Management today: What Louis Gerstner can teach us

October 2003--June 2004

Management Today - What Louis Gerstner Can Teach Us

- Pankaj Kumar Mandal

Looking back, in the 1970s and 1980s the International Business Machines Corporation (IBM) was at the top of world business.But when the computer market paradigm shifted from the mainframe (large computer) to Personal Computers (PCs), the IBM culture needed change. Though some measures were taken by the previous CEO, John Akers but the flagship of IBM was sinking rapidly like the Titanic. The IBM sales and profit were declining at an alarming rate, its cash position plummeted to an all time low. Nevertheless, Gerstner agreed to take over the charge of the CEO on March, 26, 1993 (though formal election took place on March 30).

“Who Says Elephants Can’t Dance?” (Harper Business, 2002) is the allegorical book by Louis V. Gerstner, which portrays the history of IBM’s dramatic turn around.In a nutshell, it is a masterpiece of management strategy, planned and executed with mathematical precision and motherly passions.It will be immensely useful for the managers and administrators of all times and all climes.It has a special relevance to Indian Economy - especially the management of public sector enterprises (PSEs) and down-sizing of the Government.

Because of strong political opposition, the privatisation process has almost come to a halt.On the other hand, the cold process of disinvestments of PSEs,that is, distancing of PSEs from the government through the mechanism of the Memorandum of Understanding which at once offers autonomy and ensures accountability, has also failed and there is hardly any improvement in the management of the PSEs.

The Comptroller and Auditor General of India, in his Audit Report, has recently revealed that out of 268 Central PSEs, 97 have incurred a cumulative loss of
Rs. 60,996 crore in 2001-2002 as against Rs. 45,527 crore in the previous year. Obviously, in these PSEs the rate of return on investment by the Government is nil or negligible.The other implications are low productivity, slow execution of projects and uncontrollable expenditure.The CAG’s report also mentioned that as many as 65 of the sick PSEs have been referred to the Board for Industrial and Financial Reconstruction for formulation of revival and rehabilitation scheme.But alas! the BIFR approved revival packages for only 3 ailing PSEs, while 22 cases were pending with the Board for more than ten years.

As mentioned already, the Government of India has been insisting on improvement of the performance of the PSEs through Memorandum of Understanding.Besides, Boards for PSEs have beenmademore professionalby selectingexperts and professionals from outside the government as non-executive directors are selected by Search Committee comprising of Chairman, Public Enterprise Selection Board, Secretary, Department of Public Enterprise, Secretary of the Administrative Ministry and some eminent non-officials.

Regrettably, all these steps failed to bring about significant improvement in the overall performance.In fact, in order to make the PSEs less bureaucratic, and more free and fair, it would be desirable to broad base the Public Enterprise Selection Board (PESB) who should be aided and assisted by independent recruiter consultants.The PESB should be the final authority for recruitment of the CEOs and other functional directors without going to the Appointments Committees of the Cabinet.The proteges of the politicians should, as a rule, be barred.

The procedure followed by IBM has certain merits.As soon as John Akers, CEO, IBM decided to retire on January 26, 1993 a Search Committee, headed by Jim Burke, was formed to consider outside and internal candidates.The Search Committee assisted by two reputed recruiting firms “spotted” Louis
V. Gerstner, CEO of RJR Nabisco, from amongst the top CEOs in America, namely Jack Welch of General Electric, Larry Bossidy of Allied Signal, George Fisher of Motorola and Bill Gates of Microsoft.Well, what were the criteria? They were not looking for a technologist but rather a broad-based leader and change agent.In their own words, “ What is critically important is the person must be a proven, effective leader one who is skilled at generating and managing change”.

Gerstner took up the challenge right from the day of announcement.He came, he saw and conquered the hearts of the IBMers as well as the customers.On the day of his announcement as CEO, he had his first meeting with IBM team of senior executives at the World Headquarters at New York, where he declared his early expectations : “If IBM is as bureaucratic as people say, let us eliminate bureaucracy fast.If we have too many people, let’s right size, let’s get it done by the end of the third quarter”.He explained what he meant by the word right sizing.He said, “We have to bench mark our costs versus our competitors and then achieve best in class status”.

