple of years of his tenure, yet the acquisition of PwC reminded people that he and IBM were still innovating.

Figure 18.3

“Sam” Palmisano, IBM’s CEO after “Lou” Gerstner, led IBM deeply into the IT services industry. Photo courtesy of IBM Corporate Archives.

The first shoe Palmisano dropped was IBM’s announcement in June 2002 that it had sold its anemic hard drive business to Hitachi for $2.05 billion and would lay off 1,500 workers from the Microelectronics Division. What a shock. IBM had invented hard drives in the 1950s, and they had been a great source of technological pride for decades across the company, not just within R&D, but the business was so successful that it became commoditized. IBM did not do well squeezing profits out of commodity businesses. Other firms did that better, as happened with PCs. Long-term employees who felt an emotional attachment to disk drives leveled a surprising amount of criticism against Palmisano. Newer hires could not understand the fuss. Business media considered it a wise decision. The layoffs, however, reminded people that full employment was gone. They signaled the start of an increasing number of layoffs, and even more during Rometty’s time at the helm.

In October, four months after the sale of the disk drive business, IBM acquired PwC. Palmisano and his senior executives kept looking for other low-margin businesses to get out of and higher-margin ones to enter. In 2004, IBM sold the PC business to Lenovo, bringing to an end a quarter-century struggle to make it profitable. The sale created consternation inside IBM, as did the earlier disposal of disk drives. It also seemed that many in the computer industry symbolically had to take off their hats, for the end of an era had come.²⁵ Industry observers again applauded the disposal of yet another low-margin business. Customers paid little attention, as they had moved on to other vendors and platforms.

Employees in the PC group acquired new ID badges from Lenovo. Ironically, at the time IBM sold the PC business, the PC group was enjoying a period of some profits, generating $20 billion in annual revenue. But Palmisano knew it had no future. Few fully understood at the time that smaller mobile devices would soon compete against all PCs, not just IBM’s. But IBMers at the highest levels clearly appreciated that smartphones, ever-lighter laptops, and tablets would quickly make their way into the market. Scientists and engineers in both research laboratories and the product divisions were making presentations on the future of these technologies, often proposing that IBM enter those markets.²⁶ More immediately, the sales of disk drives and PCs contributed to the overall decline in IBM’s hardware revenues during the second half of Palmisano’s tenure.

Human drama and tragedy played roles. The death of Tom Watson Jr. on December 31, 1993, the sad news that the popular Dennie Welsh was leaving IBM because of deteriorating health, and the anguish over IBMers being laid off reminded employees that they lived in changing times. Gerstner taught everyone that change was essential, that it needed to be relentless so that the company could thrive and not fall back into its old ways. Most managers who lived through the late 1980s and early 1990s were prepared to hold employees and management above them accountable to never repeat mistakes of the past, even to the point of risking their own careers, since they knew the alternative meant loss of their jobs anyway. IBM was becoming a tougher environment, with gentility a thing of the past. Fragility seemed to be everywhere, and never more so than on September 11, 2001.

IBM AND 9/11

Every IBMer knows where they were that morning. I was at my desk at home in Madison, Wisconsin, hosting a conference call with colleagues in France, Great Britain, Japan, and the United States that began at 8:00 A.M. New York time. My wife, who never interrupted my IBM conference calls, rushed into the room and blurted out, “You have to see this,” and turned on a little TV set I had on a nearby shelf. There was the iconic image of the two World Trade Center towers in Lower Manhattan, with one on fire and soon after an airplane crashing into the second one. I had the volume muted on my phone because I was confused about why she would interrupt me, and then I instantly realized, “Oh My God!” I turned up the volume and over the speakerphone stopped whoever was talking to announce that it looked like the United States was being subjected to an attack in New York. There was silence, and then everyone started asking the same questions at the same time. I started to relay what was on the screen for a minute or so and then simply said, “All of you get to a TV or radio. This is serious. This meeting is over.”

Four hours later, drained by the experience, I drove over to the local IBM office. There everyone was pale, sullen, shocked, scared, confused, and depressed. Nothing got done. The phones did not ring, the volume of e-mails dropped to almost none. Over the next several days, IBM worldwide remained shocked; few really worked unless they were in the Washington, D.C., and New York regions. An IBMer was killed on the flight that crashed into the Pentagon, while members of employees’ families were killed on the other airplanes. Hundreds of customers died in the World Trade Center towers; data centers evaporated. The U.S. government announced that it wanted the stock market restored by Monday morning and called on the financial industry to move Heaven and Earth to show the world how resilient Americans could be.

That meant whole data centers had to be put together in days, with software, computers, peripheral equipment, cables, telecommunications hookups, and new staffs. Normally that took months. IBM had 1,200 customers in the World Trade Center towers and within two blocks of the site. Backup facilities had to be activated, all in days. IBMers scrambled all over the United States, in particular in New Jersey, snapping up empty warehouse space and office facilities that could be commandeered, rented, or borrowed. They went through their warehouses pulling in equipment, borrowing other machines from customers, and giving up sleep. But, on Monday, new data centers operated all over the country to support the finance industry. IBM built 20 new data centers in less than a week and found thousands of ThinkPads and workstations for its New York customers. Thousands of employees worked on the data centers and in providing support for relief organizations and government agencies. IBM immediately pledged $5 million in cash, technology, and technical assistance to a hastily established September 11 Fund in New York. Gerstner sent notes to the entire company, updating employees on IBM’s role and complimenting them on what they were doing to help customers and communities.

