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[APPLAUSE]
CHARLES VIANEY: I was told it was OK if I
take my jacket off.
When I joined IBM, it was very clear what you wore.
It was a dark suit, white shirt, and the
coat would be buttoned.
There'd be no question, the coat would be buttoned when I
would be speaking.
I was really hoping to be across campus at the press
conference announcing me as the new head football coach.
[LAUGHTER]
DR. MARK BING: It pays quite a bit.
CHARLES VIANEY: Yeah.
It pays better than IBM, I guarantee that.
But that's OK.
Well, thank you for inviting me to participate and I
appreciate you all being here.
When Mark and I were chatting about your course--
can I call you Dr. Bing in here [INAUDIBLE]?
DR. MARK BING: Whatever makes you happy.
CHARLES VIANEY: I answered a lot of these first.
DR. MARK BING: They call me a lot of things in here.
CHARLES VIANEY: I understand, I understand.
He told me about the book you were reading.
And I had not read this book.
And so I went out to Amazon and dutifully found it,
actually at one of their partner companies.
Partnering is something I'll talk a little bit about with
IBM later, about what we're doing as part of our
transformation.
But I had not heard of Paul Carroll.
I didn't remember.
I think some of the things he had written in the Wall Street
Journal, because I try to read the Journal as often as I can.
But I have to tell you, I lived through this period.
And it was humorous.
It was painful reading some of the things that he talked
about, because I lived through that.
I have some notes here just to make sure I
don't forget some things.
I joined IBM in 1980 in a sales role.
I was a salesman.
I was a salesman out of our Jackson, Mississippi branch
office at the time.
At that time in IBM, sales was what most people
thought about IBM.
And we were very sales focused.
We were very product focused.
I think some of that came out in the book.
But we were a very product oriented organization.
We had multiple product organizations and I think you
may have picked up on some of that.
Mostly the mainframe discussed in the book, but we were in
many cases, competitive with one another.
And that was by design.
I'm in a business now, I'm in a unit called our Global
Business Services.
I'm in a part of IBM that didn't exist 27 years ago.
27 years ago, we weren't in the consulting business.
We were in the systems integration business, mainly
with the federal government.
It was mainly with literally doing NASA type related
activities, or automating the Social Security
Administration.
It was not working with commercial clients, commercial
businesses.
So I am going to talk a bit.
A lot of my discussion will be around the transformational
things that I've seen.
Ground rules for today.
You can ask anything me anything you want to ask.
And I would encourage you whenever you have questions,
just raise your hand and we're going to stop then and take
the question.
I want to make this interactive.
The idea is not to save the questions to the end.
The idea is you don't have to be overly polite.
I will not disparage any of my competitors.
I will not disparage any of the people that were written
about in the book.
I did not work directly for any of the people
that were in the book.
I was a really low-level guy.
I was a salesman when most of this was going on, and in
sales management.
But I'll be candid with what I know.
And if I don't know something factual, I'll
call it out as such.
I'll tell you what I know and I'll tell you what I think.
But I'll label it as such.
So any questions before we get started?
STUDENT: I don't understand.
What's the difference organizationally between
change and transformation?
You use transformation [INAUDIBLE] about five times
in a single IBM [INAUDIBLE] change.
Why?
CHARLES VIANEY: Well, I guess I look at transformation as
significant change.
I'm not going to get into the nuances of either.
But transformation in our case wasn't an incremental change.
It wasn't, let's sweep the organization.
Let's change who's operating this or
change the org structure.
By the time this book ends, we were bleeding.
And I'll show you some charts here to show you how much we
were bleeding.
But we were bleeding a lot of cash, we were losing market
share, and we were in serious peril.
And so by transformation, I mean major systemic change
that the organization had to undergo to survive.
That was our case.
That was our case.
OK, yes?
STUDENT: You also said [INAUDIBLE].
What's the main activities of the company now?
[INAUDIBLE]?
CHARLES VIANEY: Hold that for a bit.
STUDENT: Yes.
CHARLES VIANEY: I am going to comment throughout this what
our business was like.
And also [INAUDIBLE]
next couple slides on how our business has evolved.
And if you have question about that, please ask me that.
As you read through the book--
and I finished reading just last week, just after
Thanksgiving--
so as you read through the book, I would like to hear
from you some adjectives.
Don't have to be long sentences, but just words or a
brief couple of words on how you would describe IBM from
the book that you read.
This is where you don't have to be polite.
You can go ahead and say whatever you want to say.
STUDENT: Bureaucratic.
STUDENT: Bureaucratic.
CHARLES VIANEY: Bureaucratic?
OK, bureaucratic.
STUDENT: Redundant.
CHARLES VIANEY: I'm sorry?
STUDENT: Redundant.
CHARLES VIANEY: Redundant?
OK.
STUDENT: Resistant.
CHARLES VIANEY: Resistant.
STUDENT: Very policy driven.
CHARLES VIANEY: Very policy driven.
STUDENT: Inefficient.
CHARLES VIANEY: Inefficient.
STUDENT: Arrogant.
CHARLES VIANEY: Arrogant.
That's the word I was looking for.
[LAUGHTER]
CHARLES VIANEY: Go ahead.
STUDENT: Most profitable and most [INAUDIBLE] in the world.
CHARLES VIANEY: At times, yeah.
That's right, that's right.
Any other words?
Arrogant's a good one.
STUDENT: Set in their ways.
CHARLES VIANEY: Set in our ways.
Yeah, definitely.
Definitely.
Very insular.
If you looked before Lou Gerstner, who came on the
scene in April of '93--
in fact, I stopped this morning in Tupelo and saw an
old friend of mine who used to work for IBM.
And he was in the third wave of cuts.
