HE'S SMART. HE'S NOT NICE. HE'S SAVING BIG BLUE LOU GERSTNER ISN'T EASY TO LOVE, BUT YOU HAVE TO RESPECT HIM. HE'S DONE THE JOB NO ONE WANTED BETTER THAN ANYONE EXPECTED. BUT WILL HE FINISH IT AND RESTORE GROWTH AND GLORY AT IBM?
(FORTUNE Magazine) – Everybody wants a piece of Lou Gerstner, now that his stock is back up. At a recent speech to Internet World, he attracted a horde of trade-press paparazzi. On a tour of the show afterward, he was surrounded by reporters, fawned upon by corporate dignitaries, and approached by webheads seeking his autograph. He has turned down invitations to the White House (no time, he says). He was even the subject of a Jeopardy! answer: "In 1993, Louis V. Gerstner became the first outsider to head this computer giant." Does anyone not know the question?
All the attention is unexpected--but not necessarily unwanted--by this uptight, buttoned-down CEO, a blue-chip guy built like a mainframe, clad not in Silicon Valley shirtsleeves but in Westchester County pinstripes. He is intense, ambitious, driven--a man who demands results in a New York minute and plans his schedule down to one. He would never be mistaken for technology's poster boys. This is not Bill Gates or Andy Grove or Marc Andreessen. This is Lou Gerstner, 55, strictly Harvard MBA and quintessential McKinsey. After a great run at American Express, he gave Jimmy Robinson his notice one day and was gone the next. After arriving at RJR Nabisco with much fanfare, he quit abruptly, the job unfinished. Gerstner may be the ultimate free agent, always on the lookout for more money, more glory, a better franchise. But as he cuts his swath through corporate America, he leaves all sorts of questions in his wake. Chief among them: Now that he has taken the job no one wanted--and done it better than anyone expected--will he stay long enough to make IBM great again?
Gerstner seems to go back and forth on the answer. On the one hand, he says, "I'm still warming up here. I haven't had my portrait painted yet." On the other hand, he notes that he does not have an agreement with the board over how long he will stay. "There are days when I ask myself, 'How much longer do I want to do this?'" he mused just recently. "I've basically completed what I was asked to do." (For more of Gerstner on Gerstner, see box.)
This is a guy who could single-handedly supply the raw material for three case studies at his old B-school. He's also a fascinating personal case study, though here it's a struggle to get him to supply anything at all. "You're not getting inside my head," he snarled when I introduced myself. Months later, to the question, "Where does your ambition come from?" he replied, with characteristic brusqueness, "I have no idea. I'm left-handed. Where did my left-handedness come from?"
And talk about contrasts. He is drawn to the limelight like a moth to flame, yet he is belligerently private. He has lived a great Horatio Alger story, but doesn't want to tell it. He is a devout Catholic who attends Mass every week but often flouts the golden rule. At a time when EQ is coming of age, he is all IQ. He intimidates many who work for him, yet a cadre of loyal executives has followed him from company to company. He hates for anyone or anything to waste his time, yet he's a gardener who enjoys the painstaking process of growing asparagus. He is passionate about golf but seems to have little patience for its etiquette. In a recent round at the Medalist Golf Club in Hobe Sound, Florida, the foursome ahead of Gerstner's twosome had fallen a bit behind. When they offered to let Gerstner play through, he grumbled something about an open hole ahead, and proceeded on without so much as a thank you.
A number of CEOs interviewed for this story, most of whom credit Gerstner with bringing IBM back from the dead, remarked privately on his arrogance. "He's done a hell of a job," says one. "He took a place that was totally into itself and got it to see reality. But he just goes out of his way to be pompous. I'd never hire him, even though I think he's very capable. Why's he like that? We've asked each other that a lot."
In response Gerstner says, "I'm intense, competitive, focused, blunt, and tough, yes. That's fair. I'm guilty. Quite frankly, I am not very comfortable in chitchat. When I go to board meetings, I arrive two minutes before and leave when it's over. I don't stay for lunch or go early and have coffee." Although Gerstner's handlers steadfastly polish his image, they've had a hard time putting a shine on it. Indeed, a big part of the Gerstner mystique may be that so far, he has defied that adage: Pride goeth before a fall.
And, oh boy, has he defied it! Louis V. Gerstner Jr. walked into IBM on April Fool's Day 1993 to become CEO of a company in extremis. IBM had been flattened by the desktop revolution, and nearly everyone--including much of IBM's own management--had written off the mainframe. The stock had collapsed; John Akers, Gerstner's predecessor, was actually splitting the organization 13 ways and contemplating spinning off some of the parts. Nobody--but nobody--wanted to save this company. The job was dangled before a pantheon of corporate heroes, including GE's Jack Welch, AlliedSignal's Lawrence Bossidy, and Eastman Kodak's George Fisher (then at Motorola). None bit. At first Gerstner wanted no part of IBM either: "It just looked like it was going into a death spiral. I wasn't convinced it was solvable."
Signs of trauma were everywhere. The company famous for lifetime employment was in the process of halving its work force: from 406,000 in 1986 to 219,000 in 1994. It had taken $20 billion-plus in write-offs. Its debt rating was plummeting. After decades of market domination, it was hamstrung by internal politics. "IBM's scrimmages were much better than the game," says G. Richard Thoman, who is now chief financial officer. Overlaying all this was a perfectionism so intense that it was difficult to get products out of the lab, let alone to market. Early on, Gerstner told some of his technical people, "You don't launch products here. They escape."
