IBM: The company of the future

How IBM went from selling stuff to selling ideas.

Lou Gerstner’s first day as CEO of IBM — April Fool’s Day, 1993 — began with the repeated banging of his fist on the front door. He had yet to receive a security badge, and he was locked out of his own company. A cleaning lady eventually let him in and guided him to one of Big Blue’s large offices. But as Gerstner wandered the halls of the building in Westchester County, N.Y., looking for his first meeting, he had more pressing concerns than his missing security pass. The company was foundering. IBM had failed to predict, or even react to, the rise of the PC. It had yet to acknowledge the growing power of Microsoft, one of its key suppliers, and it was still sending letters to CEO Bill Gates addressed “Dear Vendor.” Once lauded for cultivating relationships with customers and vendors alike, IBM had become deaf to its clients’ needs as it tried to shove more and more hardware out the door.

Staff morale was at a record low, and a nasty ditty about former IBM CEO (Big Bad) John F. Akers was popular among those toiling on the front lines. (“Kind of big in the wallet and narrow in the mind / And every VP knew how to kiss the behind / of Big John,” it went.) More worrisome was IBM’s financial situation. In 1991, the company announced a massive loss of $2.9 billion. By 1993, its losses had soared to more than $8 billion (all figures are in U.S. dollars). Many doubted the tech giant would ever recover. The Wall Street Journal proclaimed that “IBM will never again hold sway over the computer industry,” and there was talk of ending it all and splitting the blue behemoth into seven smaller “Baby Blue” units.

Gerstner was recruited to turn it all around — fast — and he had plenty of ideas. The company had to stop spending. It had to turn a profit in 1994 to send the message that IBM was stable. Perhaps most important, Gerstner needed to show customers that IBM was focused on their needs, not, as he put it, “just pushing iron [mainframes] down their throats to ease our short-term financial pressures.” Gerstner would transform IBM from a hardware and software vendor into a trustworthy guide to the Internet age. Any company could make PCs, servers and software, he reasoned — and those in China could do it cheaper. But IBM was uniquely equipped to send in experts who could show companies how they could use that technology to solve their most pressing problems. IBM could shine by cozying up to the customer and becoming the gateway to their technology needs. In short, the solution was for IBM to go from selling stuff to selling ideas.

International Business Machines’ first president, Thomas J. Watson, was a volatile man with a strong background in sales and a keen interest in his customers. Right from the beginning of his tenure in 1914, IBM was all about ideas. The company’s first trademark, filed in 1935, was the slogan “Think” — it didn’t trademark its own name for another 14 years. Watson liked his ideas big and risky, and made bet-the-company decisions that brought IBM near disaster on several occasions. Each time, however, the company recovered, and became even stronger than before. In 1956, at age 82, he finally relinquished control to his son, Tom Jr., but the focus on ideas and service didn’t change. IBM grew and expanded globally, and by the mid 1960s it had built up a reputation for not just providing business equipment to its clients, but sticking around to make sure that equipment worked. Back then, “There was a saying among IT professionals that nobody ever got fired for buying an IBM,” says Richard Tedlow, author of The Watson Dynasty: The Fiery Reign and Troubled Legacy of IBM’s Founding Father and Son. “What that meant was that if you bought it and it worked, you were a hero. And if you bought it and it didn’t work, you were able to say, ‘Well, gee, it was an IBM!’ “

By the late 1970s and ’80s, however, the focus on service began to fade. Business was booming, thanks to the growing demand for room-filling mainframes, but IBM got so caught up in selling stuff, it forgot about the service. In 1979, sales of IBM’s System/360 mainframes reached $7.5 billion, making $1.08 billion in profits. The company seemed invincible. IBM sales reached their record high in 1984 at $6.58 billion, and the company employed an incredible 405,535 people at its 1985 peak.

Unfortunately, IBM’s subsequent decline was just as rapid. Just one year later, in 1986, sales remained strong but profits became unexpectedly lean. By the time the recession hit in the early 1990s, IBM was losing billions of dollars a year. In January 1993, the unpopular Akers retired, to be replaced by Gerstner four months later.