When somebody came into their office and said basically, 70%
of the office no longer have a job.
Here's your package to leave.
But up until Gerstner, every CEO had been
promoted from within.
They started off in the sales ranks.
Some had Ivy League pedigrees, some did not.
Any other words that you'd use to describe IBM as it
impressed you as you read the book?
STUDENT: Shortsighted.
CHARLES VIANEY: Shortsighted?
Yeah.
John Opel, who was the CEO preceding John Akers, he had
forecast-- and I forget the year he said we were going to
do this-- but said we're going to hit $100 billion in sales.
Now, last year we had $92 billion, $93 billion in sales.
So we never hit that number.
But one thing that we did was that we built manufacturing
capacity to be a $100 billion company, basically on the back
of the mainframe.
So shortsighted, OK.
Other words?
STUDENT: Well, you read the Gerstner book
and you'd say elephant.
CHARLES VIANEY: Elephant, that's right.
Teaching the elephant to tap dance.
I only heard him speak once in public and it was really
toward the end of his career.
He talked about-- on the point of whoever said bureaucratic--
he talked about how tough it was to get things done inside
IBM as the chairman and CEO.
Good.
Well, I wanted to get that framework.
I want to give you another word I want you think about.
And now, I'm not here to give you a rah-rah
sales pitch on IBM.
That said, I'm very bullish on IBM.
I've been here 27 years.
I've had a number of different jobs.
I think it's a great company.
We've had some pretty painful times and we've had our heads
handed to us in very painful lessons.
But I'm proud of the company I work for.
I'm proud of the business that we have.
But my job is not to give you a rah-rah sales pitch.
And if you think that I am, please let me know that.
But hopefully I'm going to be factual and let you know
what's going on.
Whoops.
[INAUDIBLE] know how to use the clicker here.
I want to just start off with a slide, and I'm not going to
read all this to you.
But one word I want to give you that you didn't mention--
and you're probably gonna laugh at me
when I say this word--
but one word I want to give you to think about as you
describe IBM would be the word innovative.
None of you gave me the word innovative.
I heard arrogant.
I heard bureaucratic.
Shortsighted.
I mean, it made me want to kind of leave.
[LAUGHTER]
CHARLES VIANEY: I said you didn't have to be polite.
But you didn't hear the word innovative.
And often, you don't think of--
from a lot of what was written in the book-- you don't think
of innovation.
Throughout the year--
I don't know if you know this or not-- but IBM actually got
its start back at the early part of the 20th century.
And we made things as varied as time
clocks and meat scales.
Lot of time and attendance type clocks you'd find in
businesses.
It was once known as the Computing
Tabulating Recording Company.
Our founder was a guy named Thomas J. Watson, Sr. His son
succeeded him as the CEO in the '50s.
And Watson came from NCR and he had an interesting past.
But a lot of those things [INAUDIBLE], these are things
IBM invented organizationally, I'll call your
attention to 1935.
IBM's been very progressive in hiring women, not into
clerical ranks, but into professional ranks.
I think this is a picture of a group of systems engineers
that we had in 1935, which was somewhat of
an innovative practice.
From a product standpoint, I'll tell you, we have been a
very product focused company for most of our career.
Very product focused company.
I think at the very beginning, we certainly have listened to
our customers and responded to our customers
with what they needed.
We did a lot of work with the Social Security Administration
back in the '30s.
And there's some other innovations
that are product oriented.
I think what you read in the book, as we became more and
more successful and we became more and more insulated we
found ourselves as a company that we had all the answers.
And by the way, all the answers happened to be IBM.
And if you came from somewhere else, particularly as I read--
I remember when Estridge came on the scene
and the PC was announced.
And frankly, I remember there was a product called the
Datamaster that we sold that we were
competing against the PC.
And we had very product specific sales training on how
to compete with the PC.
Now right now if I told you a PC was $5,000 or something,
you'd say that would be crazy.
You know, what you could buy it for today with Best Buy and
what you could buy for $5,000.
But that was phenomenal.
That was a phenomenal price for that type of
technology at the time.
So $5,000 for an IBM PC with a couple disk drives.
No hard drives, right Ryan?
STUDENT: Right.
CHARLES VIANEY: And monochrome monitor.
Compare with a Datamaster for about $30,000 or $40,000 that
we were selling.
And we were telling the customer that we know what was
right for them.
And so that came out pretty loud and clear.
But look at some of the history of innovation that IBM
had where we really did listen.
We innovated in office equipment.
Lost our way in office equipment.
But the Selectric typewriter.
You still see some around here, probably on campus.
But they had a little element, which was a little ball that
was easy to take off.
You could change the type style very, very easily.
The System 360 in 1964.
This was when Watson, Jr. was the CEO of the company.
I believe it's Father, Son & Company is the book that
Thomas J. Watson, Jr. wrote.
If you're really interested, you ought to read that.
But he literally bet the company on the technology that
was associated with this System 360.
It's hard for us to imagine at this point in our lives, but
until the System 360 came on the scene, every time IBM or
any of our competitors would come out with a new set of
technology, we'd have to write all new software for it, and
change the operating system.
And Watson declared, with System 360, that if you buy
this technology, and you write software for this product, for
successive technologies that come out, you'll never have to
rewrite your software again.
So we've had System 370, System 390 and other names
follow on there.
And you would not have to rewrite software again.
And so he bet the business on that.
And it was a bet that paid off and IBM showed
innovation at the time.
Some of the work that we got in our current business-- and
I'm going to talk about what Gerstner came in and did.
But Gerstner put us on a track to be able to go solve
customers' business problems and be a
solutions focused company.
And early days, we started off, particularly NASA's an
example of that.
We did some of the guidance system work for NASA not too
many miles from here.
