9 “THE IBM WAY”: HOW IT WORKED, 1964–1993
I attribute our success in the main to the power of IBM’s beliefs.
—THOMAS J. WATSON JR.1
FOLLOWING THE INTRODUCTION of the S/360 in 1964, IBMers walked the hallways of almost every large organization in the industrial world. IBM came to dominate about 60 percent of the U.S. mainframe computer market and up to 70–80 percent elsewhere. Everywhere executives, political leaders, and regulators felt the influence of IBMers who behind the scenes quietly shaped computing events around the world. Some loved that role, while others resented IBM’s influence and market dominance.
Inside IBM, its corporate culture, also referred to as “business culture” by historians, was known as the IBM Basic Beliefs—while outsiders called it “The IBM Way.” For sentimental retirees, IBM was always about the people and the way they worked with each other. IBM’s culture reflected the soul of this company; that is how IBM became iconic. As one senior executive put it in the 1980s, “There really is an IBM way of marketing and managing.… IBM’s approach to business, technology and people has nothing clever or slick about it. How it functions, and why, has more to do with IBM’s success than what it does.”2 Earlier, Tom Watson Jr. explained, “The real difference between success and failure in a corporation can very often be traced to the question of how well the organization brings out the great energies and talents of its people. What does it do to help these people find common cause with each other? How does it keep them pointed in the right direction despite the many rivalries and differences which may exist among them?”3 This chapter and chapters 10 and 11 explain the essence of IBM’s massive growth into an iconic firm. Midway, in the 1970s, customers, the media, regulators, historians, and the public worldwide thought of IBM as the computer company. When this paradigm changed in the 1980s and 1990s, the resulting crisis nearly destroyed the firm.
Business historians and other academics focused on business management practices have paid great attention to corporate cultures since the 1990s. While Alfred D. Chandler Jr. focused on strategy and structure, other historians began to work through the issues of a more sociological, values-driven approach to the history of corporations and disciplines. As Kenneth Lipartito observed, corporations had both effective and ineffective cultures that directly affected the performance of the firm. Lipartito may well have started the current trend in studying corporate cultures by rethinking “the relationship between business and culture.”4 As he described it, the study of corporate culture “starts from the position that all experience is mediated through some symbolic or linguistic system,” since employees (and customers) needed “some framework of meaning,” such as the “IBM Way.”5 Historians are increasingly looking at how actors in a company navigated in a defined culture, taking into account their own self-interests.6 This chapter and those that follow continue to engage in the issues that Lipartito and others have served up.
One finding presented here is that not all was rosy within IBM’s corporate culture, despite that culture’s positive effects on the life of the corporation. IBM’s slow response to changed circumstances suggests limits to the value of a strong corporate culture. One reason it faced tremendous challenges after the 1970s was precisely because its way of doing things aligned so well with the realities of selling, the needs of its customers, and its ability to coordinate and control most of the technological, and hence economic, impacts of these changes as they existed before the changes in technology and markets. The IBM Basic Beliefs were codified into the daily operations of the firm. Next, this chapter shows how the company’s culture revolved around selling practices. Finally, we see that much of the cultural glue that held the company together was its personnel practices. In short, the Basic Beliefs provided a shared view of the world, its sales operations converted beliefs into revenue, and how employees were deployed and how they managed the “nuts-and-bolts” encouraged alignment with the corporate mission across the entire company. These three elements of IBM’s operations underscore historian Alfred D. Chandler Jr.’s observation that once a company had a strategy, it made the necessary investments to produce, distribute, and service its products in order to remain successful.7
CORPORATE CULTURE AS A WAY TO VIEW HOW COMPANIES OPERATED
Earlier chapters showed that IBM had its own style of work, which evolved into a complex social ecosystem. IBM’s engineers, sales force, and finance and planning (F&P) staff might follow their own practices, but those were not incompatible with IBM’s overall values and procedures. The same held for IBM’s expanding international activities. While French, American, and Japanese IBMers behaved somewhat differently, they were linked together by shared practices. English as the corporate language, as part of the “similarity of approach,” emerged from shared values, viewpoints, and practices so carefully nurtured by IBM.8
Today, we understand that corporate culture begins with top management’s beliefs, values, and actions, as they are communicated in a consistent way over time. These can be embraced intensely and create a company-wide consensus. Management can enforce these values with salaries and bonuses, promotions, public recognition, and approvals, often with rituals (e.g., IBM’s 100 Percent Club), all codified to sustain the company’s norms.9 As two experts phrased it, corporate culture for large enterprises was (and remains) “the ultimate strategic asset,” and that is why it is so important in explaining IBM’s successes, later its troubles, and always its behavior.10 Companies with strong corporate cultures pay careful attention to who they hire and extensively train them, two practices evident at IBM for many decades.11
IBM’S BASIC BELIEFS AND WAY OF WORKING
Every keen observer of IBM speaks of its culture as its secret hot sauce. Was it still Watson Sr.’s American values and idiosyncratic admonitions, Family Dinners, and singing songs? Did those white shirts and blue suits constitute the “IBM Way?” Did IBM transform its culture when it grew fourfold from 1960 to 1985, from fewer than 100,000 employees to 405,000, a community the size of Oklahoma City in the United States and twice as large as either Bordeaux or Brussels?
