The Downfall of IBM in the 90s Was Dramatic but so Was The Turnaround

John Iwata

To appreciate the revival of IBM and how far they have come, you have to begin by showing how far they fell.

That was Jon Iwata's premise when he began his presentation at the Spring Seminar, the final speaker of the meeting. A 15-year veteran of IBM, most of it in communications jobs, Iwata is currently vice president-corporate communications. He had moved up to the executive ranks at Big Blue in 1994, about the time the company was really singing the blues.

"I was hired in 1984, our peak year," Iwata said. "We had about 430,000 employees. We were enjoying an amazingly long run in terms of growth, profitability and market value. We were the most admired corporation in America, with an incredible culture of high performance and excellence that was the envy of the world. Then something went wrong."

Iwata said a lot of things were happening as the seeds of IBM's demise were being sown in the late 80s. There were big shifts in the market and some key market changes were missed. "Many of our problems didn't take hold until the early 90s," he said, "but when they did we went into a tail spin. Our revenues flattened and then declined. Our profit margins collapsed, and we had to report, for the first time in our 80-year history, big losses. Our stock price was cut in half. And, painfully, our tradition of full employment and no layoffs had to be abandoned. In a four-year period, we lost about 200,000 jobs."

Iwata noted that IBM's reputation also took a beating in the press. The New York Times even ran an obituary on IBM on their front page. Shortly after, IBM had a new chairman and CEO, Lou Gerstner, the first outsider to run the business. And gradually things began to change.

Over a period of several years, revenues were re-ignited, profitability was restored, market value went up and new people were being hired. "We're not yet where we want to be," Iwata said, "but we're holding our own right now."

What happened at IBM has all of the elements of a classic turnaround, Iwata explained.

"The culture really did change. Productivity and the effectiveness of our workforce are clearly much greater today than in the past. We exited some relatively minor businesses, but we have not entered any new businesses. Our growth and profitability has come not from changing our business model or portfolio but from executing our business strategy and making it work more effectively."

Public relations and communications played a major role in the turnaround, Iwata said, helping to heal, drive and affect change with a variety of tools, most notably the Intranet.

The biggest cultural change occurred at corporate headquarters. "We wanted to create a new IBM," he said. "We wanted to take forward the heritage and the best things from our old culture, but we wanted a new culture that would enable us to compete and win in the new times."

What IBM wanted to be, Iwata said, was a company that is entrepreneurial, global, risk-taking, loves diversity, grows shareholder values, has quality products and creates opportunity for all. "No one can argue with those aspirations," he said, "but we knew you can't change behavior by simply describing the attributes of the corporation we wanted to be. We had to make a fundamental change in our approach in order to change behavior. We stopped focusing on what we wanted to be and focused instead on what we wanted to do."

The burning question in the mid-90s after IBM had stabilized itself, a question asked by employees, shareholders, analysts and reporters alike, Iwata said, was '"Is IBM going to lead again?' Did we have the commitment and courage and capability to take on Microsoft and Intel and Dell who were outdoing us in the marketplace?

"Lou (Gerstner) answered that question for us," Iwata explained. "He said, 'We are going to lead the industry again. There is no other worthy goal for this company.' And this wasn't just bravado. Gerstner recognized what was happening in the industry as a result of e-business and the Internet, and he wanted us to grab the opportunity."

And so a market-based strategy began to drive the company, Iwata said, and all of the things they wanted to do in terms of culture change no longer seemed like management rhetoric but were obvious implications of a business strategy.

The centerpiece of the new e-business strategy was a document called "One Voice." Put out in 1996, Iwata said, "It was a very simple booklet, signed by Lou, that for the first time explained our business strategy to employees. It didn't try to describe the ideal company. It said: 'This is the mark of opportunity; this is what we have to do.' And because it predated the e-business marketing campaign by about a year, it helped our workforce understand where we were trying to go."

Iwata said they initially printed about 300,000 copies for employees, but then had to print another half-million. "It took on a life of its own. Our salespeople were giving it to customers. HR used it for recruiting. It became must reading for managers," he said. "'One Voice' did not change IBM. But it reoriented our strategy and changed our culture."