A lot of that work was done over at Huntsville, Alabama.
Huntsville, Alabama, at one time had thousands of IBMers
living there.
And this is a case where I'm told--
a colleague's father who actually was
doing some of the work--
but literally NASA came to IBM and said, go write me a
guidance system.
There was no competitive bid.
It was, go do this.
And so, I'm told that's how it happened.
But we delivered [INAUDIBLE] men on the moon.
Of course, if you look at the technology which any of you
have in your Palm Pilot or your BlackBerry or certainly
your laptop, it far exceeds the technology that we had in
the early days.
But yeah, innovation that was done there.
Innovation through, we have some Nobel
Prize winners in science.
Certainly, the innovation that you read most about and we
read most about in '81 happened with
the personal computer.
And really it happened because you had a guy named Estridge
and a few other guys who really sold--
I think it was Frank Cary at the time--
that there's this new thing we ought to go do.
And for us to go do this, how do we go do it?
So what did he do?
What was creative about the approach that they used?
What do you remember that they did?
STUDENT: Standardized [INAUDIBLE].
CHARLES VIANEY: Standardized.
What about IBM organizationally?
How did they develop the PC?
STUDENT: Underground.
They let them get away from the bureaucracy of IBM
[INAUDIBLE].
CHARLES VIANEY: Yeah.
On--
STUDENT: [INAUDIBLE].
STUDENT: Skunk works.
CHARLES VIANEY: It's a skunk works.
That's exactly the word I was thinking.
It was the skunk works down in Boca Raton, Florida.
And they got this little group.
And we were talking about corporate culture a little
while ago versus enormous force of corporate culture
going against them to go do that.
Because that's not the way we'd done things before.
And you started seeing cases of that.
I mean, they developed that in spite of, in the face of, the
overwhelming corporate culture that why do we need this toy?
Because it was really viewed as a toy there.
And we certainly have seen the case of what happened in the
juxtaposition in the marketplace.
Microsoft was this small little company that no
one had heard of.
In anticipating this discussion today, I went and
just did just some search using Google, my favorite
online tool--
it's probably one of yours as well--
and looking at antitrust information.
Information on antitrust cases.
Now IBM, for the first part of the career I was in til the
middle '80s, we were under something
called a consent decree.
This is before you were born.
This was imposed upon IBM going back to the '50s, where
the government was concerned about IBM being a monopoly and
monopolistic practices that they said that we had, that we
controlled--
particularly after the 360-- really controlled the
mainframe marketplace.
No doubt about it.
I think he may have had some misinformation in there about
gross profit margins.
But the profit margins on the mainframe were like the profit
margins of the modern-day software business.
They were very lucrative and they funded a lot of other
things that IBM, including [INAUDIBLE], including the
development of the PC.
You've seen some other things up there.
Certainly in '95, the group that I was with was formed,
IBM Global Services.
But I'll talk a little bit about the changing nature
[INAUDIBLE] of our businesses.
But we sold some of our chip businesses.
But one of the things you probably don't know if you've
got PlayStation 3 or if you are shopping for a Wii for
Christmas, or you have one, or you have a Xbox or Xbox 360,
the chips that drive those are all from IBM.
And so that's a very specialized business that
we're in right now, which is very niche-oriented, very
specific to the needs of a Sony or a
Microsoft for those products.
So it's very, very different from what
we've been in before.
STUDENT: [INAUDIBLE]
question.
All that you present here is product information.
On the other side, I always recognized IBM as capable of
talent management.
I mean, [INAUDIBLE]
how did such a bureaucracy manage to maintain top quality
talent and their motivation to innovate?
[INAUDIBLE].
CHARLES VIANEY: That's a good question.
How did IBM manage to keep top talent?
If you look at IBM, some major, major areas we had,
just think of our research and development.
My perspective is we had a research and development
organization that was given significant resources.
It was a budget probably of $4 billion to $5 billion a year
to do pure research.
They were able to attract top talent to that organization
for all types of research interests, without a real
regard for how applicable would that research be to a
product that sold at marketplace.
STUDENT: [INAUDIBLE] diversity.
CHARLES VIANEY: Very much.
It was a very, very academic setting without regard for
what's the marketability of what they're working on?
That's that aspect of it.
IBM has had a history of being a very good place to work.
Going back to the '50s and even early '60s and mid-'60s,
in large IBM communities, particularly
in upstate New York.
Towns like Poughkeepsie and Binghamton.
Towns maybe you have heard of or you haven't heard of, there
were country clubs owned by IBM for IBM employees.
I mean, if you had a job with IBM, it was
considered a job for life.
As long as you didn't kill someone.
Literally, as long as you didn't commit a felony, you
had a job for life.
And so it was considered a good place.
Competitive pay, hiring above average people.
May be some exceptions here, but hiring
above average people.
STUDENT: [LAUGHTER]
CHARLES VIANEY: And so there's that mental stimulation.
So I think it was a combination of things.
Overall above average wages, above average benefits.
You know, health care and so forth.
So I think it's a combination of things, depending
on where you work.
Let me ask you, anybody in the room-- we have a number of MBA
candidates as well as faculty--
anybody ever work for IBM?
Anybody have any family who works for IBM?
STUDENT: [INAUDIBLE]
worked for IBM.
CHARLES VIANEY: Doing what?
What kind of role?
STUDENT: I don't know.
She worked out of Jackson.
I think she sold stuff in the late '80s, early '90s.
CHARLES VIANEY: OK, who was that?
STUDENT: [INAUDIBLE].
CHARLES VIANEY: Yeah, yeah, OK.
So out of Jackson.
I mean, every town, every city, towns like Jackson,
towns even like Tupelo, Memphis, Birmingham, would all
have an IBM location there.
Some very small.
