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Summary:

Louis Gerstner may have saved IBM, but he also endowed it with some bad habits that haunt it to this day, according to a new ebook by blogger Robert X. Cringely.

Former IBM CEO and Chairman Louis Gerstner.
photo: IBM

The conventional wisdom about IBM is that Louis V. Gerstner, the RJR Nabisco executive who became IBM’s CEO and chairman in 1993, righted the ship, taught the elephant to dance, and insert-whatever-turnaround-metaphor-you-want here.

There’s no doubt he did turn around a struggling company founded nearly a century before by Thomas J. Watson. But he also helped sow the seeds for IBM’s current distressed situation, according to a new ebook, The Decline and Fall of IBM by Robert X. Cringely.

One of the negatives Gerstner brought to IBM was the notion of superstar CEO with pay package to match. According to the synopsis of Cringely’s book on Amazon.com:

Only the Watson family had become rich running IBM with later CEOs like John Opel and John Akers living comfortable lives with lots of perks, but they never got BIG RICH. That changed with Gerstner. Sam Palmisano an IBM lifer followed Gerstner as CEO and followed, too, the Gerstner playbook. Palmisano retired three years ago with a retirement package worth $241 million, replaced by IBM’s first woman CEO, Ginni Rometty, who certainly expects a comparable golden parachute.

When top executives don’t have skin in the game, things get out of whack. If IBM does well, its CEO does well. If IBM tanks, its CEO still does well. Top execs are insulated from the fate of the company.

Current and former IBM insiders noted that IBM’s emphasis on innovation and invention has been on the decline for years, Watson being the exception to that rule. The past few decades at the company have seen a transformation from an R&D-driven company where engineers and developers were valued to one where marketers and lawyers are valued more.

IBM makes much of the fact that it spends about $6 billion on R&D annually, but that figure has been pretty much unchanged for years. In its rankings of the top 20 R&D spenders worldwide, Strategy & (formerly Booz & Company) ranked IBM 16th last year.

Strategy&

Strategy&

When you look for transformative technology now — things like augmented reality glasses, self-driving cars, electric cars, etc. — they’re more likely to come from Google, than IBM despite the polished PR IBM pours into projects like its annual 5 in 5 technologies extravaganza.

In a book excerpt posted on Re/code, Cringely writes:

Lou Gerstner saved IBM from a previous crisis in the 1990s, and then went on to set the company up for the crisis of today. Gerstner was a great leader who made important changes in IBM, but didn’t go far enough. Worse still, he made a few strategic errors that helped the company into its current predicament. Sam Palmisano reversed some of the good that Gerstner had done, and compounded what Gerstner did wrong. The current crisis was made inevitable on Palmisano’s watch. New CEO Ginni Rometty will probably take the fall for the mistakes of her predecessors. She simply hasn’t been on the job long enough to have been responsible for such a mess. But she’s at least partly to blame, because she also hasn’t done anything — anything — to fix it.

Cringely probably doesn’t look kindly on Palmisano’s edict that IBM hit $20 earnings per share by the end of 2015, a move made to assuage shareholders but that has damaged morale and IBM’s ability to build great products, so I’ll have to read the book to find out.

Part of IBM’s problem is now that terrible morale, exacerbated by a continuing wave of layoffs driven by the $20 EPS mandate. It appears the only people not on the chopping block at IBM are those in the C-level suite — the very executives who engineered its decline, or at least watched it happen.

 

  1. I spent many years in IBM research before leaving for greener fields, and can attest to the fact that everything in this article is 100% accurate. Gerstner did an excellent job, but he only went half way – he failed to change the inbred and inward-looking culture of IBM which is what got us in trouble in the first place. Palmisano is the one who really broke the company – he made it very short sighted, focused on financial results only, and destroyed R&D. The irony is that some pundits look at what he did – moving investor’s focus from each quarter to a 5 year horizon – and say that he did a good job of limiting investor’s influence, when in reality he overhauled and destroyed the R&D community inside IBM in order to achieve those 5 year numbers. And yes, he was absurdly overpaid for a guy who did such a bad job. I feel sorry for Ginny, but only partially so – she didn’t make the mess, but she also hasn’t shown the guts or insight to make any real departure from Sam’s lousy approach. IBM’s board of trustees is also to blame – they need to wake up and fix the mess that’s been made of the company over the last 15 years by totally blowing away the top layers of management, creating a much flatter corporate structure with fewer fiefdoms, and restore the company’s R&D focus. Otherwise, there is no reason why IBM shouldn’t join DEC, Sun, etc. in the scrap pile.

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  2. Cringely is part of the ‘Keep jobs in America’ crowd that seeks to associate IBM’s decline with the globalization of it’s Services workforce, his regular column throws a fit about innovation anytime something is moved to Asia. This article just relays whatever correlation he seeks to draw without validating the causation

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    1. Ibummer – forgive me, but if you’d have been inside IBM you’d know that the R&D community was damaged in all the labs around the world, not just in the U.S. The problem is IBM’s lost ability to innovate other than the one poster child – Watson – which was protected, primarily for PR value. However, Watson does little in terms of innovation – if you’d take opensource machine learning libraries, set up a good UIMA pipeline, and spend the same time/effort IBM must to get Watson to be useful in any new domain, you could do the same thing they do.

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  3. While I agree with some of these points, it seems a bit of an overreaction. The EPS mantra certainly seems to have dragged on morale, but it is silly to say Rometty has not done “anything” at all. She denied year end bonuses for herself and other executives last year (which barely got any pub) due to their poor financial performance overall, and they have been aggressively divesting away from low margin hardware into the higher margin cloud arena. Millions of dollars invested to create a new Watson group division (cognitive computing) is showing their attempt at innovation, though it’s yet to be seen how it well it will fare in market. This sets them up for future, but it’s too bad that everything has to be now now now. As for the layoffs, they (along with most huge global companies) do this annually, as they also are hiring in newly created division and once that are actually growing. These recent layoffs were part of divesting away from hardware, which is the right move for the company.

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    1. “This sets them up for future, but it’s too bad that everything has to be now now now.” The question is not IBM’s ability to monetize one specific PR project, but rather its R&D pipeline of many projects that will keep it leading the way into the future. That pipeline has been destroyed as scores of talented people have fled IBM Research and SWG over the past 10 years for Google, universities, and banks. The EPS mantra caused them to squeeze everywhere they could, making everything so tight innovation became impossible, all the while adding more and more layers of management. Yes, Ginni denied bonuses but that’s not a concrete step to improve the company, that’s just not being a thief and taking money they don’t deserve.

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