Another part of IBM's culture change effort, Iwata said, was "to bring the marketplace inside of the company. Only 25,000 of our 325,000 employees call on customers so they are the only ones who really understand the competitive pressures of the marketplace. But how do you bring the marketplace realities into the company so they are felt by everyone?"

They did it in a number of ways. They changed the compensation system so all employees get bonuses based on individual, business unit and overall corporate performance. They created a "Scorecard" on their Intranet, which established for every major business unit the business metrics that are tied to that variable pay program. This "Scorecard" enabled every employee to see how they were doing in their own business area.

The Intranet increasingly became a major communications channel. To help employees manage the flow of information that they needed to do their jobs, Iwata said, they created a personalized news service on the Intranet called "My News." Each employee created a profile of work-related interests and based on that profile, "My News" filtered news feeds from both inside and outside the company. Several times a day, it created a news page for the employee with the information they specifically wanted.

Iwata said IBM also realized that they couldn't allow the structure of the company to get in the way of their business model, which required cross-organizational teamwork. So they are creating another Intranet feature called "The Matrix" which will help employees navigate their way through the company to get information and make the connections that they need.

To do this, they are taking the 4,000 different organizational Intranet sites and four million Web pages that are in existence and building a system that will allow employees to move seamlessly across the organization. Instead of moving from Web site to Web site, Iwata said, "you stay in one Web site and the information you need comes out. It's a major change in how we will manage our Intranet."

The Intranet is also playing an important role in training. "We had to teach ourselves how to do certain things that are very basic in any business enterprise," Iwata said, "because the way we had done things in the old days were responsible for some of our inefficiencies and dysfunctional behavior. So we designed a series of Intranet tutorials called the 'How To' series. They covered some very basic things such as how to hold a meeting, how to use e-mail, and how to make decisions. These were some of the fundamentals that our employees needed to know."

In addition to the "How To" series, the Intranet has thousands of training and product information videos that employees can view in the office or at home. Salespeople even take their Think Pads to customer premises and play the product information videos for them.

Iwata said one of the killer applications for their Intranet was the "Blue Pages" which is basically their telephone directory. But it's a directory with a difference. Besides being able to search for names, addresses and telephone numbers, employees can also do a search based on the type of information or expertise they're looking for. "It's a tool that allows us to find not just people but also knowledge," he said.

A new feature called "World Jam" will be making its debut shortly. Iwata described it as horizontal communications that goes beyond e-mail and chat rooms. Initially, 10 topics that employees have identified as being important to morale and business success will be posted on World Jam and employees from anywhere will be invited to participate in discussions about any of the topics. The emphasis of the discussions will be on employees entering ideas or best practices that they have found effective. The participants will even have an opportunity to vote on the idea and the system will post the results. 'It's not management saying these are the best ideas or practices," Iwata said. "It's the employees. We're calling this experiment, e-to-e communications, employee to employee communications."

When they were trying to change the IBM culture, Iwata said, one of the roadblocks was the "frozen middle." Employees loved what the CEO was saying, but told us they were experiencing problems with their middle management. "Our solution," he said, "was to go direct using the Intranet. If your manager won't tell you the strategy of the company or how your unit is performing or how to make connections, you can turn to the Intranet for answers."

The success of this strategy became obvious when they looked at their annual surveys of best sources of information in the company. In 1997, the best sources were, in order of importance, co-workers, managers, INEWS, senior executive letters, external media and the Intranet. By 1999, the Intranet had risen to second on the list, and in the 2000 survey it was tied with co-workers. Management didn't like it, Iwata said, but it showed what a powerful communications tool the Intranet is.

"With the Intranet we've been able to allow employees to walk through walls, so to speak," Iwata concluded. "We've gone beyond creating messages to developing tools and resources that help employees behave in new ways. As much as we depend on management to drive culture change, the reality for us has been that the management team lags the workforce. It is the employees who drive internal change."