You'd have IBM customer engineers, guys that would go
fix things when they break.
Guys and gals.
You'd have salespeople.
Then you'd have [INAUDIBLE] locations like in Raleigh or
Binghamton, development organizations.
So just curious to see if we had any.
STUDENT: I had a second cousin who sold
mainframes back in the '60s.
CHARLES VIANEY: Did you?
STUDENT: And he retired on Lookout Mountain in
Chattanooga.
CHARLES VIANEY: Yeah?
STUDENT: He was in sales.
I've seen pictures of the blue suit, IBM pin.
CHARLES VIANEY: Oh yeah.
STUDENT: I think he had the Alcoa or Coca-Cola--
TVA contract.
CHARLES VIANEY: I was about to say, 'cause TVA is big out of
Chattanooga.
And also Tennessee Eastman.
Used to be Eastman Kodak and Tennessee Eastman out there.
But yeah, they probably still buy a lot of mainframes.
By the way, I'll tell you-- fast forward--
we typically sell out of mainframes every year.
Literally, our manufacturing capacity.
The mainframe is far from dead.
It's been reborn a number of times.
But not that you're going to go buy one and put it in your
dorm room or put it in your apartment.
But we'll get into that.
I think clients and customers have decided that certain
equipment is optimized for certain types of processes.
For example, if you're running a large bank, you're running a
large insurance company, you're not going to do this
off of network PCs networked together.
And there's reasons why you do that.
Here's just some history.
If you're in an MBA class or in the business school, you
probably care about some of the metrics.
Leading up into the middle '80s, if you look at where we
were revenue-wise, net income-wise, stock prices at
an all-time high, it had split.
Now you had a second cousin who sold.
So back in the '60s, the stock price was into the hundreds
and split many times.
At our height, and I believe when John Akers retired from
IBM, we were somewhere around 420,000 employees.
So we were really sizable.
By the way, we're probably at about 320,000 now.
So we've dipped way down from 420,000 and have come back up
from 320,000.
The mix of employees, the jobs that we have, the types of
skills that we have, very different than what we had
back in the middle '90s.
So we were on a very positive trajectory here
in the middle '80s.
And you saw a lot of that.
Let me see the other comments that we had.
Again, we were very product oriented.
When I joined IBM, we actually had three basic divisions.
We had an Office Products or an office equipment division.
So we sold typewriters.
We sold office products equipment like a Display
Writer, which was a word processor.
Which was really a PC optimized for word processing
type functions.
Copy machines.
Then you had a General Systems division who
sold mid-sized products.
A lot of those were written in a programming language you
probably never heard of called RPG and RPG II.
Then you had the mainframe, the Data Processing division.
Those were the big iron guys.
Those were the guys who thought they ran the company,
and because they did.
And the profit margins out of the mainframes drove business.
But that was what was the big irony.
We were characterized by a point that was made here
earlier about full employment.
It was a job for life.
It was basically a job for life.
And IBM prided itself-- even through depression, through
some cycles of ups and downs, had full employment, never
laid anybody off.
So you think about a company that had its origins back
around 1906 in that first slide until the mid-'90s, and
never laid anybody off.
You've been a person--
a guy named John Akers--
and just because he was the guy in the seat at the time.
And Yale graduate, all-star IBM sales, Navy pilot.
He had been successful at everything he'd ever done.
So you think about, it's on your watch when all this
starts to happen and all this starts coming unravelled.
Interesting, I mean, I can only imagine what that must
have been like.
Must have been something like being a division one football
coach or something [INAUDIBLE]
SEC game.
[LAUGHTER]
CHARLES VIANEY: Here's the trajectory that we're on.
That's gonna change, right?
That's gonna change.
'84, couldn't hear enough good things
about a lot of companies.
We weren't the only one.
Fortune magazine, [INAUDIBLE] looking at the date, you can
just look at the graphics, you know it's
an old Fortune magazine.
But IBM was continually on the most admired list.
IBM and a number of other companies.
For a number of years, we were in the top five.
Tom Peters made a lot of money, with his buddy from
McKinsey, writing about most admired companies.
IBM was in here, the best run companies.
And it wasn't just that our products were successful.
But if you look at all the business metrics, very
successful business metric-wise, if you look at
the way we treat employees.
And those attributes very successful.
And in significant growth.
But it wasn't to last.
And so I think you didn't see this chart in your book, but
you certainly read about this.
You certainly read about this.
And what are your thoughts, what are your comments about
your observations for when literally the wheels were
starting to come off?
What did you see in the book reading between the lines?
What did you see there?
STUDENT: Too slow to market?
CHARLES VIANEY: Too slow to market?
In what respect?
STUDENT: Well, there's two things.
One, they wouldn't anticipate customer desires.
So by the time they built a laptop, customers actually
wanted a notebook.
And beat to market by Compaq in those areas.
And so they were also too slow.
Their argumentative system had slowed them down.
It served them well when technology wasn't moving so
fast in the '50s and '60s.
But that argumentative system buckled things down to the
point where they'd be slow to market in comparison to
Microsoft or Compaq or HP.
CHARLES VIANEY: Exactly right.
So one of the keys, one of the attributes of success or when
we talked about creating the PC, back when I had the slides
from 1981, the PC came out, I asked you how did we do that?
And you said we had a skunk works down
in Boca Raton, Florida.
So nice place to do something like that.
They didn't see the light of day that much.
What happened after some period of time with the PC?
STUDENT: They brought it back in.
CHARLES VIANEY: Brought it back in to the mother ship.
Brought it back in to the mother ship.
And I do remember Phil Estridge and his wife being
killed in that plane crash.
It was a horrific plane crash.
It was a Delta L1011.
It went down in Dallas.