Earlier chapters touched on several features of IBM’s corporate culture that shaped how its employees went about their work, such as Thomas Watson Sr.’s persisting values. His son Tom Jr. codified these into the three Basic Beliefs: respecting the individual, offering the best customer service, and working in a “superior fashion.” His codification was part of a broader pattern of formalizing work practices and beliefs. Watson Jr. directed that managers at all levels spend a “major” portion of their time sustaining the Basic Beliefs. From these emerged practices first developed during Watson Sr.’s time that survived until the late 1980s. These culture-shaping practices included IBM’s famous policy of “full employment.” Employees, even during economic downturns, would be retrained, not fired. Another practice was the Open Door: anyone who felt they had been mistreated by their manager could write to the chairman’s office (or to any other executive) to have their grievance investigated and fixed if warranted. Instituted in the 1920s by Watson Sr., it was soon taken seriously at all levels of the corporation. All employees were put on a salary; Watson Sr. had considered either piecework or hourly pay as undignified. Salaries meant no distinction between blue collar and white collar IBMers, since each achieved solidly middle-class standards of living. After Watson Sr.’s time, there developed a tradition of using first names everywhere, with one exception: CEOs continued to be called “Mr.” and in the third person as “the Chairman.” A factory worker could call Bob Evans “Bob.”
The second Basic Belief of customer service set the corporation on a trajectory to become fundamentally sales and services oriented. This was critical when for decades IBM leased equipment, because the company owned the equipment and so its customers could swap these out if they were disappointed with IBM’s support. That support called for collaboration across IBM, meeting expectations, and honoring commitments: “We found that good service to the customer requires the cooperation of all parts of the business.”12 This belief helps explain why IBM was selective in who they hired, how they were trained, and how their compensation and benefits reinforced the priorities of service and company-wide collaboration.
These actions facilitated the third Basic Belief regarding doing work well, about holding everyone to high standards of performance. It explains IBM’s long-standing practice of “completed staff work”; that is, thoughtful and thorough analysis of issues, such as the work of the Stretch and Future Systems task forces. That requirement of excellence made it possible to aim—IBM used the term stretch—for high objectives: creation of S/360, overachieving to meet seemingly impossible sales goals. Watson Jr. described the pursuit of excellence as “a blend of optimism, enthusiasm, excitement, and pace. The company was always on the move, constantly changing, always striving for something better.”13
All three beliefs underpinned IBM’s culture throughout its Golden Age, as Watson Jr. put it, “because they fit together and support one another.” He noted further, “If you hire good people and treat them well, they will try to do a good job. They will stimulate one another by their vigor and example. They will set a fast pace for themselves.”14 Any ambitious IBMer feared failure, and when it occurred, it was studied, because the real danger was accepting as habit something less than excellent performance.15
The memoirs of dozens of IBM employees, great or modest, illustrate how these ideals played out. Most observers of IBM’s culture speak about the outward manifestations in 100 Percent Clubs, Golden Circle trips, Family Dinners, white shirts and blue suits and black wingtip shoes, the Open Door, and IBM language. People could move around the company and find a familiar world. For decades, IBM jokingly stood for “I’ve Been Moved.” As one progressed through their career, many did move, especially as they rose into executive ranks, but all were constantly working on new things with new managers. The culture helped everyone work together. During IBM’s Golden Age, and despite the challenges of bringing out the S/360s and S/370s, fighting lawsuits, and battling competition, IBM was successful; employees felt the company had a Midas touch, which reinforced the value of its culture. People could not afford to “screw up,” and perhaps became overly cautious.
IBM’s style of working helps explain the thorough staff work presented for decades in the form of flip chart presentations, then in large slide decks called “foils,” and more recently PowerPoint presentations. Louis Gerstner, CEO in the 1990s, complained that his executives had difficulty discussing business issues without a stack of slides. It was not uncommon for an executive presenting to the corporate management committee for 30 minutes to prepare two dozen slides, with 250 others in reserve in case a question required additional detail.
Throughout these decades, IBM consisted of the U.S. half of the business, called “Domestic,” and the rest, called “World Trade.” While both halves shared the Basic Beliefs, measuring business in points, and the same budget and accounting methods, each operated differently. Domestic was a tightly managed monolithic structure. World Trade was a mosaic of different countries and cultures (as it is today). Domestic imposed its culture on everyone else, what one could call “corporate colonialism.” Its domineering mode of operating created tensions and even conflicted loyalties during World War II. Does a U.S. Army pilot who worked at IBM before the war bomb a German IBM manufacturing plant, surely killing fellow IBMers? Should IBM run a national company with Americans or use locals? In the Golden Age, management understood that national cultural styles varied.16
There was a third sphere of IBM—Corporate—with its satellite group and division headquarters located in the middle of New York’s Hudson Valley. The stories of Corporate operating in its own world were legion and were sufficiently believed that senior executives forced colleagues progressing up the organization to spend time working in the Domestic and global sides of the business before bidding for top jobs in Armonk. It was said that senior management and their staffs in Corporate believed executives who reported to Armonk’s Corporate executives were responsible for “their own business,” not the CEO. In reality, of course, no major divisional or group decision was made without the blessings of the chairman. Possibly a leftover from Watson Sr.’s days, it was more realistically the need to develop and coordinate worldwide strategies for product development, manufacturing, and distribution. The sorts of debates that occurred during the development of IBM’s early computer business and the S/360 continued through the rest of the century.