Gerstner wrote a lengthy “Dear Colleague” note to all of IBM’s management on September 18: “Your responsiveness helped us account for our people—over 2,000—in a fast but thorough way. I’ve heard stories of managers that arranged for medical attention, food and clothing for their people, and of others who personally provided transportation for employees who were stranded when mass transit systems shut down.… Many of you took the time to talk to each individual on your team and listened to our people express their feelings and fears. It was a superb job under conditions that none of us could have imagined, let alone practiced or prepared for.”²⁷ Managers took decisions into their own hands. One first-line field engineering manager at 12:36 P.M. (central time) on the 11th sent out an e-mail to all his colleagues, “We are not officially closing the IBM location, however, as always, we encourage you to use your own discretion in terms of your personal safety,” adding that wherever IBM operates, “the regional crisis management team is assembled right now.”²⁸ In days, thousands of e-mails inquiring about people flowed through the company network, such as, “Nabil, thank you for your concern and good wishes. All the Global Sales Ops team members are safe. Marie-Claire lives in New York City but is safe. Catherine lives near the Pentagon, but is also safe. It is comforting to hear from our friends outside the U.S. Merci beaucoup.” Another wrote, “To my US colleagues: I hope yourselves, your families, relatives and friends are in good shape. All over the world, we all consider ourselves as Americans in such a horror situation.”²⁹

On the afternoon of 9/11, Gerstner and his senior team scrambled to get messages of assurance out to IBMers, to call on them to use good judgment, assist customers, and donate blood. He first communicated worldwide with IBMers at 3 P.M. eastern time, barely six hours after the tragedy, next just after 5 P.M., and again the next day, and so it went all week. It seemed every executive and manager within hundreds of miles of New York was now figuring out what to do in the city; the same was true in the Washington, D.C., area, where IBM had 10,000 employees. A major effort that afternoon involved identifying the location of all employees in and around the disasters, following an extensive telephone tree process long in place at IBM. The employees were right to worry. As one colleague at 590 Madison Avenue wrote the next day: “I am … was in my office at 590 when it all happened … drove out around midday … no one on the roads except people covered in soot walking north on the FDR from Wall Str … friends of mine were there and are hysterical … many IBMers still unaccounted for … a tragedy of unbelievable proportions!”³⁰

Air traffic came to an immediate halt for two days across North America, so IBMers moved machines by truck to affected areas, but the shock and pause in many activities extended into the following week. Some U.S. IBM sales executives began to worry that business forecasted for September—the last month of the third quarter, historically IBM’s weakest because of summer vacationing—was in jeopardy. In the United States, one executive sent an e-mail in the third week reminding sales management of their commitment to their pre-9/11 sales forecast and to “close that business” with customers. It may have been one of the most quickly deleted e-mails in IBM’s history.

The 9/11 tragedy was the most dramatic event of the early years of the new millennium, but it was not the only one, because life at IBM continued into turbulent times. Quickly, U.S. IBMers in the military reserves began to be called to active duty, upsetting consulting projects and normal workflows within IBM, but, with its prestige back and its influence in the corridors of corporations rising, management faced the delicate challenge of continuing the arc of its successful transition of the 1990s. One of the most important influences on it was the dot-com economic crisis that erupted near the end of Gerstner’s tenure, but first a personnel change was in order.

A SMOOTH TRANSITION

The last thing anyone in Armonk wanted was more high drama in the changing of the guard when it came time for Gerstner to move on. The world needed to see that everything was working fine at IBM, and there was no better way to signal that than to appoint a “lifer” as the next CEO. On January 29, 2002, Gerstner wrote to all employees announcing that the board had selected Palmisano as the next CEO, effective March 1; that the current vice chairman, John Thompson, would retire on September 1; and that he (Gerstner) would stay on as chairman of the board until the end of the year. A transition could not be made any smoother than that. Gerstner put a fine point on the nature of the transition: “Over the past two years, Sam and I have forged a strong partnership to prepare the company for a transition in leadership. Supported by a fine Board of Directors, we have undertaken a process that has been disciplined, transparent, and thorough.” He endorsed his replacement as competent and experienced, and declared that “Sam bleeds Blue. And because he does, he understands the character of our company at its soul.”³¹ The media, customers, and Wall Street approved, for it meant IBM’s current strategy would remain intact.

IBMers and observers looking back on the 10 years Palmisano served as CEO and chairman used the word incremental a great deal, but it was a relative term—incremental to what? For example, as India began producing competent programmers and technologists who cost only 20 percent of what they did in the United States, many U.S. IT companies began hiring them in large numbers. In 2002, IBM employed about 2,500 Indians, in 2004 that number grew to 9,000, and in 2006 it expanded to 41,000.³² By the end of Palmisano’s term, although kept confidential by IBM, many in the computer industry believed IBM employed nearly 150,000 Indians. Just as important for the effect on IBM, as the Indian population increased, the number of American employees, who were more expensive, declined. They either incrementally retired, their divisions were sold off, or they were laid off. Continuous layoffs occurred in small numbers to keep IBM out of the media with ugly headlines about thousands of departures. During Palmisano’s decade, the U.S. employee population shrank by an estimated 60,000 to 70,000, setting a pattern of ongoing “resource balancing” (IBM’s PR term for layoffs) that extended almost on a quarterly basis to the present.³³ It became routine for IBM’s CFOs to announce that IBM would be setting aside funds for “resource rebalancing” activities, although they never actually said how many people would be let go. Industry watchers translated dollar amounts into generally accurate numbers, however. Without accurate numbers coming from IBM, speculation ran rampant for years.