Have you ever heard the term wind shear?
It was massive.
It was horrendous when that happened.
But Phil was really out of that at that point, I think.
But the product had been brought back in.
And so I'm not looking for the name of the person who was
managing the PC in product end, but what were some of the
attributes of that person?
Or the people?
What were the skills in those people that were now managing
the development of the PC?
STUDENT: After Don Estridge?
CHARLES VIANEY: Yeah.
I'm not looking for a name because I can't [INAUDIBLE]
at one point.
STUDENT: [INAUDIBLE] was after Bill Lowe came back in.
CHARLES VIANEY: Right.
STUDENT: Bill Lowe had proposed the PC to Cary.
CHARLES VIANEY: Right.
And the point is--
I was trying to pull out this--
these were all mainframe guys basically.
These were all legacy IBMers that had developed mainframe
applications, that had developed mainframe hardware
and products.
Long development cycle.
By the way, product life cycle of the
mainframe, five plus years.
And what's the product life cycle even then of a PC?
Somebody besides Mark Bing answer the question.
[LAUGHTER]
CHARLES VIANEY: I mean, what do you think the product life
cycle was in a PC?
I don't know what it is now.
STUDENT: Maybe five years?
CHARLES VIANEY: Five years?
A lot less.
STUDENT: [INAUDIBLE]
Less than that.
CHARLES VIANEY: Yeah, a lot less than that.
A lot less than that.
I mean, down into maybe a year-- that's OK.
[LAUGHTER]
CHARLES VIANEY: [INAUDIBLE].
STUDENT: Well, the other thing was they tried to stuff the
genie back in the bottle.
They tried to go back to the IBM proprietary architecture
days and the built-in switching costs for their
customers, not recognizing the huge changing marketplace that
they were in.
The exploding open systems marketplace.
They thought they could just keep doing it the way they'd
always done it and they didn't see that things had changed.
CHARLES VIANEY: You know, IBM missed the market.
You saw [INAUDIBLE]
IBM's initial investment in Intel.
And then we had to really get them going.
And we've done that with some other companies and just
really missed.
But the perception was so strong that the mainframe--
[INAUDIBLE]
momentary glimpse in time--
that our business was going to continue.
So really missing the market.
The market had really shifted.
The market had shifted and we just didn't know about that.
Now in all fairness, we missed some other cycles too.
Most of you probably aren't even really aware of the
technology probably that was referred to as a
mini-computer.
I know some of you are.
We were late to that market as well.
The AS400 was a product mentioned in your material.
But there's several companies that made people very wealthy
and made some stockholders very wealthy in the
mini-computer market that were really devastating to IBM that
we competed with for a number of years.
That by the way, no longer exist.
Data General.
One that I think was just a phenomenal company out of
[INAUDIBLE]
Massachusetts, but Digital Equipment Corporation, or DEC.
Which ended up being bought by Compaq, which of course, got
folded into HP.
But IBM actually did the AS400, which was a
mini-computer.
It actually still lives today.
The name's been changed, but it's still a
very successful system.
One thing I will tell you, the reason it was successful in
the beginning and still successful, we'll touch on
this later about part of what Gerstner brought to IBM that
we actually got partially right before he come on, was
the idea of partnering.
And the idea of you can't do everything.
Part of IBM's arrogance was--
and you could probably find lots of example
of how IBM was arrogant--
part of our arrogance was, we thought if we didn't do it
ourselves in our own product development labs, it couldn't
be any good.
We really dismissed Intel.
We really dismissed Microsoft-- you saw that
pretty clearly--
as well as others as being guys that who should really--
All the goofiness that you read in the book about
refusing to have meetings or refusing to meet halfway
across the country for a lunch or a breakfast.
A lot of arrogance.
A lot of arrogance there.
But the point here is in the financial metrics, which was
really hurting us, was all across.
Revenue stock price.
If you look at the net income and then the number of
employees that we ended up shedding, close to 250,000
from closer to 400,000.
Yes?
STUDENT: The problems which you are explaining related to
IBM, it really wasn't just particular of IBM.
All of the manufacturing in United States, they had the
same problem, the same arrogance.
[INAUDIBLE].
Some of them sooner, some of them later.
But all had the same [INAUDIBLE].
CHARLES VIANEY: Good point, good point.
And even some of our traditional competitors have
been severely marginalized.
One of our tradition competitors were
Hitachi Data Systems.
And they're still around, but not in the same
form they once were.
Amdahl.
Amdahl made what was called plug compatible mainframes.
Basically it was a mainframe that could run IBM software.
STUDENT: Even [INAUDIBLE] companies.
I mean there's all type of manufacturing [INAUDIBLE].
CHARLES VIANEY: And if you go on to this slide here, which
this is a painful slide.
But I remember this article.
I remember this.
But if you look at who is pictured with IBM in this
slide, you have General Motors, Sears &
Roebuck, and IBM.
And let me ask you this.
Outside of the tools, who has shopped for
clothes at Sears recently?
STUDENT: [INAUDIBLE].
CHARLES VIANEY: Some of you may have bought a General
Motors SUV.
But we know what's going on, continuing
with General Motors.
We know what's going on with Sears.
So you're right.
There's a lot of very traditional companies that
missed the market.
You know, it's also mentioned in the book--
there was plenty of criticism for everyone-- but there was
criticism for IBM's board of directors as being a
handpicked club of the CEO.
I'll submit to you--
not to be overly harsh on the IBM board of directors--
but if you look pre-Enron, so that's not too many years ago,
many boards of directors were very similar.
They were handpicked groups by the CEO, part
of the CEO's club.
And it better change.
If you go back and look-- has anybody gone to look at the
IBM website to see what the makeup of the
board looks like today?