One student of the Golden Age, Nancy Foy, explained that, “IBM recruits people who value learning, change, and group achievement.”17 Change and flexibility were needed when technologies and markets evolved quickly, while frequent rewards for achievements reinforced the desired behaviors. Foy added, “Every time people transfer within the company, the IBM ethic as well as the technology goes with them, so the organization retains a cohesiveness, and internal unity that is self-grown, relatively undisturbed by outside forces.”18 This was true through the 1970s. As long as IBMers were guaranteed a job and played by IBM’s cultural rules, their employment proved secure and interesting.
This culture was fabulously expensive, requiring sustained financial success. Sales, consulting, and factory managers believed the company was run by a powerful financial community, the “F&P crowd” (finance and planning), always whispering into an executive’s ear, “No you can’t do that as we cannot afford it,” or offering up creative “financial engineering” strategies. Through the early 1980s, the F&P staff seemed less of an irritation, but in the late 1980s, sales managers thought them harsh and counterproductive when business began to deteriorate.19 Finance proved crucial to the effectiveness of IBM’s culture and operations. For example, during its decades of leasing, IBM paid up front for the development and manufacture of its products and only recovered these heavy costs over 48 months at best, or even 64 months. As sales branches leased more machines, the company had to borrow heavily to fund their manufacture. In the cash-starved Watson Sr. years, the company developed financial management into a fine art. IBM controlled growth, curtailing it to what could be delivered. Sales targets were set and managed to provide the company with a predictable annual rate of growth, typically 12 to 15 percent.
IBM noticed a pinch in the 1960s when third parties could buy an IBM machine and pay for it outright. These firms then leased equipment to a customer for less than IBM charged, amortizing the lease over 10 years, while IBM did it over 4 years in anticipation of replacing leased machines with a new generation. Changing IBM’s depreciation schedule from 48 months to 56 months in 1970 was a good example of financial strategy at work in support of corporate sales objectives. National tax laws and regulated accounting practices, most notably depreciation, affected IBM’s strategies. When consulting firms, such as Gartner, IDG, and Forrester, described IBM’s financial strategies, customers became more impressed with IBM’s managerial practices, while competitors feared and hated the firm even more.
IBM tied financial strategies to how it structured organizations and managed budgets. During the 1950s to 1980s, Corporate constantly introduced reorganizations from “groups” that consisted of divisions to sales branch offices. A neophyte staring at a bulletin board at work might have been forgiven for wondering what was happening. It seemed that the same executives and managers kept popping up in these announcements, taking on different responsibilities, almost as if playing a game of musical chairs every 18 months. IBMers became students of the organization in order to figure out where they fit and to nurture contacts to get things done, such as optimize their ability to solve problems, bring experts to their customers, leverage contacts to obtain exceptions to rules, and recruit resources to meet changing market conditions.
IBM developed a culture of cross-reporting, consensus-building conversations at each level of IBM to vet issues, which then got kicked “upstairs” to the next level, where another round of “concurs” or “non-concurs” took place. The process was often slow, frustrating an impatient workforce. However, once an issue came to the top of the company, a decision could be made quickly and, just as important, be executed rapidly, because much of the thinking about how something could be done had been worked out at lower levels. “Defining the problem” was the slow part, “executing” the strategy for addressing it the quick one. Basic Beliefs motivated many a mighty fight, such as about what computers to develop or with personnel practices, sometimes taking on the tone of a theological debate. However, in IBM’s world, once the relevant manager made a decision, no further complaining or debating occurred. Experts, such as sales or F&P, informed the decision-making process and execution.
It seemed everyone lived in a world of matrices, yet, regardless of organizational changes, employees knew what they had to do. As one veteran of the process described it, “I’ve never seen this in any other company,” but “with all those dotted lines and multiple bosses, everybody’s on the same side.”20 Recall that matrices first emerged when scores of executives and organizations reporting directly to Watson Sr. and codified into divisions had to coordinate their activities within the larger IBM of the 1950s and 1960s. The use of matrices proved useful in an environment of constant reorganizations. Jay R. Galbraith, a European business professor, opined, “It is probably the most complex organization that I have seen.”21 IBM “uses matrix designs throughout its structure to make key linkages.”22
But how did financial planning engage with how IBMers managed organizations? Watson Sr. developed the process. He had a sign in his office: “Businesses are built on net profits.” Net profits are earned and reported within one year, translated into earnings per share. Management at IBM always wanted earnings per share to increase at a steady, predictable pace over the years, an objective facilitated by leasing equipment in a growing market. The challenge, of course, was to maintain that gentle growth rate in earnings and have sufficient profits to reinvest in products and staffing in support of future net profits. It was a delicate balance, as illustrated by the problems of the early 1920s and 1930s, and again in 1952, when gross profit rose to 18 percent. Why was 18 percent a problem? Spending had grown just as much, hence there was no increase in net profits. Watson Jr. pointedly asked, “Where’s the control?” Before then, and subsequently, CEOs wanted to decide what the year-end numbers should be. A process of managing “the numbers” monthly developed, including the ritual of the chief financial officer going to the CEO in the fall to offer several scenarios for year-end numbers to choose from. F&P refined planning in the mid-twentieth century. Often their influence at all levels seemed to be micromanagement, such as occurred when an edict came out of Corporate canceling “nonessential” travel or employee education during the difficult years since the 1980s.