Almost immediately, Gerstner cut more than 150,000 staff and shifted the focus from hardware sales to IBM’s IT services business unit. He rejected calls to subdivide the company, arguing that the company’s size and reach were key assets. Instead, Gerstner set about changing IBM’s culture, refocusing it on customers’ needs rather than shilling computers. He travelled the world, visiting clients like Procter & Gamble, which was one of IBM’s best customers yet hadn’t heard from the company’s CEO in decades.

As he wrestled with his company’s public image, Gerstner tried to change its internal ethos as well. Watson, IBM’s founder, had famously imposed a professional suit-and-tie dress code “because that’s how the IBM customer dressed,” and he didn’t want the clothes that his people wore to be a distraction. That dress code went unchanged until 1995 — when Gerstner realized customers weren’t wearing suits anymore. Silicon Valley now favoured open collars and sneakers. So Gerstner introduced a new casual dress policy that mirrored IBM’s new client base, while encouraging the introduction of flexibility and play into the IBM workplace.

Gerstner’s changes paid off, and when he retired on the eve of his 60th birthday in 2002, the IBM board quickly appointed Sam Palmisano, the company’s chief operating officer, as its new CEO — thus signalling that there would be no major changes in strategy. In fact, Palmisano started with a string of multi-billion-dollar deals that severed many of the remaining ties with IBM’s manufacturing past, while bolstering its new position as a global problem solver. In 2004, IBM sold its entire PC division — including the flagship ThinkPad notebooks — to China’s Lenovo Group.

Meanwhile, IBM was building up its stockpile of brains. In 2002, it bought the consulting division of PricewaterhouseCoopers for about $3.5 billion in cash and stock. IBM then merged its existing consulting services with its new subsidiary to create a new global business unit, IBM Business Consulting Services, comprising more than 60,000 consulting professionals. The move made IBM Business Consulting Services the world’s largest consultancy organization, with operations in more than 160 countries. “The acquisition of PwC really added significant capability to us at the top end of the business value, client value portion of the business chain,” says Bruce Ross, president of IBM Canada. IBM also aggressively acquired software companies, spending $4.8 billion on 13 firms in 2006 alone.

IBM is now a completely different company than it was when it hit rock bottom in 1993. Hardware products such as servers and semiconductors — once the backbone of the company — accounted for just 9% of IBM’s revenue in 2008. These days most of the company’s revenue comes from software (40%) and its consulting and business services (42%). “We’ve really transformed our business from just hardware and software products to very much a services-oriented business,” says Ross. The result? The company is now back up to 398,455 employees — close to its record high — and it enjoys a whopping $96 billion in annual revenue.

As a company, IBM now aspires to have its service, software and hardware divisions complement one another. In theory, an IBM consultant can identify ways to make your company run more efficiently, come up with a plan to solve your problems, then sell you the software and servers to implement the solution. The key is that, like in the old days, IBM sticks around to make sure all that software and hardware really does solve the problem.

The company’s mobile phone application for Air Canada illustrates this new focus. In this project, IBM was hired to develop an app that allows travellers to check in for flights and obtain boarding passes digitally using a mobile smartphone. Upon entering the plane, a bar code can be scanned right off the smartphone’s screen, which eliminates paper waste, saves the customer time at check-in and leaves a digital trail that’s easy for Air Canada to track. But while the technology is impressive, what IBM is most proud of is how easy it is to use.