It's not something I usually spend a lot of time doing.
I don't get paid to do that.
But I went and looked in anticipating that.
And I know there's one board member, the longest serving
board member, that came on board in '95.
No one predating 1995.
All the rest, you see a lot of 2002.
You got three 2005 that came on.
By the way, some previous boards, very bright, capable
people, but no.
No longer here.
DR. MARK BING: I think what's interesting about this
downfall, especially with respect to the PC, going back
to who took it over after Don Estridge.
Don Estridge, I think the book makes the point, was very
iconoclastic, right?
He was black sheep, right?
CHARLES VIANEY: Yeah.
DR. MARK BING: Very different type of person at IBM.
And afterwards, I don't think it's saying anything about
anybody, but then Bill Lowe, when he took it over, he
started using a process at IBM which had always
worked in the past.
CHARLES VIANEY: Good point.
DR. MARK BING: Why shouldn't we use it again?
CHARLES VIANEY: Good point.
DR. MARK BING: And there's a set effect that happens when
there's a technological advancement or changes
[INAUDIBLE].
It's hard to see that because it's forgivable in the sense
he's using a culture and a process which had always
worked in the past.
Why shouldn't it work now?
CHARLES VIANEY: That's a good point.
And we had a history of success.
And there was no doubt.
One thing I wanted to also mention is that part of our
history, and I think [INAUDIBLE] our cultures and
values-- and I'll talk a little bit more about values
later 'cause it's very much important to us--
some of this has-- we chatted about this at lunch-- some of
this has roots back to the real concern that the
government might be breaking this up.
But when I started with IBM, every year I'd be given a
document by my manager, who would sit in an office very
near, as close to me as that window, and I'd have to read
it, sign it, acknowledge that I'd read it, and give it back
to him or her at the time called our Business Conduct
Guidelines.
And by the way, 27 years later, I still have to read a
current version of the Business Conduct Guidelines
and electronically sign off on it.
And my manager sees to ensure that every employee
signs off on that.
This is part of our culture and part of our shared values.
If you go out to the ibm.com website, lot
information out there.
But if you want to go read about IBM and investor site,
you can actually download a copy of the Business Conduct
Guidelines.
But it really guides the way, the guiding principles on how
we operate.
And as an employee, the guidance that I have.
Now it doesn't get down to say, my particular job
function and say OK, these are the 10 things you
need to go do today.
Hopefully, they've hired people that can go figure
those things out.
But this is the framework in which we operate.
And I'm going to go ahead and tell you the story now,
because I don't want to forget it.
But as we've really changed our business, and we are much
more of a services focused company now than just a
product focused company-- by the way, we're still very
technology focused--
we're learning a lot of new things in this world.
In the business consulting area that I'm in, we're very
project driven.
The work that we do for clients is all project based.
Whether it is doing what you might call management
consultant, where we're looking at some of their
business processes and just giving advice.
Or if it is implementing software package that they
bought, like an SAP or an Oracle or PeopleSoft,
something like that.
We were doing a project for a midsized client in the US over
the last couple years.
I'm being vague just because I don't remember the exact date.
It was the last couple of years.
And it was a blended team.
We had a group of people who were a small team, probably
10, 12 people.
Some naturalized US citizens.
We had a project manager.
One of the key project leaders on the team was from India,
who was on-site.
And we had a contractor from India who was on-site.
Part of our culture-- and you may laugh
when I tell you this--
you probably wouldn't have to be told that bribery is not
the way you do business in the US.
Or most businesses do not do business by issuing bribes.
Bribery is a way of doing business in some parts of the
culture in India.
It was part of the culture of two of the individuals on this
project team.
And one of the project leaders was extorting money from one
of our subcontractors on the team.
Said if you don't pay me money, I'm going to give you a
bad project evaluation.
You may get fired and you'll go home where your family
still lives in India and you'll be shamed and you'll
lose your job.
And so this guy was paying extortion and finally told
somebody about it.
And we investigated it and found out.
Again, this is all clearly laid out in our Business
Conduct Guidelines.
And again, intuitively most of us would know you don't do
business this way.
But the guy who was our employee was terminated
because it's the right way of doing business.
But also, as we were talking about, it has potentially a
severe impact on the project we were
running for our client.
And I'm not sure if the client ever found out.
I don't think the client ever did.
We were able to keep it from them and manage it ourselves.
But the changing nature--
I'm talking about culture--
the culture in your organization is
not going to be static.
It will be changing over time.
Particularly as you start involving other cultures that
are different from Western culture that we were used to.
Something that we've learned a lot about.
You know, I read this quote.
It was like, I don't know if this ever happened to any of
you, but one of your parents ever catch you
doing something wrong?
Or a teacher?
Now I know it never happened here.
But maybe you come to class unprepared and you're caught.
And you know you're not prepared.
I know that would never happen [INAUDIBLE].
But what's the worst is when it's true and
you know it's true.
And how painful that can be.
And how painful this was 'cause it was true.
We had lost our way.
We had clearly lost our way as a business.
We weren't the only one.
We weren't the only one who had lost our way, but it was a
very visible fall.
STUDENT: [INAUDIBLE]
why IBM lost its way early in the '90s.
I mean, it had been arrogant for 40 years, and it worked.
What I see really happened in the '80s was Japan
incorporated and then fueled deregulation.
All of a sudden, the basis of competition was shifting from
organizational effectiveness-- where the Japanese all of a
sudden became big--
to innovation and high level of innovation.
So in early '90s, there was a major change in the
environment.
Unprecedented.
Given by huge level of deregulation
that started in 1986.
And [INAUDIBLE]
big companies were simply not prepared to change that level.
I mean, the radical level of change that was required,
simply they did not have the framework of experience how to
organize it.