Organizations were given two types of targets: budgets (capital and operating) and year-end headcount. The first was about how much money an organization could spend. Management immediately above a subsidiary organization decided how it would be spent, such as on buildings, people, and travel. Management determined how many people any subsidiary organization could have by the end of the year. This approach resulted in every organization having an “admin,” F&P “staffee,” or manager to track—“control” (in IBMese)—the “numbers.” Nobody tolerated surprises involving their fiscal and headcount plans.
How did the numbers roll up, especially revenue? The lower one operated in an organization, the larger their target as a percentage of the quota, so that when “actuals” (results) were consolidated, they were sufficient to make each level’s targets up through Corporate. A hypothetical example from sales illustrates the practice. Suppose a sales VP at the division level receives a point target of 10 million and has ten districts. He might assign to the districts 10,100,000 points in total, spread across the ten districts. A district might then take its target of 1.1 million points and assign each of its ten branch offices roughly 120,000 points. Each branch manager might then assign to his sales managers a total of, say, 125,000 points. Not everyone was going to achieve their targets, so the delta (difference) between one’s targets and what one assigned was often calculated to account for the historic gap between target and actual achievement. The sales organization at each level provided guidance as to how much flexibility in assigning quotas was possible, because a higher quota could hurt the chances of someone making or exceeding their targets, which could have a direct impact on their commissions and bonuses. Organizations would meet their objectives or possibly “underperform” or “overachieve.” Overachievers low in the organization made up for underachievers. The larger the business unit, the less variation from targets occurred. This rollup occurred across all countries.
The clever part of the process was that IBM kept two sets of books. One, expressed in local currencies, conformed to local national laws around the world, as done by corporations worldwide. A second set was kept by every country organization reporting forecasts and actuals in points, not currency. Recall that one point equaled one dollar or “x” amount in pesos, francs, and so forth. Everyone was using points as the firm’s internal currency. Salesmen spoke in terms of points in their quotas and achievements. Product divisions did the same when forecasting pricing for new machines and software. Employees subconsciously converted currencies into points and points into currencies within a month of joining the company. Inflation, deflation, or other currency fluctuations could be accounted for using the points system. While country headquarters management kept accounting books in local currency, they internally spoke of points and only at the highest levels converted them back to revenue, profits, and expenses, all in dollars. Points were IBM’s version of a multicountry currency, like the Euro in Western Europe. The system worked and was used until IBM abandoned leasing in the early 1980s, at which time it switched to currency measures.
Other processes underpinned these activities involving setting of budgets and quotas, and financial management. The first and second linked the current year’s targets with a preliminary glance toward the next year or, in the case of manufacturing and product development, sometimes three years out. Financial planning involved the delicate dance of income versus expenditures. The entire company participated in annual time-consuming “Fall Planning,” a process that began in July or August and extended in iterative give-and-take manner until November, when objectives for the following year were locked down. By the mid-1980s, volatility in the marketplace had led to an additional “Spring Planning.” Both planning cycles occurred at all levels, with every account, product, and organization examined to see what costs and revenues and their scheduled occurrence were anticipated. It was both a top-down and a bottom-up process. Everyone around the world used the same forms and had similar agendas and deadlines. F&P imposed measures of performance, often as ranges, such as to expect 16–18 percent of IBM’s revenues in the first quarter, 21–22 percent in the second quarter, and so forth, so that if anything went awry, such as during an economic downturn, management knew instantly, across the company and within organizations, where performance gaps existed and probably how to fix them.
HOW IBM SOLD
It seemed everyone at IBM, and most supporters and critics, believed that IBM’s sales force was superb. Many of Watson Sr.’s sales processes persisted for decades with only minor modifications. Articles and books were written about them, Harvard professors taught about IBM strategies, competitors constantly raided IBM’s sales staff for employees, and customers mimicked the “IBM Way.” “Buck” Rodgers, a popular and dynamic sales executive, published a best-selling book about them, The IBM Way, in the 1980s.23 The most widely sold business book of the decade, In Search of Excellence, by Tom Peters and Robert Waterman, celebrated IBM’s customer service ethos. Such publications appeared in multiple languages.24
Since the 1950s, IBM’s salesmen have evolved, too. One change noted earlier was the replacement of tabulating salesmen with others more suited to selling computer systems. Worldwide, they were still young hires, usually under the age of 26, and all college graduates. So, they could be molded into IBM’s way without prior experiences causing them to qualify their adoption of the company’s practices. They continued to wear dark suits, white shirts, and regimental ties. Women and ethnic minorities entered sales in the 1960s and 1970s and also began working their way into other jobs at IBM. A sales background remained the fastest way to reach the largest number of managerial and executive positions in the company.
Sales School evolved, too. By the end of the 1960s, sales personnel went through a series of classes about how computers worked, IBM’s products, and even a bit of programming to teach them concepts of how software and hardware worked together. They took a one-week course on how to make sales calls. Some seminars explored telecommunications, others specific industries. Sales trainees, as they were known, shadowed a salesman for several months to learn what went on in an account. Finally, a trainee attended Sales School, armed with a case study of a customer from their branch office that they used to navigate through a half dozen mock sales calls with instructors playing the role of customers, culminating in a final presentation. Sales School was still the gate through which they passed to qualify as a “rep” into the 1990s.