It seemed the new CEO took a couple of years to get his own voice, but by 2006 he was speaking in his words about IBM and its largest customers becoming “the emerging globally integrated enterprise,” an institution “that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide. State borders define less and less the boundaries of corporate thinking or practice.”³⁴ More than explaining a trend, he was describing IBM’s operations. He clarified how it was possible to employ tens of thousands of Indians to displace U.S. IBMers to work less expensively for clients in the United States and in Western Europe. Swapping employees created enormous discontent in the U.S. and later in Western European workforces, but it went on anyway. To operate globally, IBM created transnational processes, metrics of performance, and improved profits. IBM moved from low-profit to higher-value market opportunities in the new millennium.

Palmisano launched a corporate “make-over,” as IBM publicists called it in mid-2005, named Roadmap 2010, which initially was not controversial. An IBM publication explained that it was

aiming to build on the company’s previous success in wringing $5 billion per year in inefficiencies from its global supply chain. The goal was to use a combination of business process redesign, technology upgrades and redeployment of global labor to improve quality and responsiveness and drive annual productivity gains of 10 percent to 15 percent across the company’s entire service portfolio.³⁵

Work shifted to less expensive employees in Eastern Europe, Latin America, and Asia. Service centers provided programming and other consulting support on a global basis; manufacturing took place in China and later elsewhere in Asia. IBM was following the practice of other global companies in integrating around the world, told others about it, and became a model of how to accomplish that transition. What made it a remarkable move, however, is that outside of IBM the roadmap was a public statement of what financial targets IBM would aim for by 2010 and, if achieved, how it would continue to increase the value of IBM stock. With Wall Street’s confidence, and customers acquiring its goods and services, it proved an effective tactic. The value of IBM’s stock rose, helped by the simultaneous buyback of shares by the company.

However, it may have been too much of a good thing, because at its successful completion, Palmisano, with the help of his successor, Ginni Rometty, crafted a sequel, called Roadmap 2015, to extract further efficiencies. While the first Roadmap strategy met with some pushback from U.S. IBMers who saw their jobs disappear, that resistance escalated, went global, and involved executives high in the corporation who thought it had become a perverted strategy. Why that happened, and its consequences, is one of the central stories of the next chapter, but in the process of making additional changes during the period of Roadmap 2010, Palmisano had continued to move IBM toward becoming a services and software firm, while increasing revenue, profits, and the value of its stock. He spent $25 billion on software companies while selling the least profitable pieces of IBM. He was able to control the cost of the 426,000 IBMers under his command.

The smooth transitions could be seen elsewhere in the firm; for example, inside IBM’s board of directors. Members came and went quietly and smoothly: two left in 2003, next two others in 2005, another two the next year, one each in 2007 and 2008, two in 2009, none the next year, and a final two in Palmisano’s last year, in 2011.³⁶ Their replacements slipped in quietly, too, a mixture of CEOs of major customers and a few leaders from nonprofits. Members included CEOs of global enterprises, such as American Express, CEMEX, Eli Lilly, Emerson Electric, and Caterpillar. The board grew in size, too.

A reading of Palmisano’s cover letters to investors in each of his annual reports demonstrated that IBM’s strategy remained essentially unchanged. The language he used from one year to the next seemed almost repetitive. IBM’s financial performance in the first decade of the twenty-first century remained consistently solid. That occurred during the dot-com crisis of 1999–2002, which drove thousands of IT companies out of business, and again in 2008–2011, when a severe global recession had the same effect on other companies. IBM’s market share increased in all its core businesses, with the company spinning off billions of dollars to be reinvested in R&D, to cover the expense of swapping out existing IBM workers for others, to be returned as cash to investors through dividends, and to be used for buybacks of billions of dollars of IBM stock.

The tone of Palmisano’s letters centered on financial strategies. He spoke of moving IBM into high-value markets, which meant moving into thriving economies in Central Europe and in Asia. He wrote of customers wanting to engage in another round of IT integration, with which IBM was assisting. He kept referring to trends and constancy. For example, in 2004, he wrote: “Over the past several years we’ve taken aggressive steps to remix our business” and “since 1997, exited or reduced our presence in such areas as application software, hard-disk drives, networking hardware, low-end printers and retail PCs” and moved into other lines of business, such as more services, moving into China, India, Russia, and Brazil, and adding 730,000 new accounts, largely smaller firms.³⁷

The following year, Palmisano began a highly detailed description of IBM’s strategies, which remained the same for the rest of his tenure. He spoke of IBM’s move into “a high-value model” with three pillars—systems and financing, software, and services—the same trilogy that would characterize IBM from the late 1990s up to the present. Again, IBM declared that “the company has steadily shifted its business mix toward more profitable, innovation-based segments,” with emphasis on the remix of where revenues came from (as figure 18.1 shows) and sources of profits, with software the most profitable and hardware the least. Palmisano’s closing argument was that IBM was “capturing growth opportunities and increasing efficiency,” such as by pursuing the emerging markets of China and Brazil, increasing its involvement in health care, travel, transportation, and consumer products industries, and focusing on small and medium-sized businesses to find new customers. He kept pushing global integration to lower costs for delivering services, manufacturing, and corporate functions. By 2005, it had become common for a manager to have staff scattered all over the world.³⁸ IBM reduced its layers of management, yet the number of managers kept rising, while divisions returned to old habits of competing for resources.