Or change.
CHARLES VIANEY: Well, one thing that we find and we see
continuing today.
But clearly then, there was a time when there was this great
mystery around this thing called information technology.
And it wasn't even called information technology.
It was called data processing and other things.
But there was this great mystery.
And the grand wizard that held the tools--
I mean, it was like Dumbledore and Harry Potter.
I mean, he had all the tools.
And he held many of his constituents at bay.
And at that centralized IT organization, you wanted
something, you had to go through that person.
So the buildup of the DECs, Digital Equipment, and the
Data Generals and the Wangs and those companies, those
were companies who were very successful because they were
selling business computing.
By the way, they didn't go see the CIO, the IT director.
They went over here to see the VP of Manufacturing and talk
about a manufacturing product development problem.
They went over to see the sales executive to talk about
a sales force automation problem or sales force
management problem.
And they started offering specific solutions to their
problem and they were bypassing IT.
And IBM, we were calling on our buddy in the IT
organization.
And that was part of our problem as well.
Lou Gerstner.
How did the book characterize Lou when he came in?
What comments did it have?
What did it say about Lou?
Anybody?
You made eye contact.
It's your go.
[LAUGHTER]
CHARLES VIANEY: Anybody remember what it said?
I mean, I'm not looking for a verbatim quote, but just how
they characterize Lou Gerstner.
IBM's choice of a CEO named Lou Gerstner that Carroll
thinks, hey, this guy is the right guy.
He is the guy that's going to bring IBM back.
[INAUDIBLE]?
STUDENT: What was his background?
CHARLES VIANEY: What was his background?
He was a Dartmouth engineer, Harvard MBA, youngest McKinsey
consultant to make partner.
Prior to IBM, he had run American Express.
Or at least a piece of it.
I'm not sure he ran the whole thing.
But at least a piece of American Express.
He came to IBM from RJR Nabisco.
So he sold cigarettes.
DR. MARK BING: Cigarettes, yeah.
CHARLES VIANEY: He sold cigarettes.
He sold--
DR. MARK BING: Oreos!
CHARLES VIANEY: I'm sorry?
Oreos!
Oreos.
Everybody likes Oreos.
Who doesn't?
DR. MARK BING: The transition to mainframes is quite
straightforward.
CHARLES VIANEY: It's a direct line.
It's a direct line.
So do you think the market [INAUDIBLE]
American Express?
So he's done credit cards.
He's done financial services.
He's a *** kid, high brow McKinsey
partner kind of a guy.
He's done Oreos and cigarettes.
Natural choice for IBM, right?
STUDENT: But he knew business.
He knew what capital markets required.
He understood that without organizational management
change, all of the product changes--
CHARLES VIANEY: Well, and I think to sell books--
again you have to be a little bit provocative to sell
magazines and things such as that.
Most of us didn't know anything.
And from a culture standpoint, those of us--
almost if you think about this, you saw in the previous
slide, we'd gone from close to 400,000 employees down to
about 250,000 employees.
We had had basically a no layoff policy.
So nobody ever lost their job at IBM unless
they wanted to leave.
We'd had multiple cuts.
And so you'd see, you'd be looking around and all of
sudden you'd see your friends were no longer around.
If you really looked at the stages of grief--
I mean seriously-- if you look at the stages that someone
goes through with grief, the people who left were going
through a grief process.
The people who remained, we were going
through a grief process.
So it's easy to look back now and say we were arrogant, we
missed the market.
But it was tough.
It was hurting.
And there was upheaval in the sales organization, because at
one time we had two rows of people covering the sales
territory in Mississippi.
And now we have one guy here.
Jason's now covering the sales territory.
And Jason's freaking out because he's getting people
calling with problems.
Fix this, my invoice is wrong.
What do you mean I'm getting charged for this?
Who are you, by the way?
I don't know who you are.
And so those left behind, culturally it was tough.
It was very tough.
So this is when Lou walks in.
And I remember hearing him speak literally a couple
months before he left.
He didn't speak a lot to internal audiences.
He really did not.
He brought to IBM--
and what he said, bless his heart-- he said how difficult
it is to get things done inside IBM.
He saluted the culture.
He saluted the bureaucracy.
It was arguably still a big company with very ingrained,
entrenched ways of doing things.
But he came and said first of all, I've been
a customer of IBM's.
I'm a business guy.
And I know business.
I don't know mainframes.
I don't know technology.
But I've bought a lot of technology.
And leading up to Gerstner coming in--
and as I say, he was the first non-career IBMer to
come in as our CEO.
And if you think back to the time of this, if you think
back to other companies like AT&T, some of the things that
AT&T-- the old AT&T, not the new one now that's
Southwestern Bell AT&T, BellSouth AT&T. The old AT&T
was going through selling off parts of their business--
Bell Labs, Western Electric, various
pieces of their business--
thinking that the parts separately are
worth more, et cetera.
And IBM was on the path of breaking itself up.
After the government had not done, we were
going to do it ourselves.
Gerstner basically said, the last thing IBM needs to do is
break itself up.
We need to stay together.
The perspective he brought, which is really the
perspective that we have today, is perspective of that
customers have business problems.
And if I have a business problem with my manufacturing
organization or my sales organization or some other
part of my business, I need somebody to come in and help
me figure out what the solution is to that.
And in many cases, there's a technology component or
technology components to that solution.
There may be some other things.
There probably are some other components to that.
Somebody needs to come and help me figure that out.
And he put us on a path to being a
solutions focused company.
I think there was a comment made, if I remember.
Mark and I had lunch, he was refreshing my memory.
There was a comment made in the back by Carroll that after
Gerstner came on that IBM was never going to see the margins
as a services business.
You'll never see the margins that you saw previously as a
mainframe business.