Salesmen still worked in branch offices. Beginning in 1962, systems engineers (SEs) began appearing in branch offices. They knew in more detail than a salesperson how software and hardware worked but were also trained in many of the same topics as salesmen, including how to make sales calls. They solved software problems (“debugging” in IBM language), installed programs, and did technical analysis to see how much computing a customer needed. More women worked as SEs than in sales roles.25 SEs were largely paid a salary, while a salesman received a paycheck amounting to between 70 and 85 percent of their “assigned earnings,” the rest of which they were expected to make up by achieving their quota, which spun off monthly commission and bonus checks. Overachieving their quota was one way to pick up substantial bonuses useful to young peddlers buying their first home.
By the early 1970s, it was not uncommon for branch offices to have two to six marketing managers, each with seven to ten salespeople, one to three systems engineering managers, each also having seven to ten SEs, and an office-wide administrative manager to provide back office order processing, F&P services, and accounting. Field engineers (FEs), and by the end of the 1980s customer engineers (CEs), had a similar organization within separate branch offices managed within their field engineering division.
Branch offices had a “branch manager,” still a coveted position, an essential career milestone for those eager to enter the executive ranks. Through the 1960s, branch managers were quite independent, but in the 1970s they received more direction from regional and divisional management. By then, they were increasingly being told the types of sales and support people to have and what percentage of their attainment to achieve by product type and market niche. Nonetheless, it remained a coveted position. Career branch managers who ran large branches for a decade or more, as in Chicago, New York, and Paris, were famous inside IBM and took little guff from a young regional manager or divisional vice president. When any branch manager telephoned an executive, their call went through. A call from the “field” to a staff or headquarters employee was a priority to deal with.
By the end of the 1960s, there existed two computer sales divisions: DPD and GSD, later renamed the National Accounts Division (NAD) and the National Marketing Division (NMD). Office products, largely electric typewriters, had their own division, called the Office Products Division (OPD). OPD was the last bastion of the “tab salesmen” and home to some of IBM’s most consummate peddlers, who could charm a secretary into telling her boss that she could only work with an IBM Selectric typewriter, and were frequently able to “sell ice cubes to an Eskimo.” Branch offices reported to geographic regional offices. As these grew in size, they aligned by industry, particularly in DPD.
Watson Sr. opened the Nashville, Tennessee, branch in the 1930s, long before DPD, GSD, or OPD existed. Its experience was broadly typical. A half dozen accounts supported this office, consisting of the state government, local banks, insurance companies, and Vanderbilt University. By the 1960s, some of its salesmen specialized in government (public sector), others in banking and insurance. They knew what computers were used by those industries and introduced their customers’ data processing managers to others in their industries to share information. In the 1970s, the sales branch office split into DPD, GSD, and OPD, and FE. By the early 1980s, the DPD (now NAD) branch had a sales unit devoted to banks and insurance, another for manufacturing and process accounts, and a third for state and local government, elementary and secondary schools, and higher education.26
In 1983, a 32-year-old branch manager, Buzz Waterhouse, successfully managed these “territories,” propelling him into IBM’s executive ranks. In addition to himself, his branch had a mixture of young and permanently stationed older salesmen and a young and ambitious set of first-line managers. Dave Condeni, a new salesman in 1983, became a divisional executive in sales, while a salesman from the 1950s, P. E. “Bud” Cook, served as DPD’s vice president of marketing operations. All the first-line managers went on to successful careers at IBM after their tours in Nashville. The same could be said of many branch offices around the world. It was a continuation of Watson Sr.’s ideal.
Each region had a half dozen or more branch offices in the 1960s and 1970s, and in some countries these reported to “areas” with several dozen branches or directly to a division vice president. Regional and area managers were usually stars on their way up, typically in their 30s in the 1960s, often older by the mid-1980s. Divisional vice presidents were also in their late 30s to early 40s. DPD had a practice in the 1960s and 1970s that its president had to be under the age of 40 so that he would still have enough time (runway) to get through that assignment (usually two to three years) and move on up to compete for the role of CEO. In those decades, IBM had ten layers of management.27 In small countries, the organizations had less structure, although large countries such as Great Britain, Germany, France, and Japan supported considerably larger organizations. Each regional, divisional, group, and corporate organization had accountants, F&P staff, lawyers, “marketing practices managers,” and personnel managers (human resources, better known as HR). Divisional, group, and corporate staffs had marketing people to do product support for the branches, “media relations” (PR and press relations) people, and “competitive analysis” people with sales experience tracking competitors and educating sales staffs about their activities and offerings.
One student of the company’s operations aptly explained the behavior of IBM’s salesmen: “They embody the combination of arrogance, image, pretentiousness and service that gives IBM its present eminence,” another manifestation of the company’s culture.28 These employees and their regions and areas kept lists of customers they needed to work with, including companies yet to become customers. They tracked their computing activities, firm by firm, agency by agency, and country by country. Over the decades, these lists acquired different names, such as “key accounts” (1960s and 1970s), “target accounts” (1980s), or “Top 100” (post-2000), with “large accounts” always the most important. Multiple levels of IBM interacted with these organizations, and if an important sale was at risk, senior management would swoop in to talk with customer executives. IBM divisions paid close attention to customer needs, ran task forces, and conducted studies to understand and address customer issues.