In India how many Chairman-cum-Managing Directors of the PSEs do have such clear cut thinking and courage of conviction? Very few, indeed, despite volumes of road map offered by the Ministry of Finance, Disinvestments Commission and the Expenditure Reforms Commission (ERC).

In its first and second report (combined) under the chapter “Optimising Government Staff Strength”, the ERC clearly stated that “a drastic down-sizing of the Government staff becomes necessary not only for securing professional governance as visualized by the Fifth Central Pay Commission but also to ensure that burgeoning salary bill does not pre-empt scarce resources, that could otherwise be applied to priority areas like infrastructure development, human resource development and poverty alleviation”.

While reviewing the working of the Department of Heavy Industry which administered 48 Public Sector Enterprises the ERC observed “Unfortunately, most of these are sick or near sick enterprises.Only 16 out of 48 made profit in 1998-99 but this was overshadowed by the large losses made by the remaining 32 enterprises.All the PSEs together made a net loss of Rs. 411 crore”. Obviously, there was hardly any justification to retain most of them in the public sector.The ERC, therefore, observed, “Consistent with the Government Policy, the approach should be to privatise all these PSEs which are non-core and also close down those which can not be revived / privatised. Towards this end, a well conceived plan of action, with a time frame of three to four years and well defined milestones for achievement would need to be drawn”.
The Reports of the ERC are probably gathering dust in some quiet corner of the Ministry of Finance.The initial enthusiasm of the recommendation has already diminished, particularly after the long and loud protest by the then Minister of Information and Broadcasting against the ERC recommendations for reduction of staff strength from 7779 posts to 2176 posts and winding up of the Films Division. Children Film Society and the Directorate of Film Festivals.

Incidentally, it is interesting to recall that the Ministry of Information and Broadcasting established a five member committee under the Chairmanship of
Shri N.R. Narayanamurthy, Chairman and Chief Executive Officer of Infosys.The ERC reminds us of the apocalyptic findings of Narayanamurthy Committee : “ that by international standards, the Engineering staff employed by Doordarshan and All India Radio is 36 times larger than needed ; that a drastic overhaul of human resources of the Corporation (Prasar Bharati) in terms of pruning and jettisoning of deadwood, redeployment of staff etc. would be required; and that the Indian Broadcasting Service may be abolished, treating it as a dying cadre”.

In his very first meeting with the top executives of IBM, Gerstner summarised his management philosophy and practice.Most crucial of these are:-

  • I manage by principle, not procedure.
  • The marketplace dictates everything we should do.
  • I am a big believer in quality, strong competitive strategies and plans, teamwork, pay off for performance and ethical responsibility.
  • I am heavily involved in strategies, the rest is yours to implement.
  • Hierarchy means very little to me.

He went on with his exhortations: (a) Stop hemorrhaging cash, we were precariously close to running out of money; (b) Make sure we would be profitable in 1994 to send a message to the world and to the IBM workforce - that we had stabilizedthe company ; (c) Develop and implement a key customer strategy for 1993 and 1994 - one that would convince customers that we were back serving their interest not just pushing “iron” (mainframe) down their throats to ease our short-term financial pressures. (d) Finish right sizing by the beginning of the third quarter.It is satisfying to note that these exhortations had profound impact on IBM culture which remained true during Gerstner’s nine year tenure.In fact, these got embedded into the “DNA” of the IBMers.

His job was not over with issuing orders.He saw to it that the customer strategy was implemented seriously.He called for a ten-page report from each business unit leader within 30 days covering customer needs, product line, competitive analysis, technical outlook, economics, both long and short term key issues and the 1993-94 outlook. Meanwhile he undertook a whirlwind tour of the company’s European regional and branch offices within a period of a week. The feedback he received was the same old story of declining of mainframe sales, higher prices of IBM machines and lack of participation in PC segment and alarming decline in the image of the company.When the company was suffering from acute shortage of cash, he noticed to his dismay, double infrastructure, unduly large unproductive supporting workforce in some regions.

In view of this, he had no option but to decide to reduce the price of the mainframe though it meant initially a huge loss.Simultaneously, he sat with his technical advisers for a technological innovation in the S/390 Division. Gerstner staked out a bold move to a totally different technical architecture for the system 390, that is, moving from what was known as a bipolar to C-MOS technology, which turned out to be cost effective.