And the answer to that is absolutely right.
Our services business does not carry the margins of what our
mainframe business was, or hardware today.
But as a part of our solutions business, we really got into
software in a big way, which carried very significant
profit margins.
And we're still technology based, so we still will sell
technology as a part of, in many cases, as a part of a
real solution.
But I'll get to that a bit more.
But it is described in lots of different-- who's the holy
terror riding to save IBM?
And he was the guy.
STUDENT: So why was he successful?
First of all, Wall Street believes him.
So he got carte blanche.
He did not care about people.
I mean, people were the natural
victims of the process.
[INAUDIBLE], downsize to attract new capital.
And he said, I will not break it.
Because they would not allow anybody else
to keep it all together.
They would otherwise themselves break it apart.
CHARLES VIANEY: He had a honeymoon.
But he was given a carte blanche to come
in as a change agent.
I mean, IBM, I don't think most people knew how
perilously close to collapse we were.
We were in very severe situation.
We were bleeding cash.
We'd had multiple layoffs.
I talked about the morale, or I talked about what it was
like being left behind, if you will.
Morale was horrible.
So what did he do?
He really took a business approach.
He took a look at our business.
And what we were were a series-- and if you read the
paper, I'm not going to ask for a show of hands, but if
you read the paper--
globally integrated enterprise, we were very much
a multinational.
But were a very fragmented multinational.
We operated, and even today, we have so [INAUDIBLE]
designations, you have to some for legality.
But we have an IBM US, IBM Canada, IBM Mexico, IBM China,
et cetera, et cetera.
IBM Japan.
But within those organizations, we were
extremely fragmented.
So if you think about all the things you need to run a
business, there's an area that we call supply chain
management.
And supply chain management is very broad.
It's all those business processes from--
and I'm speaking of this as almost a straight line, as a
linear set of processes, and they're not.
But for simplicity's sake, everything from sourcing goods
and materials that you need as the raw materials, all the
sourcing activities that go with that, all the
manufacturing activities, all the distribution or logistics
activities that you have within your organization, with
partners, with suppliers, and then getting out to your final
customer with all the products and stuff that we make.
'Cause at the end of the day, we're still
a big product company.
We absolutely are still a big product company.
We make a lot of stuff.
And so all that is supply chain.
So Gerstner started looking at our supply chain.
It was a mess.
We didn't have a supply chain.
We had hundreds of supply chains.
He started looking at, OK, we're the world's largest IT
organization.
What is our cost of information technology?
And I don't remember what the exact cost was and he never
could come up with a final number, 'cause I think it just
kept increasing if you were to look.
But if you looked at best in class organizations of
different types of companies, we were many times what best
in class was from the standpoint of how much we
spend on information technology.
By the way, we had many, many, many what we called legacy
systems running all these different
disparate parts of IBM.
Very expensive.
Very expensive to do that.
And so our supply chain was in a mess.
For example, procurement.
Most large organizations today have very sophisticated
procurement or sourcing organizations.
Typically, if you think of a manufacturer, you source
basically two types of material.
You source direct material, which those are the things
that go into your manufacturing process.
And then you source indirectly.
It could be everything from pens, pencils, paper, anything
that's not in the manufacturing process.
Travel expenses.
70%, 80% of our procurement professionals-- if you want to
call them that--
before Gerstner were focused on transactions.
They were focused on administrative functions.
We didn't have a chief procurement officer.
We have a single CIO.
We didn't have a single chief supply chain officer.
And so he started looking at areas where we could get very
quick business return.
So for example, part of our first initiative around supply
chain transformation that was very significant, our supply
chain effort was around procurement.
Setting up a procurement organization with a real chief
procurement officer looking over both direct and indirect
materials that we buy, and hiring professionals who have
expertise in buying those items.
They're called commodity items.
And so if you're used to buying literally office
supplies, if you're buying travel goods, you want to have
somebody who is used to negotiating with the airlines.
Somebody who is used to negotiating with the hotel
chains, with the rental car companies, and so
forth and so on.
People with very specific expertise.
Carrying the procurement story forward where we've gone now.
So organizationally, we've made some very specific
changes and actually made some tremendous savings.
We were very much a paper based organization.
Now we are, if not 100%, we're all but 100% electronic.
So if you're a supplier to IBM, and you don't do business
electronically, you're no longer a supplier.
We had gone from something like 33,000 suppliers to a
small fraction of that number.
And we have leveraged contracts
with all of our suppliers.
And we have systems in place to be able to know what kind
of discounts we're getting with the suppliers and
negotiating ability.
Yes, sir?
STUDENT: You are explaining to us how you streamlined your
supply chain of IBM.
But at the same time, you have learned how to add value to
your client's supply chain and to be [INAUDIBLE] of all the
outsourcing.
Like FedEx is for all [INAUDIBLE], you
have become for IT.
CHARLES VIANEY: Yeah.
There's been a great byproduct.
Now [INAUDIBLE]
and an example of that that I use every day when I travel,
as well as we use with clients.
One is talking about our supply chain story, about how
we've changed.
We also learned, as we were shedding hundreds of thousands
of square feet of office space, most of our employees
don't have a permanent office to go to or don't have a
permanent desk in a location.
They may be assigned Birmingham, where I live.
But in most cases, some people call it hoteling.
But we actually built the technology and the
infrastructure for every office around the world, that
any of our employees--
as many of them travel--
now we have actually created a set of technology and
capability around mobility so that I can go and I can plug
my laptop to our network in Bangalore, India or China or
New York or Birmingham.
I can download the drivers for the printers in that location,
have some infrastructure there.
We've taken that capability, we help clients with similar
type problems now.
So we've turned that into intellectual capital,
intellectual property that we're able to--