For enterprises such as multinational corporations with many locations and multiple salesmen, IBM sales established two programs, called “Selected National Accounts” (SNA) and “Selected International Accounts” (SIA), the former for a customer within one country, the latter for global accounts. Participants included General Motors, Shell, British Petroleum, and Canadian Bell, among others. One branch office would be responsible for ensuring all others working with that account coordinated support and sales. Large corporations with many offices and factories around the world appreciated this feature of IBM because no other vendor provided that level of coordination. The headquarters branch office received duplicate points for all sales made by SNA and SIA branches. It also carried a higher quota to account for those extra points. If a problem developed, IBM’s response time was lightning fast, with SNA headquarters staff arriving on the scene within hours or, if they had to travel across the world, within a day or two, if needed. Problems leading to such actions included major competitive threats, large accounts receivable problems in one location that might affect others, changes in national regulations (such as de Gaulle encouraging French companies to consider buying French computers before IBM’s), or a customer’s business downturn compelling budget cuts.
Customers admired, feared, and sometimes disliked their sales support. Data processing managers did not like the intimidation they experienced if it appeared they were going to make a non-IBM product acquisition. If they were not one of IBM’s top customers, they sometimes felt unloved, “remote,” and spied on with the efficiency of a national intelligence agency. In fact, most, if not all, salesmen kept detailed written files on every account. If a large account was not an SNA or SIA customer, by the 1960s these accounts endured multiple sales divisions of IBM calling on them, often competing against each other for the same business with different IBM products. The SNA/SIA program was intended to address that problem and proved relatively successful.
IBMers were maniacal competitors, but they had their limits, delimited by corporate ethics. Beginning in the 1960s, every year, all who worked with customers had to read and sign a document saying they had read the booklet Marketing Guidelines. A by-product of the 1956 consent decree, reinforced by a desire to be both ethical and in conformance with national trade laws, it was influenced also by the extended series of lawsuits in the 1960s and 1970s. Over time, IBM established written rules to follow. Failure to do so frequently led to IBMers being fired, often within days or weeks of a violation. These rules were meant to keep IBM out of court and to prevent it from being accused of “predatory marketing.” The rules were simple: Thou shalt not disparage a competitor, only compare features of IBM’s products to those of a rival in a factual manner. Thou shalt not “unhook,” meaning cause an account to cancel an order with a competitor. Thou shalt not bribe a customer, which was challenging to obey in countries where bribery was normal practice. Thou shalt not “book” (take) orders for business that were never going to materialize or take credit for existing orders not known to be solid.
Field organizations kept receiving training during the middle decades of the twentieth century. As a result, salesmen and customers kept current about trends in the computer industry, mainly because IBM had the largest sales force and the most customers. This circumstance helped make the “IBM Way” the de facto approach by which much of the industry worked. IBM’s ethics, way of talking, and thinking became how things were done.
PERSONNEL PRACTICES IN THE AGE OF FULL EMPLOYMENT
As I was writing this chapter in 2018, IBM was shedding employees and moving work from one country to another, involving additional turnovers. Executives called it “workforce rebalancing” in response to changing “market dynamics.” IBMers called it firings, and it had been going on for over a decade. IBM had also brought in tens of thousands of new people through over 100 acquisitions during the previous decade to rapidly deploy capabilities that in earlier decades would have been nurtured organically by retraining employees. In earlier times, management thought employees could learn quickly about some new technology, but it took time to understand how to do things at IBM, so understanding how the firm worked was believed to be more important than knowledge about some new technology. Most employees today would not recognize personnel practices from Watson Sr.’s day. None of those practices proved more central than IBM’s full-employment policy. Today’s employment practices represent some of the most dramatic divergences from nearly all of IBM’s history.
Recall that central to the company’s personnel policies was the implicit contract between the employee and IBM, which we can paraphrase as, “You give us the full measure of your talents, thinking, devotion, and time, and we will guarantee you lifetime employment with interesting assignments and a comfortable standard of living.” Such a pact does not diminish the fact that it was always difficult to do. IBM management created and sustained personnel practices in support of full employment, net profits, revenues, and returns to shareholders. For the most part, they were successful until the late 1980s.
In the post–Watson Sr. period, Tom Jr. continued his father’s paternalism, which he passed on to the next generation of executives. IBM’s senior managers of the 1950s to 1970s lived by IBM’s values and practices and remained more committed to his values than subsequent generations of management would be. Managers at all levels were keepers and promoters of the culture. They were also punished if they did not adhere to it. Managers hired employees, ensured they were trained, and had to generate enough revenue to support them. Benefits remained stable and funded through the middle decades of the century. These included bonuses, starting salaries roughly 7 percent above competitors’ and with increases, medical insurance paid for by IBM, vacation-like events for high achievers, additional funding to take care of handicapped children and immediate family members in crisis, the Watson Scholarship for college-bound IBM children who exhibited outstanding academic performance, IBM stock purchases at a discount, and a pension, among others. Employees could apply to have the company fund local community projects in which they were involved. In exchange for benefits, IBMers were expected to support the company and to embrace IBM’s culture and its rules.