On May 16 Gerstner convened his first Strategy Conference at Chantilly, Virginia.It was a hectic day for him, struggling to acquaint himself with all technical jargons and abbreviations and the arcane terminology, yet he decided to join the IBM Customer Forum in the evening.This was attended by about 175 Chief Information Officers of the largest United States Companies including most important customers.

He addressed his customers in a most friendly manner, which was unprecedented for an IBM CEO.He declared in his opening remarks that “A customer was now running IBM” (as he was a customer of information technology information when he was at American Express and RJR Nabisco).He reassured them by saying that “We would redefine IBM and its priorities starting with the customer”.He also announced that price of the mainframe, both hardware and software were coming down quickly.The price of a unit of mainframe processing was in fact drastically slashed down from $63000 that month to less than $2500 seven years later, an incredible 96 percent decline.

A Calculated risk, no doubt, but it paid him good dividend in course of time.“IBM mainframe capacity shipped to customer had declined to 15 percent in 1993.By 1994 it had grown 41 percent, in 1995 it had grown 60 percent followed by 47 percent in 1996, 29 percent in 1997,63 percent in 1998, 6 percent in 1999, 25 percent in 2000 and 34 percent in 2001. This represented a staggering turnaround”.

A disgruntled customer Gerstner himself, now CEO, he was determined to assuage the ill-feelings of the IBM customers.That is why, in his first meeting of the Corporate Management Board, which consisted of 50 top executives, he inter alia, laid greater stress on the question of the loss of customer trust.He called the scheme for the restoration of the customer confidence as “Operation Bear Hug”. Under this, “Each of the fifty members of the senior management team was to visit a minimum of five of our biggest customers during the next three months. The executives were to listen, to show the customers that we cared and implement holding action as appropriate.Each of their direct reports (a total of more than 200 executives) was to do the same”.The “Bear Hug” became a first step in IBM’s cultural change.

Grestner’s secret of success was his enormous commitment to the company.In other words, his passion for the company was total and complete.The other passion was for his own employees. The company was brimming with talented people who had unique expertise and who were the real asset of the company.Whether at the time of financial crisis or national catastrophe (September 11,2001) or company achievement celebration, he was always in communication with his employees.He articulated his relationship with the employees in his “Dear Colleagues” series of marvelous letters.The third passion was the customer satisfaction.He was fully aware that while yesterday the shareholders came first, today the customers come first.The exchange of place of the shareholders and the customers resulted in improved sales, better performance, greater market share and ultimate addition to share value.

As mentioned earlier, Gerstner’s first 100 days as IBM’s CEO were marked by a number of events - some of which were highly risky.However, after all the customer and employee meetings as well as week end and air travel, he decided to take the following four vital decisions:

  • Keep the company together
  • Change our fundamental economic model
  • Re-engineer how we did business.
  • Sell under-productive assets in order to raise cash.

When these decisions were announced in July, 1993 there were mixed reactions in the media.“Gerstner can be fabulous at this cost cutting stuff and see IBM all but collapse over the next five years or so”, said the New York Times.On the other hand, the Economist asked “ But does cost cutting amount to a strategy for survival?” However, without fear or favour, Gerstner executed them all neatly.

Louis Gerstner is widely known and greatly respected for his transformational leadership.He also knew the art of developing leadership in others to lead themselves.After disbanding the all powerful but bureaucratic Management Committee which was a stumbling block to quick decision making, he created his own team called Corporate Executive Committee which would not accept delegation of problem solving nor would sit through presentations or make decisions for business units.“Its focus would be solely on policy issues that can cut across multiple units”.

Then he embarked upon to prune the size of the baggy Board of Directors from 18 to 12.The smaller Board with distinguished Directors made the World Wide Company less bureaucratic, faster and more effective.Except Gerstner himself, all the Directors were independent outsiders which included Chuck Knight, the Chairman and CEO of Emerson Electric Company, Chuck Vest, President of MIT, Alex Trotman, Chairman and CEO of Ford Motor Company, Minuro Makihara, President of Mitsubishi Corporation etc. Clearly, the modern concept of Corporate Governance was in full operation.The company was now more efficient, more transparent, more responsive and more accountable.

Our Senior Managers and Administrators might not become instant leaders by imitating Gerstner but the latter has a lot many things to teach us.

Formerly Accountant General, Sikkim

Go to the top