Alon Kronenberg, who heads up the two-year-old mobile division at IBM, worked on the Air Canada project. He spends most of his days designing mobile apps with his team in Toronto. Standing in the middle of his open-concept office, featuring dot-com era neon wall mounts and a foosball table in the kitchen, Kronenberg holds up one mobile device after another — first an iPhone, then an Android, then an industrial-use phone that looks like it was made by Tonka — and demonstrates how each is loaded with a new bit of magic. One contains the Air Canada app, another a prototype for an Egyptian bank that wants to introduce mobile banking to the country’s cash-based economy. The hefty industrial phone contains software designed to help airlines scan and organize their payloads. The products might serve different purposes, but the end goals are largely the same: technology that just works. “If it’s a pain to accomplish something on a mobile phone, people will pass on it,” Kronenberg says. None of the technology that IBM used for Air Canada was mind-bogglingly new. IBM just found a way to improve the customer’s experience. “It’s not about doing stuff that hasn’t been done,” says Kronenberg, “It’s about taking what’s out there and packaging it in a way that really adds value.”

IBM itself has taken that strategy and packaged it as a big idea, the sort that Tom Watson Sr. might have loved. In a speech to the Council on Foreign Relations in November 2008, Palmisano unveiled the notion of a “Smarter Planet,” a world where improved technology allows us to collect information, share it, analyze it and use the resulting insights to make things run more smoothly. “Our planet is becoming smarter,” he said. “This isn’t just a metaphor. I mean infusing intelligence into the way the world literally works — the systems and processes that enable physical goods to be developed, manufactured, bought and sold, services to be delivered, everything from people and money to oil, water and electrons to move, and billions of people to work and live.”

In IBM’s Smarter Planet vision, there are no jet packs or robot butlers. Instead, there is the continual improvement of the systems we already have, from street lights to water filtration systems to trucking lines. For instance, while working for Rosenau Transport, one of Western Canada’s largest freight carriers, IBM developed a telemetry system that makes the average GPS look like a map book. The system collects information about traffic congestion, notes customers who take an extra-long time to load, and knows which trucks can leave city limits. Sensors even record the tire pressure. The system is smart enough that its human operator “only has to deal with exceptions,” says Terry Rhode, Rosenau’s IT manager and system controller. “The operator reviews what the system decided and says, ‘Can’t do that, because this shipper hates Bob. You can’t send Bob in there because his ex-wife is somebody’s cousin.’ “

In a similar fashion, IBM teamed with the New York Police Department to create a data warehouse of information that tracks 120 million New York City criminal complaints, 31 million national crime records and 33 billion public records. Yes, they’re just creating better ways to manage data, but with the system’s help, New York’s crime has dropped by 27% since 2001.

IBM has even developed a system for Galway Bay in Ireland that examines how pollutants move through the waterways, and their effect on surrounding fish populations. The system accesses streaming data, processes it, and then uses software to look at the information. IBM contends the same technology could be used to explain financial traffic and currency flows worldwide, or to track trade volumes in the financial services industry. Through thousands of such projects, IBM’s new Smarter Planet focus is not just changing the company but the larger business community. “It’s not a new packaging,” insists Ross. “It’s a real transformation agenda that we believe the marketplace is heading to.”

If IBM really is the company of the future, then it’s fair to ask what kind of company it is. Not just what it sells and how it generates revenue, but how it is structured as well. This is key because, in a way, IBM’s structure is what it sells. As a global network of 398,455 problem solvers, in some ways the company is like a giant brain, made up of interconnected smaller brains. When you go to IBM, you’re hiring that giant brain to solve your problem. A closer look at the company reveals how important those individual brains — or employees — are, but also how important the overall web of connections is. Three aspects of that network stand out in particular: first, that it is unusually democratic. Second, that it is global. And third, that it uses cutting-edge technology to help its workers form and dissolve problem-solving networks on the fly.

IBM’s democratic structure can be seen in such organizations as its internal Academy of Technology. The institute is a collection of senior technical leaders from across the company who undertake cross-disciplinary studies, drawing together hardware, software and service expertise. Bob Blainey, distinguished engineer, next generation systems, is a member of the academy. He says it is self-organized, with new members voted in by existing members, and the president and officers are not appointed by senior executives but elected by the membership. Overall, the academy “works as a medium to create connections between members,” he says.