An element of all of IBM’s personnel practices concerned how it treated what today are called “protected groups,” including ethnic and religious minorities, people with disabilities, and women. IBM had a long history of protecting, nurturing, and recruiting such people. Altruism served as a reason, but another was the hard fact that they represented pockets of potential employees. Beginning in 1943, when the pool of potential male employees in the United States dried up because of the military draft, IBM began hiring handicapped people, including blind and mentally challenged workers. They were offered ever more opportunities. In the early 1930s, service staff in factories included women. Women entered field engineering’s ranks in growing numbers in the 1940s and became systems engineers and salespeople in the 1960s. Women worked their way up the management ladder. By the early 1970s, IBM had formalized hiring and promotion of women to tap into a talent pool already in the firm and in response to affirmative action laws in the United States.29 In 2012, IBM appointed its first female CEO, Virginia “Ginni” Rometty, who started her IBM career as an SE. By the end of the 1980s, nearly a third of IBM’s managers were women.
IBM’s response to minorities and women was an example of how it often embraced practices widely adopted by other large U.S. and European corporations. The civil rights and women’s rights movements in the United States in the 1960s, followed by U.S. federal civil rights laws and regulations mandating inclusion of protected groups in employment, reinforced the authority of personnel departments to implement the kinds of formal processes described here. Over 95 percent of corporations with 5,000 or more employees already had personnel departments by the early 1930s. By the time IBMers were developing affirmative action processes in the 1960s, other firms were doing the same to avoid legal battles with individuals and federal authorities, while personnel managers were touting the benefits of tapping into a larger, more diverse internal hiring pool.30 By 1970, 20 percent of all large corporations had formal programs similar to IBM’s, and not until 1991 did even half of all large U.S. companies have processes that included protections against discrimination, training on diversity, and measurement systems to track progress toward diversity.31 While the U.S. government backed off forcing corporations to implement such programs during the Reagan administration, these had proven so effective that many companies continued with them, including IBM. IBM’s affirmative action initiatives started at the same time as the 20 percent, but built on its earlier experiences more extensively than most and then shared its experiences with customers, burnishing its image as a progressively managed enterprise.
On the U.S. side of the company, prior to the 1950s, most IBMers were white men. The first observable change came with the influx of Jewish scientists and engineers in the 1950s, with the increase in women soon after. The inclusiveness of various groups occurred worldwide. IBMers worked in a meritocracy that valued results and adherence to IBM’s values. A great sales manager who abused his employees would go nowhere in the company. At the other extreme, someone closely tied to a rising executive could ride up the corporate ladder but still had to be competent and exhibit strong interpersonal skills. IBM was not, however, egalitarian. A slight caste system existed. At the top of the social order were sales personnel from sales people to senior executives. IBM’s CEOs were all in sales at one time. IBMers and customers thought the importance given to leadership from sales was one of IBM’s success factors, because these people paid less attention to the features of a technology and more to solving a customer’s problems. The majority of senior executives were U.S. citizens, to the consternation of ambitious IBMers in Europe during the Golden Age, an issue discussed further.
Managers comprised a powerful minority within IBM’s population. Less than 5 percent of IBMers became executives, while approximately 12–15 percent were managers during the Golden Age, the percentage being lower in the 1950s, higher in the 1980s. A manager hired, fired, and controlled the work of employees. In the 1960s and 1970s, one had to have two or more employees to be a manager, but later some held the title but had no employees reporting to them. By the late 1990s, as budgets tightened and organizations flattened, some managers had as many as 50 employees reporting directly to them. Managers were not treated gently the way employees were. They were expected to perform, and when they didn’t, they were brutally pulled out of their jobs, some literally overnight. If union activity took place within one’s organization (unit), that manager could easily be taken out of his or her position. An executive whose organization failed to accomplish its objective could be pressed into early retirement, be denied further promotions, or be put into the “penalty box,” especially executives. The penalty box remained widely used, including during the Golden Age, when, for example, the PC side of the business became a career killer for potential CEOs who had difficulty in making that business prosper. They could wait it out or, as many did, leave IBM. So managers remained an insecure lot, especially as the Watsonian paternalism began to wear off. As one IBMer observed, “The nearer you get to the center of IBM, the more you have to conform. More of your attitudes are determined for you up there.”32 Branch managers were saying the same thing by the early 1980s. Nevertheless, they were expected to be “tough,” whereas being “soft” harmed one’s career advancement. While being tough, they had to be gentle with their employees, persuading and motivating them. Early female executives had to be even better than men at these two roles.
One unattractive part of IBM’s managerial practices was the paucity of non-U.S. senior management either at corporate headquarters in Armonk, New York (the new HQ since the early 1960s), or on the board of directors. The one exception repeatedly trotted out by IBM apologists was Jacques Maisonrouge (1924–2012), who joined IBM in 1948, worked his way up in sales in Europe to become chairman of the board of World Trade in 1976, and retired in 1984, but even he complained about the lack of international representation.33 The wholly owned national subsidiaries, however, were often 95 to 99 percent populated with local nationals. American management worked in a national subsidiary at critical moments, as in Europe just after World War II, if it experienced a round of corruption or if it was not performing as required.
