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7 minute read
Joshua Cooper Ramo

When IBM announced its quarterly results last Monday, the news seemed like the last, grateful chapter of some Joseph Conrad epic. IBM had returned from its arduous journey to the land of lesser companies. It had produced a solidly black summer. Profits, the company said, rose ahead of expectations; hot new IBM computers such as the ThinkPad 560 were rocketing off the shelves for the first time in decades; and the company’s services business, which helps firms get up to the warp speed of the infobahn, had booked a mind-blowing $11 billion in business in the first nine months of 1996.

Wall Street, however, can’t make up its wary mind about the miracle that Louis V. Gerstner Jr., IBM’s seventh CEO, seems to have managed. In the past three years, Gerstner has brought IBM back from what his top lieutenant immodestly calls a “near death experience” instigated by the company’s slavish commitment to mainframe computing, a business that started to dissolve sometime during the Carter Administration. Since arriving in April 1993, Gerstner has refocused IBM on businesses that actually exist, unplugged more than 40% of the work force, tripled its once crippled stock price and, in the process, answered what looked to be the most difficult business riddle of the decade: How do you save a company from its own worst instincts? Think. Gerstner seems to be doing it all the time.

Yet last week’s good news traveled in a sort of endless loop around the stock price, which remained locked at about $130. If, as F. Scott Fitzgerald famously remarked, there are no second acts in American lives, they are even rarer in American business recoveries. Act One, of course, will be familiar to most of our audience from the recent performance of AT&T: fire nearly everyone in sight. It’s Act Two–creating sustainable, profitable growth–that seems to be the tricky part. Companies such as K Mart have performed brilliantly in the Sweeney Todd role, slicing overhead and enjoying the resultant earnings boost, but have failed to grow once the cutting stopped. That’s the real problem facing Gerstner in the mirror each morning.

It’s worth noting that establishing growth at a company the size of IBM–with $72 billion in sales last year, it is the 18th largest on the planet–is no mean feat. In fact, to grow at the 7% rate their corporate bosses are planning, IBM’s sales force has to discover economic opportunities the size of Bolivia’s gnp each year–north of $5 billion in new business. And while some passionate analysts expect IBM to pull that off elegantly (and hit $200 a share by 1998), others consider the company already stressed: thus the yo-yoing stock price, which remains below its 1987 high. The prediction problem is so bad that according to the Wall Street Journal, analysts attending IBM’s investor meetings pay more attention to the body language of CFO Richard Thoman than to the numbers he unveils.

Gerstner and Thoman, however, have engineered a corporate future that takes more from their corporate customers’ body language than their own. The folded arms and quizzical looks on display in the meetings about computer systems–not another one!–at offices and factories alike are body talk expressing fear of machines, and IBM sees a huge business in making that emotion go away. Digital change has evolved from an amusing walk toward the future to an all-out sprint. FORTUNE 500 CEOs feel they are running for their life when it comes to technology decisions, and the race is distracting them from their real businesses. “Companies are realizing that they want to do what they do and not information technology,” says Thoman.

So instead of being a high-tech hardware store, IBM is now selling help. Gerstner is betting that for the next 10 years, the technology market will be stuffed with firms aching to get rewired but without a clue about where to begin. IBM plans to sell these folks “solutions,” the institutional equivalent of your nephew Phil, the relative you call when you’re debating which PC to buy or wondering how to rescue the last half of that tax return you were preparing. Gerstner’s Big Blue will offer solutions to help point you safely to the future. If the old IBM was father Thomas Watson in his white shirt next to a multimillion-dollar mainframe, the new IBM is Uncle Lou, sleeves rolled up, getting the darn thing to work.

It looks like a highly profitable choice. IBM’s service sector, with sales of $12.7 billion, is pegged to grow at around 25% a year–that’s good news, since the company can sell real brainpower rather than its quickly obsolete silicon counterpart. The group is growing so fast, says Thoman, that it’s facing a challenge that’s novel even for IBM: locating 15,000 talented new bodies to throw into the business next year.

Gerstner has revived the old-line software and hardware businesses that were at the root of the last corporate nosedive. He parachuted Thoman into the firm’s struggling PC division with a mandate to clean up the mess. Thoman killed some of the group’s nearly 500 models of machines and breathed life into those he kept while pounding costs through the floor. In January, IBM spent twice as much and took twice as long to make a PC as industry leader Compaq. Now it claims it has No. 1 beat.

The problems haven’t been so easy to fix in the company’s mainframe business, which manufactures the multimillion-dollar data monsters that are the Cadillacs of the information highway. Most of the growth in computing these days is coming from small firms wiring up new networks with inexpensive computers. These small machines generally sell for thousands of dollars, not millions, and they are selling fast enough to push upstarts like Dell to the front of the market, well ahead of No. 1.

Gerstner, in contrast, still believes in big iron. He is making a huge wager that the flood of interest in the Internet and internal networks (intranets) will produce a surge in demand for the sort of giant computers only IBM can make and maintain. The prediction evokes some scary memories at company headquarters in Armonk, New York; it’s exactly the same bet the company made in the early ’80s, when it wagered billions that the mainframe market was due for growth. The decision almost killed the company. Gerstner at least has stripped away the division’s techno-worshipping culture and replaced it with an outlook that’s more McDonald’s than McDonnell Douglas. The customer focus has paid off: analysts expect the group to begin slowly increasing revenues.

Software is a trickier problem. Although IBM annually sells $12.6 billion worth of code, twice as much as Microsoft, it isn’t seen as much of a software innovator, something that’s considered essential in the age of the Internet. Gerstner tried to repair that view with his $2.9 billion purchase of Lotus last year, but skepticism remains. “They’re not really innovating on the Internet,” says Jon Oltsik, an analyst at Forrester Research. “They’re being outmaneuvered by Netscape and Microsoft.”

Gerstner insists that the hardware-software balance he has struck so far is the right one. “When I got here, this industry was still believing the propaganda that was coming from some of the Pied Pipers–that the PC was the solution and that everybody would be able to run all of their computing needs on their wristwatch. I’ve been on the other side. It is far more complex.”

It is that complexity, of course, that will ultimately decide IBM’s fate. The firm has always pitched itself as an antidote to confusion. If it stumbled in the late 1980s, it was because the company had become more complex than the industry itself. Gerstner is preaching the message of simplicity and solutions. If IBM turns in a couple more big quarters like the last one, even Wall Street will start to believe him.

–With reporting by Daniel Eisenberg and Lisa Granatstein/New York

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