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Out of the Blue: New CEO at IBM

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The final Jeopardy answer is: "Crackers!" If your question was, "What will IBM be serving at its next board meeting?" you're a winner. With the announcement of Louis V. Gerstner Jr., formerly chairman of RJR Nabisco Holdings Corporation, as the Akers replacement and new chief executive of IBM, the age of the Triscuit dawns over Armonk.

IBM's three-month search for a CEO was conducted with military secrecy, complete with code names for the candidates. Gerstner was dubbed Able, a wishful projection, perhaps, and an indication that IBM's board has a scant sense of humor since Baker is clearly the consummate handle for someone from Nabisco.

One hundred twenty-five candidates were supposedly considered, in what the Wall Street Journal (WSJ) called "the biggest corporate beauty contest ever." The volume of candidates may reflect the difficulty IBM had in finding a successor. Early in the search process, to the embarrassment of the board, the heads of Apple, Motorola, NCR, Allied-Signal and HP publicly withdrew their names from consideration. Newsweek remarked: "In happier days it would have been one of the crown jewels of American business. But by the time IBM named a successor to chairman John Akers, the question was not who would get the job of running the embattled company but who would take it."

But IBM insists that there was only one offer and Gerstner was its man. The board certainly made it worth Gerstner's while with a base salary of $2 million, incentive bonuses for this year totaling $1.5 million more, and a $5 million signing bonus compensating Gerstner for stock options and other benefits he abandoned at Nabisco.

But the board wasn't through yet. With a munificence reminiscent of a Ginzu knife commercial (if you call now), Gerstner will also receive options to buy 500,000 shares of IBM stock, and another $500,000 in bonus pay in three years if he reaches some undisclosed goals. Deemed "an unfortunate juxtaposition" in the WSJ, IBM employees in the Hudson valley were being given their walking papers while this princely compensation package was announced.

Still, Gerstner brings some impressive credentials and at least one glaring deficiency. On the plus side, if you look up the word "manager" in the dictionary, you may find Gerstner's picture. He was a whiz kid at the management consulting firm of McKinsey & Co. where he became the youngest partner at 27 and was instrumental in overhauling the bankrupt Penn Central. In 1978, he moved to American Express where he restructured the credit-card business and assumed the presidency in just eight years. Finally, in 1989 he was hired as CEO of troubled Nabisco. Gerstner recalls, "I came on board a $17 billion company where, in effect, there were no rules anymore." Not a problem plaguing IBM. "Instinctively, and maybe even dangerously, I imposed my view of how a modern corporation should be run." That included bringing in a new executive team, slashing costs, selling off $6 billion in assets, and cutting the company's debt in half.

Regardless, the WSJ called Gerstner's appointment "an audacious gamble" primarily because, as you have no doubt noted, Gerstner has no background in computing. The WSJ concluded: "The selection of the 50-year-old Mr. Gerstner [culminates] the most high-stakes contest in corporate history with a controversial choice. IBM, suffering desperately from misreading breakneck changes in high technology, [is] handing its future to an executive with superb management credentials but no computer-industry experience."

Thus, the first outsider in IBM's history to assume the chairman's mantle inherits a business of acro-nymic complexity with which he has scant familiarity. But the hiring of a generalist as opposed to an industry visionary tells us where IBM's board thought the problems were: squarely in management's court.

One could safely assume that, ideally, the board hoped to find a CEO with some combination of management ability, technical skill, and vision. Failing to find all three presents some decided challenges, not the least of which is how an industry outsider can stay ahead of a highly technical, immensely specialized, and constantly mutating industry.

People who are primarily managers believe they can apply the same basic set of business principles to any enterprise and make it profitable. One-size-fits- all. But unless Gerstner finds the vision that can transform the IBM Saint Bernard back into a greyhound, the company may end up fiscally stable but flat and uninspired. Moving IBM into the twenty-first century will be difficult without an almost cellular connection to the computer industry.

IBM apparently felt uneasy enough about the announcement to ignore its own army of in-house PR people and hire a public relations firm, Burson- Marsteller, to orchestrate the event in a Manhattan ballroom. John Akers was reportedly sullen, and Gerstner seemed eager to get on with it. He declared that he had no turn-around strategy in mind, but added: "If we're going to err, we're going to err in the direction of moving too fast. We don't have the luxury to sort of sit around and study the problem."

And which way is IBM likely to move? The WSJ predicts: more cuts(!?), sharpening financial controls, and a shakeup of the entrenched IBM culture. If this sounds a lot like the Akers plan, well, it is. "There are few obvious actions a new CEO can take that haven't already been taken," an industry analyst observed.

Great. So where does that leave Gerstner? During the last year, a who's who of ailing corporations have searched for new leadership. At a time when there appears to be a crisis of command in American industry (the same six or seven guys are mentioned for every chairmanship), turning IBM around would be the stuff of pin-stripe legend; the second coming of The Iacocca.

In retrospect, the outgoing generation of industrial leaders often functioned as caretakers, inheriting corporations from the people who built them. The rapid demise of so many major enterprises (Sears, GM, Boeing, the airlines, IBM) suggests that men at the helm could sail their corporate vessels in calmer waters, but were unable to negotiate the tough seas of change. Gerstner will have the opportunity to chart his own course, to prove the skeptics wrong, to be a hero. A hero perhaps, but certainly not an altruist. While IBM's financial future may be in doubt, Gerstner's is secure.

So, how did investors react to the Gerstner appointment? They trashed IBM's stock, knocking another 6 percent off its market value. But as an unnamed source close to the board observed: "He may be the best they could get."

Victor Rozek has 17 years of experience in the data processing industry, including seven years with IBM in the Operations Management and Systems Engineering areas.

What We Meant Was...

Perhaps you thought we were testing you with an April Fool's joke in "Out of the Blue". The sentence stating "...a half million new pages of AS/400 technical information are produced each minute" is incorrect. The half million pages estimate refers to all technical information.

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