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Weekly Column

Fixing IBM: Big Blue has big problems

Status: [CLOSED]
By Robert X. Cringely

There is an axiom in baseball that the best and easiest way to turn around a losing team is to fire the manager. The rationale is simple � the manager is usually one of the cheapest people to fire, and about the only one whose departure is felt by every high-priced player. Since managers are fired, not traded, firing is simple. And at some level, it is true that the manager is responsible for the team's performance, and it is probably a mistake to count on the person who got you into trouble to now get you out of trouble.

Well, baseball and business have a lot in common, and IBM just got a new manager in CEO Sam Palmisano. He replaces Lou Gerstner, who isn't now the skipper of the Triple-A team in Tacoma, but might as well be. Gerstner, who retired after a celebrated decade at IBM, left the place in a mess.

Of course Gerstner was IBM's savior, stepping in to fix the bone-headed mistakes of IBM CEOs dating back to John Opel in the early 1980s. Gerstner was good for IBM. He was an outsider who could get away with cutting 120,000 jobs, shutting down or selling off most of IBM's manufacturing capacity, and pushing the company to expand its services business � a business that mimicked Gerstner'sprevious success at American Express, where service was all they did. These changes made Gerstner a hero, but the fact is he didn't really change IBM on the inside. And now the company is suffering for that, announcing recently an expected earnings shortfall of giant proportions.

Corporate delusion is one of those things that are hard to overestimate. Corporations see what they want to see, even if it makes no sense at all. IBM got into trouble under John Opel, when a clever CFO came up with the idea of taking mainframes off leases and selling them to customers. Income skyrocketed as rentals were converted into sales, but IBM, big smart IBM, somehow convinceditself that this revenue increase would be permanent. They decided to simply ignore the fact that eventually all the leases would be converted and sales would drop to nothing. That's the little problem that Gerstner had to deal with. Compared to that, having Microsoft as an enemy was nothing.

These problems � and the difficulty of solving them � aren't unique to Gerstner or to IBM. Most executives have only 2-3 techniques for achieving success. Gerstner's are described above. At Apple in the mid-1980s, John Sculley became an overnight success as CEO simply by firing Steve Jobs and cancelling the $200 million in crazy projects Steve had been funding annually. That $200 million dropped to the bottom line and Sculley looked like a genius. He looked even better still when he cut R&D, giving up any real technical future for Apple as its "Chief Technology Officer." Those were Sculley's two techniques, and they eventually got him fired when it became clear that Apple couldn't survive by standing still. Having already used his two techniques, Sculley was paralyzed.

I don't know Sam Palmisano and I don't know what are his two techniques for managing a turnaround, but I have a fairly good idea of what needs turning. Just the little billion dollar mistakes that Gerstner never got to or, more likely, didn't even know were there.

IBM's great successes come through great leadership. There is always a champion. These people rise somehow from the ranks, present a new and bold vision and make a commitment to make that vision real. For a moment, as if in shock, the rest of IBM gives these people a chance to succeed - and they do. And then they are punished for it, shuffled off into a new job doing something completely different, with a better title but no power at all. Don Estridge, who made the IBM PC a success, was made Head of Global Manufacturing. I once asked him what this title meant, and he admitted that he had no idea. Estridge saw his new job as comfortable exile.

What actually happens is these visionary projects are too small at first to even be noticed by the real management structure at IBM. But success brings them into management-by-committee mode, where vision and leadership are lost, decisions come late and are often flawed, and where there are typically more managers and "decision-makers" than there are workers. Overhead mounts, budgets are squeezed, and eventually any strategic advantage is lost.

It is a peculiar system, because it counts on those visionaries to come up with new businesses, then systematically destroys those very businesses.

At IBM, where almost everyone is a manager or aspires to be called that, the bottom three levels of management aren't allowed to see the budget for their own business. How do you succeed if you don't know your costs? How do you increase profitability if you aren't allowed to know what your profit margins even are? Well, it is impossible, of course.

Anything that is bought or spent goes through a financial review process managed by folks who typically know the money, but have no idea at all about the strategic plan for the business unit. So one group of managers knows the business and nothing about the money, while another group knows the money but nothing about the business.

Then there is procurement. In many cases, you or I could buy the same item on the Internet for less than IBM can get it from a "core supplier." Almost everything is bought from core suppliers, but the identity of those suppliers is usually a secret. Why? Nobody knows why. If you need to buy something for which there is no assigned core supplier, then a core supplier will go find you the item, markit up and sell it to IBM. Buying anything takes months, and always costs more than just going to a store.

How does IBM make money with a culture like this? Well, right now they aren't making money. But the more awful truth is that for most IBM businesses, the company - at any given moment - has little idea whether a business is profitable or not. This makes it very difficult to plan further investment or to know which businesses to shut down.This is not to say that IBM can't make money. They make money from services (Gerstner's great contribution), from mainframes, from their extensive patent portfolio, and maybe from software. But just think how much more money they could make if they ran IBM like a business instead of like a country.

And now even the successful parts of IBM are beginning to show cracks. Part of IBM's very successful service business is a help desk system that counts, tracks, and provides reports on customer problems. To an IBM committee, that's what a help desk does. But to an IBM customer, a help desk should lead to fewer problems that need helping. Nope. Help desks count, track, and report. Working toprevent or eliminate problems isn't part of that job description, as IBM customers are beginning to notice.

Power at IBM is based on headcount, so there is no incentive to use fewer people. So projects are overstaffed, take too long, and don't make good financial decisions. Return on Investment (ROI) typically isn't a factor, because to make it a factor would lead to smaller staffs and less power.

Here is what I think Sam Palmisano should do. IBM is too centralized. Run the divisions like independent companies. Get new financial systems and run those independently, too. Think of IBM as a holding company with lots of business units, each of which has its own profit and ROI goals. Link manager compensation to profitability, and have real ways of measuring that profitability. Get rid of committees. If you must have a committee, limit it to no more than six members. Remove all the chairs from conference rooms. Overhead departments like IT, HR, etc. should be more efficient. Compare them to other companies and to outside suppliers. If IBM can't be competitive, then outsource these functions. Revamp the sales commission structure to base it on profitability over the life of the deal.

That one paragraph holds all that Sam Palmisano needs to do to become a legend at IBM. Get to work, Sam.

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