In the annual report for 2006, Palmisano delivered the same message. On generating higher value, he wrote, “Several years ago, we saw change coming, we remixed our businesses to move to the emerging higher-value spaces,” which were services, systems and finance, and software, “and we decided to become a globally integrated enterprise in order to improve IBM’s overall productivity and to participate in the world’s growth market. As a result, IBM is a higher-performing enterprise today than it was a decade ago.”³⁹ Palmisano’s constancy is reflected in the following statement: “To many of us, IBM’s transformation of the past few years, while dramatic, has not yet felt unfamiliar. For me and others in my generation, the experience has not been one of entering uncharted waters, but of returning to a pace of change, a level of impact and a type of thinking that drew us to this company in the first place.”⁴⁰ For several years, the messages just quoted were repeated with updated statistics. After 2008 and the global downturn, Palmisano remained committed to IBM’s strategy, still promoting it as change, the same as in previous years.⁴¹ There seemed to be no reason to change the fundamental strategy, because it worked.

Beneath the consistent messaging, however, changes of a more tactical nature were under way. In 2010, IBM announced a set of priorities that grew in importance in subsequent years. IBM expanded its presence in growth markets, operating in over 170 countries, with revenues from outside the United States increasing their contribution to the total by 1 percent per year, with over half from outside North America. IBM began investing in software and services that specialized in analytics in business, health, and government. IBM paid attention to cloud computing, although its move into that market was slower than Amazon’s and Google’s, with Microsoft just behind them. IBM heavily promoted its campaign to wire up a “smarter planet” as a way of thinking of the world as having more intelligence (computing) injected into its activities. In January 2011, as IBM began a centennial celebration of its founding in 1911, Palmisano remained focused on revenues, income, margins, earnings per share, cash flows, and returns to shareholders, with his three-legged strategy of services, software, and systems.⁴²

IBM’s greatest source of revenue, as in earlier decades, came from the largest, most iconic firms around the world in over a dozen industries. They read like a list of the most well known: ABB, Aetna Life and Casualty, Air France, Banco Bilbao, Bank of Japan, BASF, Bell Canada, Bristol Myers Squibb, Caterpillar, CIGNA, City of New York, Coca-Cola, U.S. Department of Defense, Delta, Deutsche Bank, Disney, Exxon, Ford Motor, General Motors, Goldman Sachs, Japan Post, Kaiser Permanente, Lenovo, Matsushita Electric, Mazda, Nestle, Nissan, Nokia, Novartis, Pepsi-Cola, Pfizer, Reuters, Rockwell International, SABRE, Shell, Sony, Tata, Time Warner, Toyota, Visa, and Volvo, among others. IBM could claim all Fortune 1000 enterprises as customers, and every democratic national government. A similar list could have been created for 1990 or 2000. Its breadth of accounts meant IBM had maintained and expanded its presence in organizations, and its geographic footprint, around the world.

IBM’s senior vice president for communications, Jon Iwata (b. 1963), kept reminding IBMers that IBM was one of the world’s most valuable brands, worth over $57 billion in 2007–2008. That value placed it with the likes of Coca-Cola, Microsoft, GE, and Nokia as the most valuable on the planet, buttressed by customers saying they trusted their personal relations with IBMers, that IBM produced “innovations that matter,” and that its employees were dedicated “to every client’s success.” During Palmisano’s tenure as CEO, those quotations became new elements of IBM’s Basic Beliefs. The third echoed Watson Sr.’s: “trust and personal responsibility in all relationships.”

IBM’s research on the attitudes of customers revealed that the single largest influence on them was their personal experience with a company’s employees, followed in descending order of importance by views of analysts or professional organizations and opinions of colleagues, peers, or friends. Watson Sr. would have smiled, because these were the same influences on IBM’s customers in the 1920s to 1950s. IBM could influence customers on all manner of issues through its 200 worldwide briefing centers, which hosted 10,000 meetings per year by 2008, most running anywhere from a half day to two days each. Much depended on personal and institutional relations. IBM’s iconic status, restored by Gerstner and his team, remained intact through the Palmisano years. IBM had made strides to quietly restore its traditional role of being an information ecosystem for the IT world and for senior executives in many other industries, but IBM paid a price for its successes—one considered worth spending at the time—that shaped how it behaved toward employees and how other firms could and did. Its corporate culture changed significantly in the process.

HOW IBM’S CULTURE CHANGED

Edgar H. Schein, a scholar of corporate culture, argued that transforming institutional cultures represents some of the most challenging work of senior leaders, efforts that vary by the stage of the company, from birth to “maturity and decline.” His typology informed earlier chapters, and his model of how turnarounds occur—the story told in chapter 17—links to corporate cultural change. What IBM’s leaders did reflects behavior he identified in other companies and that we will follow here.⁴³

Everything at IBM always seems to come back to its Basic Beliefs, regardless of whether it is Watson’s version, Gerstner’s eight principles, or Palmisano’s updated three points. They all dealt with quality of work, maintaining a focus on customers and listening to their needs, and relations between the corporation and its employees. IBM’s culture—how employees behaved and what they believed—remained the source of all company policies, beliefs, and practices, so when Gerstner made substantial changes to the company’s strategies in the 1990s, which Palmisano and his team continued in the next decade, it was inevitable that these changes would affect the three areas of beliefs. IBM was still evolving as this book was being written, with employees still experiencing churn in its culture.

