Tuesday, July 26th, 2016
In 1990, IBM had its most profitable year ever. By 1993, the computer industry had changed so rapidly the company was on its way to losing $16 billion and IBM was on a watch list for extinction. Then Lou Gerstner was brought in to run IBM.
For Gerstner, the first order of business was making the company solvent. Under his guidance, IBM cut billions in expenses (partly through massive layoffs) and raised cash by selling assets. Gerstner says that few people even understood how perilously close the firm was to running out of cash.
He famously put the brakes on a plan, which was already well under way, to break up the company into several operating units. Gerstner characterizes this as “the most important decision I ever made–not just at IBM, but in my entire business career.”
The rationale behind it was to leverage all of the pieces of IBM–hardware, services and software–to deliver top-to-bottom technology solutions. He decided that the whole of IBM was greater than the sum of its parts. But its many parts were far-flung and operated independently, with little accountability. Rather than work together as a team, divisions competed against each other both internally and in the field.
Gerstner decided to tie employee compensation to the performance of the whole company rather than to the employee’s particular division. This, the thinking went, would force them to cooperate and venture outside of the fiefdoms in which they operated. To drive this change, IBM began rewarding teamwork and essentially put an end to consensus building. Gerstner learned, though, that it wasn’t enough–”People don’t do what you expect but what you inspect,” he says–and therefore created a new way to measure results.
Employees needed to know that their competitors were outside of IBM, not across the hall. Secondly, there would be no more “obsessive perfectionism” and “studying things to death.” In the new IBM, people would be rewarded for getting things done fast.
Summing-up: In the history of modern business, many companies have gone from being industry leaders to the verge of extinction. But only one company has been at the pinnacle of an industry, fallen to near collapse, and then, beyond anyone’s expectations, returned to set the agenda. That company is IBM.