Nothing attracted more attention from management than a personnel problem. If an individual “open doored” his management, there was a process involving immediate appointment of an investigator, who reached out to the offended employee within 24 hours of the employee’s lodging of a complaint. In the Golden Age, these complaints ranged from a perceived unfair appraisal to sexual harassment, and occasionally bias on the basis of age or race. To avoid the first problem, IBM developed a process that described each employee’s job and objectives, ideally to gain the employee’s commitment to the desired goals, and included mandatory appraisals at midyear and at the end of the year. The process was designed to avoid having anybody being surprised by an appraisal. Employees were given formal and informal opportunities to improve their performance. Managers learned to “keep book,” documenting an employee’s performance; otherwise, if they fired someone, invariably the lawyers and human resources staff would overturn their action.
All employees were anonymously surveyed for their opinions of their management, jobs, and about IBM.34 Their local management met with groups of them to discuss how to address areas of concern, some of which they feared might lead to establishment of unions.35 Meticulous records of these events were kept. If management became aware of union organizing, investigatory teams formed to find ways to discourage formation of a union, unless required by law. Unions did not exist in most of IBM’s national companies. Management believed unions would interfere with the company’s ability to change the roles of their employees or to move them about as needed. Salaries and benefits were hardly issues, since IBM paid competitive salaries and offered benefits similar to those of unionized companies.
Opinion surveys informed management about the mood of employees. In 1968, despite the stresses of S/360 on everyone at IBM, 40 percent of surveyed employees thought IBM was one of the best companies to work for, although their work life was filled with tensions and long hours. In 1972, at the time of a global computer industry downturn, that 40 percent had shrunk to 27 percent. As the firm grew in the 1960s, it also became bureaucratic and too process and rule driven. In 1968, already 49 percent of employees reported their managers were insisting that people adhere to company rules rather than to the intent of company practices. In 1972, that number climbed to 72 percent, and it remained there or at higher levels through the 1980s. Employee morale dipped in the late 1960s to early 1970s and rose in the second half of the 1970s and early 1980s. That earlier feedback concerned corporate officials. As the era of the S/360 receded, younger employees complained that their work was not as challenging as they wanted, again an aspect of working at IBM uncovered through opinion surveys. These employees reported that work pressures and objectives increased.
What happened when business conditions warranted reductions in headcount, given the full-employment operating principle? The recession that began in 1970 made it clear to Corporate that it had too many employees, so hiring slowed or stopped. But IBM could not dismiss thousands quickly, nor could it avoid the problem. DPD in the United States, for example, needed to shrink by 14,000 people. The bulk of the excess employees shrank through normal attrition, such as dismissals for poor performance, retirements, and people leaving IBM to work for other enterprises. “Excess resources” became a recurrent topic at staff meetings up and down the organization worldwide until the recession ended a year later. Task forces addressed the problem arising in the early 1970s and mid-1980s by offering early retirement programs in exchange for additional accruals to their pensions or outright one- to two-year salary bonuses. Programs were funded out of operating budgets and gross profits and worked to reduce the number of employees. A less successful second strategy, called “back to the field,” by which overstaffed division, plant, and corporate staffs were transferred to branch offices to help sell as a way of keeping them employed, did not work well, as not all employees adjusted well to working in branch offices.
Changes in IBM’s products and organizations encouraged employees to leave. Annual turnover ranged between 5 and 7 percent, higher if there was an emphasis on reducing “headcount.” In the second half of the 1980s, the process sped up, although as late as 1983, Think magazine, now only for employees, carried an article assuring all of IBM’s continuing commitment to full employment, while staffs in Poughkeepsie and other sites were being offered “early out” programs. Walter E. “Walt” Burdick, IBM’s vice president of personnel, told employees that “the antithesis of respect for the individual would be to take somebody’s job away because of factors he or she had no control over—say, a recession, the loss of a contract, a declining workload.” That issue of Think led with the tag line, “When the economy runs into stormy weather, it’s nice to know the commitment is there”—just several years before IBM entered a near-death crisis that ended “full employment.”36
A dark underbelly of IBM’s full-employment policy was its effect on ambition. For example, if someone had not made it to middle management in sales by age 40, they understood that they had plateaued and needed to decide whether they could accept another 15 to 20 years without further advances or should leave IBM to pursue other opportunities. Since career paths had become so rigid by the mid-1970s, one could reasonably project how far they were going to go and through what jobs. Many felt so comfortable in “Mother IBM” that they remained.
Bob McGrath (b. 1929), an American IBMer in the 1950s and 1960s, began publishing an alumni directory of ex-IBMers in 1972.37 By 1973, his list had 1,500 names, a number that grew for decades. McGrath thought that in the early 1970s, on average, 2,000 people worldwide left IBM each year out of a population of 250,000 to 260,000 people.38 His numbers seem too low, since many people did not appear in his database. By the 1970s, annual turnover hovered at between 5 and 8 percent, below the average for most large U.S. corporations but higher than in Western Europe.39 Some went into wonderful jobs, such as vice presidents, presidents, and chairmen of companies; IBMers who knew they could not become CEOs at IBM, for example. Over a third of those McGrath tracked stayed in the data processing world, which helped to reinforce IBM’s dominance. They took their IBM ethics and business practices with them, along with IBM’s long-standing policy of not participating in corrupt practices.
We have looked inside IBM during its Golden Age and seen how a large, successful enterprise built on its corporate culture and earlier efforts, thereby facilitating a period of profound, if difficult-to-achieve, growth, but to complete a full picture of that era, we now explore external manifestations of IBM’s activities. Through that exercise, we uncover seeds of its future problems, too.