Gerstner and his management team successfully increased IBM’s focus on customer needs, arguably returning to one of the company’s longest-cherished practices. In the 1990s, employees reported in opinion surveys that they understood the overall strategy, thought they were increasingly getting tools and products in support of the company’s objectives, and saw their performance evaluations, rewards, and job opportunities align more closely with corporate strategy. They understood that the workforce would have to change as IBM shifted away from hardware sales to services and software. Although concerned about their pension rights (even successfully suing IBM to restore some) and job security, they were more willing to accept personnel turnover than they would be in the decade that followed. That pushback happened after 15 years of layoffs, begun under Akers, which resulted in turning over half the workforce and replacing survivors with new people.

The central cultural change, the one that cannot be ignored in any history of IBM, was the issue of layoffs, the turnover of personnel, as IBM became a more globally integrated enterprise. The incremental reduction of employee benefits was a second concern, particularly regarding pension, health, and severance packages. As IBM moved through the 1990s and the first decade of the new millennium, with layoffs and diminished benefits, employees intensified their complaints, while the corporation increasingly pursued these changes. The polite language used by employees to express “concerns” about these changes turned to harsher language, while product and service organizations increased their internal rivalry for resources.

It did not help that Asian economies in the late 1990s entered an economic downturn and crisis, that Western economies went through their own economic recession in 2001–2002, or that the world went through the Great Recession of 2008–2011. In each instance, demand for IT products and services suffered. Large companies in most industries responded by rapidly laying off people. In the United States alone in 2001, employers laid off some 100,000 workers each month. Layoffs and cost cutting did not end when economists declared a recession over, because the end of an economic crisis arrived at different times in different countries. For IBM, it seemed some national market was always in recession.

Globalizing work to lower operating costs characterized much of the activity inside IBM and other firms. Economists argued that the recent U.S. recession ended in 2011, while many large companies continued to shed employees in many countries. That explains why IBM kept transferring work from countries with expensive employees to others with lower salaries, such as its outsourcing to China in the 1990s, India early the following decade, and later Vietnam and elsewhere. Recessions reinforced the case for further automation and process reengineering to increase a corporation’s ability to quickly move work around the world. IBM’s competitors did the same. In the first half of 2001, for example, Dell abruptly let go some 2,000 workers, Winstar Communications shed over 40 percent of its staff, and AOL Time Warner eliminated 2,400 workers. As in prior decades, IBM behaved like its peers. When it did, IBM’s behavior reinforced similar practices in other enterprises.

That behavior toward employees reflected the post-Opel world. At IBM, reducing the number of workers and their benefits had taken severe but lesser twists and turns under Akers. American workers who had grown up in the full-employment world of the Watsons became concerned, and talk of union organizing started during Akers’s tenure in the mid-1980s.⁴⁴ Once full employment was gone and benefit reductions had begun, there was no return to the paternalism of the past. The twin practices sped up under Gerstner. They were implemented more abruptly under Palmisano, and a near firestorm marked the time of his successor, Rometty, whose chairmanship was viewed as one of laying off workers to achieve her operational targets by cutting expenses. That had been her reputation within the services and consulting side of IBM since the 1990s. Her reputation, however, did not diminish Armonk’s admiration for her intelligence and her ability to communicate with customers and the all-important financial markets.

Nevertheless, as late as the fall of 2001, employee surveys from across the company showed general satisfaction with IBM. There remained high levels of understanding of IBM’s strategy, communications by senior executives were rated as clear, and employees gave a strong personal compliment to Gerstner. Employees were reporting, however, that working conditions were deteriorating: more working hours, increasing pressure to achieve results, and compensation not matching these two realities. Roughly half of IBM’s services personnel felt sufficient teaming and collaboration existed across internal organizations to accomplish their goals—an operational/cultural change Gerstner sought. In the late 1990s, roughly 60 percent of employees reported no problem with their work/life balance. It became an issue in the next decade, however; particularly worrisome to employees was when Corporate stopped reporting results of such surveys to workers late in Palmisano’s tenure.

While senior management focused on an evolving organization and work processes to meet the growing attraction to customers of IBM’s three-prong offerings in hardware, software, and IT support services, employees became more concerned about their jobs. That issue became so contentious in the United States in the first decade of the new millennium, and after 2010 in Europe and Asia, that it drew increased press coverage. Customers noticed that support from IBM could suddenly shrink, disappear, or simply deteriorate in quality. A U.S. worker would suddenly be replaced with an Indian, local support would be transferred to a help desk in Asia or Russia via telephone, or the number of employees assigned to the customer would be reduced. Complaints of language barriers cropped up for the first time in IBM’s history. In the first decade of the new millennium, IBM stopped announcing how many employees it had in any country and, more irritating to employees and reporters, how many were being laid off. Corporate remained mum on the issue, although it continued to issue press releases that it was hiring. IBM did so as it brought in new people able to implement analytics or run a cloud operation in a less expensive country. Existing employees only saw layoffs.