The office environment was even constructed in such a way as to encourage those connections. For instance, Canadian Business interviewed Blainey in a “cottage” in the middle of a floor of IBM’s software development lab in Markham, Ont. This so-called oasis lounge included a free-standing stone fireplace, Muskoka chairs and big comfy couches strewn along the edge of an otherwise industrial hallway. Other oasis lounges include a gym and a Victorian library.

Another element of IBM’s success is its decision to exploit technology to allow its employees to collaborate across national borders. The company has always been international in scope, opening its first Canadian office in 1917, followed within a year by outposts in Brazil and Italy. In the past decade, however, IBM has increasingly positioned itself not just as a multinational corporation, with operations spread around the world, but as a globally integrated company, meaning its employees and offices collaborate across borders and time zones on common projects. As Palmisano wrote in a 2006 article: “The emerging globally integrated enterprise is a company that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide.”

To enable such connectivity, IBM’s team members use the company’s own software products to collaborate on design, programming and quality management plans. Instead of e-mailing documents back and forth, the files dwell in shared spaces on the company’s servers where any team member can access them. “I can carry on an extended conversation including any kind of content I want to put in there, including video or presentations or what have you,” says Blainey. “It creates that interaction without having to be on the telephone or having to be face-to-face in the same room.”

IBM’s Academy of Technology has even begun experimenting with virtual worlds, similar to Second Life, to stage technical talks. Each member creates an avatar and gathers in a virtual amphitheater to watch another avatar’s presentation. “It got people in there from around the world, in all kinds of different time zones,” says Kevin Stoodley, an IBM fellow, the company’s highest designation for technical staff. “Some people were having lunch, other people were at home and decided to log on and participate.” During one talk that Stoodley gave recently, one avatar flew into the room Superman-style. Meanwhile, Stoodley mistakenly got his avatar’s head jammed in the floor of the theatre. “I was amazed to find that there were joists under there. It was actually that well rendered,” he says. “But then I went back out and got realigned.”

From a practical perspective, such technology means a software developer in China and an industrial designer in Toronto can work together with relative ease. “The people who report directly to me are in Toronto, but even the people based here work from home,” says Karel Vredenburg, who oversees product design and testing from the company’s User-Centred Design Lab in Markham, Ont. “And then I’ve got Seattle, Washington, and Raleigh, N.C., and London, England, and Shanghai, China, and Argentina and Paris, France, and Mexico.”

For a recent project, Vredenburg, a former academic who resembles Santa Claus in a button-down shirt, needed people adept at building widgets, chunks of reusable programming that can be inserted into larger applications. After searching through IBM’s ranks, he found a team in Argentina with the skills he needed. “I hire the best people,” he says. “I don’t care where they are. Why should I limit that to just people who live in the Toronto area? You want to be able to get the best across the country and, increasingly, the best across the world.”

One of the biggest advantages to IBM’s new focus is that tapping the best minds in the globe to manufacture ideas involves a lot less overhead than manufacturing things. The shift to higher-margin categories over the past 15 years has buoyed IBM while others have struggled. The recession did take its toll, with more than 10,000 people cut from the company’s North American workforce last year, but the firm still saw its net income rise by 9% in 2009, and revenues are continuing to grow, also increasing by 9% in the final quarter of 2009. Big Blue now finds itself in a position where some experts have trouble naming companies that threaten its dominance in the technology sector. Companies such as Apple, Microsoft and Google may capture people’s imagination in a way that IBM no longer does, but Apple made just $9.9 billion in revenue in 2009. Microsoft made $58 billion and Google $24 billion — all puny compared with IBM’s $96 billion. Not even Oracle, often cited as a potential successor to IBM, can come close, earning just $23 billion in 2009.

If the current course continues, there is a possibility that International Business Machines will some day be out of the business machine business altogether. The idea would shock consumers and many business clients, who still see IBM as a computer company, but not Thomas Watson, the company’s founder. He understood IBM’s success was always built upon solving its customers problems. As he observed a century ago when he conceived the company’s original “Think” motto: “We don’t get paid for working with our feet; we get paid for working with our heads.”