Columns

Bye-Bye, Big Lou

Lou Gerstner leaves an admirable turnaround legacy at IBM.

• By Linda Briggs
• 03/01/2002

We live in an era when top corporate CEOs are as visible and well-known as sports stars—and similarly compensated. Jack Welch, Carly Fiorina, Larry Ellison—all practically household names. Huge compensation packages aside, you've got to wonder sometimes whether the leader at a giant corporation really can have that dramatic an effect on end results.

In Lou Gerstner's case, the answer might actually be yes. Wall Street said as much in January, reacting to the (expected) news of Gerstner's retirement on March 1 with a $5 drop in IBM's stock price that day. The stock quickly recovered, as it should—successor Sam Palmisano is a consummate IBM insider who has worked his way up through the ranks and has run several successful divisions, including IBM's services division, its PC business, and its enterprise systems group.

Gerstner, in contrast, joined IBM fresh from RJR Nabisco in 1993 (ironically, the same year Thomas Watson Jr. died). He was IBM's first outsider CEO—and his specialty was business, not technology. He took on the struggling company, slashing through vast layers of bureaucracy (he laid off 60,000 workers in his first year, though surprisingly enough, that was fewer cuts than his predecessor had made) and refocused IBM's energies in a storied tech turnaround.

It's hard to remember this now, when IBM is again a solid, highly respected technology leader, but when Gerstner came aboard, the company had lost $16 billion over the last two years and, incredibly, was contemplating bankruptcy at one point. Insiders, including previous CEO John Akers, advocated breaking up the company, arguing that it was too big and slow.

In reality, the company was being pulled down by its own bloated bureaucracy, arrogance and inability to compete.

Gerstner decided that one of IBM's strengths was, in fact, its size and diversity of offerings—and he began to focus on services along with products. Recently, of course, a bevy of other large corporations, including Compaq, Sun and HP, have realized that consulting services are good business. But Gerstner saw this way back then. He also fostered a new emphasis on the customer, something that IBM had lost over time.

Gerstner's reign wasn't perfect—in the last few years, critics have called the company's growth too slow, especially during the Internet boom, when IBM earnings seemed to plod along. (Though in retrospect, the company's Internet conservatism looks like foresight.) Revenue dropped three percent last year, to $85.9 billion, and earnings from its much-touted services sector were down. Now, post-Enron, some of the bookkeeping techniques that Gerstner (and other CEOs) routinely used to improve the bottom line—playing with IBM's over-funded pension, for example—probably won't fly.

Still, he leaves an admirable legacy in having restored the shine to a venerable brand, leaving it cash-rich and ready to maneuver its next set of challenges. Not the least of those is the future of large business computers—IBM is now the last big-name builder of mainframes for the U.S. market, as Hitachi, Bull, Amdahl and others have dropped out.

Many of you are long-time customers of IBM's goods and services. As such, what will you remember from Lou's reign? And what words of advice do you have for Sam Palmisano? Send me e-mail at LBriggs@esj.com.