Starting in the United States in the 1990s, employees did the unthinkable: they attempted to organize a union in communities where IBM had factory operations, such as Burlington, Vermont; Endicott and nearby towns; Austin, Texas; Raleigh, North Carolina; and on the West Coast. Groups formed, such as the IBM Global Union Alliance, which entered the fray along with the earlier Alliance@IBM. This latter organization was sponsored by the Communications Workers of America, which had been trying to unionize IBM’s U.S. factory workers since the 1970s. Employees failed to organize a union at any facility, although in the process they created websites that collected information about layoffs, answered questions about terms of severance packages, and discussed rumors. Thousands of IBMers and ex-employees visited these websites and added comments. While participation originated in the United States, by 2010 such efforts had gone global. During some periods of frequent employee layoffs, more IBMers were visiting these sites than others sponsored by IBM about its products and news.

With the turnover of so many employees, why did IBMers fail to unionize to slow layoffs or cuts to benefits, or even to fight charges IBM and other chip manufacturers faced of polluting water in Fishkill and Endicott, New York? Lee Conrad (b. 1949), the most visible organizing leader among IBM employees, concluded that several reasons accounted for their failure. First, IBM initiated too many reorganizations, including the sale of whole businesses and divisions. Second, IBM’s strategy of incremental rather than massive layoffs kept the issue of dismissals constantly on people’s minds as the new normal rather than as an immediate crisis. Third, Conrad observed that IBM workers were too conservative and fearful of losing their jobs to risk organizing, and this was coupled with a decades-long suspicion of unions. Fourth, many IBMers remained in denial that they would be next to go (the old Basic Belief lingering). Management, largely human resources departments, carefully worked to limit the influence of union organizing, and they proved more successful than the organizers. In Conrad’s words, the fundamental reason why IBMers were unable to organize unions in the United States was the structural changes that kept things “topsy-turvy” for three decades.⁴⁵ In many European countries, employees had been members of unions and worker councils for decades, as required by national laws.

Employee complaints remained remarkably consistent during the new century. Workers criticized IBM’s CEOs for being paid vast sums while laying off workers. Palmisano was to be paid $5 million, but a union organizing website stated on March 6, 2006 that, “We are told at the IBM Fishkill Plant that there is no additional overtime allowed and no pay raise in sight.” The same complaint surfaced in 2014, when Rometty was paid a multimillion dollar bonus, although IBM’s revenue and the stock’s value had declined in the previous year. Complaints by employees about working conditions went out over the Internet. A posting from January 28, 2006 stated: “I sat in on a number of calls which were formerly staffed in the US or by people who spoke and could understand fluent English. Now a lot of those calls are staffed from Brazil or Argentina. No one knows what the heck the other person is saying half the time.”⁴⁶ Pointing out that all CEOs were living in a period when CEOs in general were being well paid, and even making the case that IBM’s were not as generously compensated as others (with the exception of Gerstner, who was very well compensated), did not affect employee attitudes toward executive compensation. Many thought executives were overcompensated for poor performance, while nonexecutive employees were denied salary increases and were laid off to reduce IBM’s SG&A.

While those complaints continued into the 2010s, increasingly the conversation turned to layoffs. The majority occurred in the United States, which had the largest population of employees in the 1990s and early the next decade, and the least restrictive labor laws. The Alliance tracked these layoffs through feedback from employees laid off and press reports. IBM employee organizer Conrad reported that in the mid-1980s IBM had 230,000 employees in the United States but by 2016 only about 78,000, many replaced by “lots of contractors, H1b visa and offshore workers with us.ibm.com addresses.”⁴⁷ Some went away with the sale of divisions, such as several thousand transferred to Lenovo in 2014 when IBM sold additional pieces of its business to the Chinese firm, joining thousands who had departed earlier with the disposal of the disk drive and PC businesses.

Employees used harsher language: “If anyone at the highest level of IBM has half a brain (which I’ve come to doubt)” (November 30, 2014). The reason for layoffs (called resource actions or RAs) was widely believed to be “so CEOs and Executives can get their bonuses at the end of the year. IBM US employees need a union to stop this corrupt practice” (October 13, 2014). Between 2006 and 2016, older workers seemed targeted for layoffs, so employee websites began reporting this problem: “It is a way to remove older employees from the payrolls” (May 1, 2012). They accused Corporate of trying to cut expenses to support the stock’s value and did not hesitate to get personal about it: “Ginni will be the only employee left” (April 2, 2016).⁴⁸ The overall complaint from thousands of commentators was neatly summarized by one British employee in early 2016: “Losing shareholders money, firing thousands of employees, clients abandoning the company like rats from the Titanic, and giving top management bonuses. IBM management is giving the middle finger to everyone. I can’t think of a more disgusting and insulting organization. Corruption reigns at Big Blue” (January 31, 2015). Such rhetoric would rarely have appeared in writing even in the mid-1990s. Conrad found many personal criticisms of CEOs and managers too vulgar or mean-spirited to post. Watson Sr.’s notion of the “IBM Family” was gone.

But it was not for lack of trying by Palmisano. Recall that during his first two decades at IBM the Basic Beliefs were still alive. When it was his turn to run the company, he still believed that shared values could play a powerful role, so he updated the Basic Beliefs in 2003. He explained in late 2004, “I feel that a strong value system is crucial to bringing together and motivating a workforce as large and diverse as ours has become. We have nearly one-third of a million employees serving clients in 170 countries. Forty percent of those people don’t report daily to an IBM site; they work on the client’s premises, from home, or they’re mobile.” Important to him was that “half of today’s employees have been with the company for fewer than five years because of recent acquisitions and our relatively new practice of hiring seasoned professionals.” He could not order them around. Top-down management had failed in the 1980s, while a set of values embraced by employees would make it possible for people to go about their work when management was not there to tell them what to do. “People—rather than products—become your brand,” taking us back to Iwata’s point.⁴⁹ When Palmisano published his three new values, over 200,000 employees quickly downloaded them, and responses back included severe criticisms about how IBM was not living up to them but very few that were critical of what these three ideas stood for. IBM had preserved some of the Watsonian DNA of the Basic Beliefs. It was the gap between values and execution that had created so much tension during Palmisano’s tenure and that of his successor.

KEEPING SCORE

The media paid less attention to IBM’s churn in personnel and layoffs than current and former IBMers wanted. The company deflected interest by not releasing data on the number laid off and usually dismissed employees in low enough numbers on a continuous basis to avoid regulatory reporting. Gerstner and Palmisano displayed greater interest in discussing “shareholder value” and dividends. Rometty continued that focus on financials. The bigger story outside the firm was its business success. Customers acquired IBM’s products and services, stockholders enjoyed rising stock values and growing dividends, and IBM was back in the business of being iconic. Table 18.1 reports the company’s financials, reflecting results for both Gerstner’s and Palmisano’s efforts.

Table 18.1

IBM’s business performance, select years, 1998–2011 (revenue, net income, and cash flow in billions of dollars)

Revenue grew, with dips caused largely by the sale of low-profit businesses. Net income increased, especially during Gerstner’s tenure. Management intensified its focus on what is delicately called “financial reengineering,” an emphasis on increasing earnings per share, dividends, and stock value, even buying back IBM shares. Cash flows improved, largely from a growing portfolio of long-term outsourcing contracts and services, ensuring a steady stream of money. After Gerstner’s tenure, the number of employees kept increasing, although who they were changed as thousands left and other thousands were hired. Annual reports always spoke to investors, less often to customers, and hardly at all to employees. Each year, Gerstner, then Palmisano, emphasized returns to stockholders, hence the efforts to reduce expenses to increase profits, move into new markets, and report on new products and services.

With Palmisano’s time as CEO ending in 2012, Corporate worked to end his term on a high note. IBM celebrated its centennial in 2011, using the occasion to claim the right to speak from a position of financial strength by which the world could learn from its experiences. Palmisano argued that, “We believe the lessons of our history apply more broadly. Whether you seek to understand the trajectory of technology or to build and sustain a successful enterprise or to make the world work better, there is much to learn from IBM’s experiences.”⁵⁰ One can forgive the hubris and celebrating the centennial, because it is rare for a company to last as long as IBM.

The media, customers, and industry observers acknowledged the company’s milestone, regardless of criticisms they had about its financial practices, layoffs, and difficulty of doing business with it. Bloomberg captured much of Wall Street’s assessment when it summarized changes the chairman had made, all of which “helped Palmisano realign what was once the largest computer company into a service and software powerhouse. The maneuvers made the company predictably profitable, boosting per-share profit for more than 30 quarters. Since 2001, Palmisano has boosted sales by 20 percent, while keeping costs of the 426,000 employee behemoth little changed.”⁵¹ Regarding Roadmap 2010 results, Palmisano proclaimed, “Over the past five years, we have increased our market capitalization by $70 billion, and returned $50 billion to shareholders in net share repurchases and $14 billion in dividends—creating approximately $135 billion in value for our owners.”⁵² Five years earlier (2006), 65 percent of IBM’s profit came from services and software, now 84 percent, while he had invested $70 billion in R&D since 2000. In the same period, IBM acquired 130 firms. It seemed the company was in good shape, but the celebration would not last long.

The end of Palmisano’s period at the helm coincided with the dawn of a rapid reversal of the momentum and successes achieved in the post-1994 era. The next one, under Rometty, was fraught with financial shortfalls and concerns, more churn in IBM’s employee population, a faltering strategy that ushered in a more widely supported one, what Rometty called a “reboot,” and the birth of a new approach for sustaining IBM’s business. Those who thought IBM could continue to ride a wave of success based on the actions taken by Gerstner and Palmisano were mistaken. What happened? How bad was it? Because IBM was a company that so many customers depended on, answering these questions became crucial to them, to hundreds of thousands of IBMers, and to the future of how humans could possibly understand the weather, solve fundamental health problems, and rely on artificial intelligence, better known as cognitive computing. Those are subjects of chapter 19.

Notes

  1. Louis V. Gerstner Jr., Who Says Elephants Can’t Dance? (New York: HarperBusiness, 2002), 213.

  2. International Business Machines Corporation, 2010 Annual Report, 8.

  3. For a recent example of how historians worked in this kind of environment, see William Aspray and James W. Cortada, “Before It Was a Giant: The Early History of Symantec, 1982–1999,” IEEE Annals of the History of Computing 38, no. 4 (October–December 2016): 26–41.

  4. Historians studying the history of computers, for example, have created a new intellectual and institutional infrastructure to support their work in contemporary history. For details, see James W. Cortada, “Studying History As It Unfolds, Part 1: Creating the History of Information Technologies,” IEEE Annals of the History of Computing 37, no. 3 (July–September 2015): 20–31; James W. Cortada, “Studying History As It Unfolds, Part 2: Tooling Up the Historian,” IEEE Annals of the History of Computing 38, no. 1 (January–March 2016): 48–59.

  5. Although useful snippets and insights appeared in the business literature. See, for example, Geoffrey A. Moore, Escape Velocity: Free Your Company’s Future from the Pull of the Past (New York: HarperCollins, 2011), 191–193.

  6. Steven W. Usselman, “Unbundling IBM: Antitrust and the Incentives to Innovation in American Computing,” in The Challenge of Remaining Innovative: Insights from Twentieth Century American Business, ed. S. N. Clarke, N. Lamoreaux, and S. Usselman (Stanford, CA: Stanford Business School Books, 2009), 270.

  7. Lou Gerstner to “Dear Colleague,” July 18, 1995, copy in author’s possession.

  8. Ibid.

  9. Lou Gerstner to “Dear Colleague,” January 21, 1997, copy in author’s possession.

10. “Lou Gerstner’s Worldwide Employee Broadcast,” January 1999. This was his initial 1999 “kickoff” message to all employees.

11. Jeffrey R. Yost, Making IT Work: A History of the Computer Services Industry (Cambridge, MA: MIT Press, 2017), 232–242.

12. Ibid.

13. Ibid.

14. Many of the new practice leaders brought into IBM from other consulting firms believed IBMers could not consult, especially if they had a sales background.

15. “IBM Global Services: A Brief History,” May 2002, IBM Corporate Archives, https://www.03.ibm.com/ibm/history/documents/pdf/gservices.pdf.

16. The company set quantifiable annual targets for the reduction of field engineers and for increased quality performance of hardware.

17. International Business Machines Corporation, Annual Reports, 2002–2014.

18. Ibid.

19. Gerstner, Who Says Elephants Can’t Dance?, 138.

20. Ibid., 140.

21. Doug Garr, IBM Redux: Lou Gerstner and the Business Turnaround of the Decade (New York: HarperBusiness, 1999), 218.

22. Ibid., 230.

23. It continued to also introduce PCs and, more important, laptops, but they were not essential to generating revenue.

24. For a popular IBM commercial about e-business, see https://www.youtube.com/watch?v=3LkQrtCIFA4.

25. Remember, however, that hundreds of millions of people knew about the IBM PC.

26. I sat in on presentations on this topic, some of which were attended by divisional and group executives. Management committee records for the period remain closed, and it is not certain that they even exist.

27. Lou Gerstner to Management Colleagues, September 18, 2001, copy in author’s possession.

28. Robert A. Myers to Madison, Wisconsin, Employees, September 11, 2001, copy in author’s possession.

29. E-mails in author’s possession.

30. Maureen A. Power to James W. Cortada, September 12, 2001.

31. Gerstner, Who Says Elephants Can’t Dance?, 280.

32. Manjeet Kripalani, “IBM’s India Pep Rally,” BusinessWeek, June 6, 2006.

33. Interview with Lee Conrad by James W. Cortada, November 18, 2016. Conrad had been a union organizer at IBM between 1983 and 2000 and subsequently a volunteer doing the same until 2016.

34. Quoted in Kevin Maney, Steve Hamm, and Jeffrey M. O’Brien, Making the World Work Better: The Ideas That Shaped a Century and a Company (Upper Saddle River, NJ: IBM Press, 2011), 212.

35. Ibid., 213.

36. Video of Sam Palmisano on the history of IBM, 2011, https://www.youtube.com/watch?v=0a6IJAZ3b9M. See also https://www.youtube.com/watch?v=HS40P7xxHkw.

37. International Business Machines Corporation, 2004 Annual Report, 8.

38. International Business Machines Corporation, 2005 Annual Report.

39. International Business Machines Corporation, 2006 Annual Report, 6–7.

40. Ibid., 8.

41. International Business Machines Corporation, 2008 Annual Report, 10–14.

42. International Business Machines Corporation, 2010 Annual Report.

43. Edgar H. Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass and John Wiley and Sons, 2010), 293–294.

44. Interview with Lee Conrad by James W. Cortada, November 18, 2016.

45. Ibid.

46. These and thousands of other comments can be found at various organizing websites. See http://www.ibmemployee.com/; https://www.facebook.com/alliancemember/; http://endicottalliance.org/jobcutsreports.php.

47. E-mail, Lee Conrad to James W. Cortada, November 14, 2016.

48. IBM Employee News and Links, April 2, 2016, http://www.ibmemployee.com/.

49. Paul Hemp and Thomas A. Stewart, “Leading Change When Business Is Good,” Harvard Business Review (December 2004), online edition.

50. Quoted in Maney, Hamm, and O’Brien, Making the World Work Better, 7.

51. Quoted from a Bloomberg report, October 26, 2011, in Ernest von Simson, The Limits of Strategy: Lessons in Leadership from the Computer Industry (Bloomington, IN: iUniverse, 2009), 393.

52. International Business Machines Corporation, “A Letter from the Chairman of the Board,” 2011 Annual Report, n.p.