Enter Gerstner, as he generally does, head down, full speed ahead. Within 90 days, he had made his most critical decisions: He would keep the company together, and he would put his money on mainframes. The notion that IBM's customers would want to build their own systems, linking PCs and other computers in networks and bypassing the clunky old mainframe, made no sense to him. "This technology stuff is hard," he says. "And if I'm a company, what I really want is somebody who can help me implement it." Sounds pretty obvious now, but at the time, says Naomi Seligman, senior partner of the Research Board, an information technology think tank in New York: "It was a very daring and unpopular decision. Everybody inside was in favor of disaggregating everything. This was critical. IBM couldn't afford any more false starts."
Heedless of criticism inside and outside the company, Gerstner began to cut costs, restructure, weed out disbelievers. He jolted the culture with shock therapy. He cheer-led the overhaul and revival of the mainframe, stoked the services business, and brought IBM back to the party in PCs. He slashed long-term debt from $14.6 billion to $9.9 billion, managed nonetheless to buy back $10.7 billion in stock, and goosed IBM's share price to $168, $6.75 below its all-time high. The stock has since fallen under $140, but even at that price IBM under Gerstner has gained more than $40 billion in market value.
After initially and famously pooh-poohing the need for a vision--"The last thing IBM needs right now is a vision"--he came up with one: to lead big companies into the brave new networked world. IBM will devise their technology strategies, build and run their systems, and ultimately become the architect and repository for corporate computing, tying together not just companies but entire industries--ideally, of course, using as much IBM hardware and software as possible. In some ways, Gerstner is taking IBM back to the future, back to what it was in the good old days: the information technology company for corporate America. The rise of the Internet has given that role new glamour and meaning. In the confusing, ever-changing networked world, IBM has a chance to once again become indispensable. Says Intel's Grove: "Lou Gerstner has defined his sandbox, and it is a very big sandbox and a very appropriate one for IBM."
Against all odds he has repositioned his company. Its stodgy blue-chip image is an asset again: IBM is the sensible, wingtip, Armonk, New York, computer company, not part of that sneaker-wearing, tofu-eating Silicon Valley crowd. And he's positioned himself as the champion of big business in an industry that just doesn't get it. Unlike so many of his technology peers, he's actually been there, done that, in corporate America. He knows the consequences of promising, then failing, to deliver. "I don't understand," he says in a spiel he makes to CEOs. "At the other places I worked, my lawyers would tell me I would go to jail for things people say they're going to deliver in this industry and then don't."
Here's Gerstner, then, on the brink of attaining full captain-of-industry status. "Lou wants to be in the very top echelon of business leaders," says James W. Johnston, his tobacco chief at RJR. Jerome B. York, IBM's CFO through the critical first phase of the turnaround, used to tell analysts that Gerstner could become the Jack Welch of the Nineties. A few more years should show whether York was right. Gerstner has stabilized IBM and given it a mission. But can he drive his changes through its entrenched culture, not only making the right technology calls but getting products to market on time? Can he do that again and again, enough to deliver consistent revenue and earnings growth? Gerstner knows the world is watching. In an annual worldwide speech to employees in January, he said, "There is no place to hide in 1997. This is the year of reckoning for all of us--1994 was the year we proved we could survive; 1995 was the year we stabilized; 1996 was the year we showed we could grow; 1997 is going to be the year we have to show we can lead. We have no more excuses. We can't say we're still getting our act together."
In all his brilliance and brusqueness, Gerstner was precisely the CEO IBM needed. He brought focus and discipline--not to mention terrifying toughness--to a culture that was the best of Thomas J. Watson Jr. gone awry. Watson had fostered what came to be known as "contention management": a way of forcing disagreements between executives into the open, where they could be decided. By the time Gerstner arrived, contention was leading to arguments that went on forever. It had also become perfectly acceptable, even expected, that IBMers would defy a direct order from the boss if they didn't agree. The practice even had a name: pushback.
The company had become one big dysfunctional family. "Our culture was very congenial, so congenial you never knew where you stood," recalls Samuel J. Palmisano, now general manager of the IBM Personal Computer Co. "Meetings would always go fine. You'd go in, and everything would be very proper and well-dressed, and a bunch of people would sit around and have a nice chat. The results might be good, and people would say, 'Thank you very much.' Or the results might be awful, and it would still be, 'Thank you very much; we know you tried your best.'"
No one in his right mind would describe a session with Gerstner as congenial. Before he meets with almost anyone, he requires something in writing that establishes the facts, defines the problems, and allows him to skip the small talk when he sees you. To embattled IBMers accustomed to dancing around problems, this was a frightful prospect. "Oh, my God, now I've got to look at this guy eyeball to eyeball," is how one former IBMer put it. During customer meetings, he encouraged people to grill his new executive team. When the executives dodged questions, Gerstner called them on it. "He'd stand up in the middle of the meeting and correct them," recalls Palmisano. His blunt style sent tremors through the organization. "When you got a call from Lou, it was never to hear a compliment," recalls the former IBM manager. "It was always: 'What the hell is this?'"
As he assembled his management team, Gerstner told people: "I don't care whether you're the next star or on your way out. You start clean with me." For the people involved, the process seemed Darwinian. Former IBM managers say he would catch them on the run and ask for an off-the-cuff evaluation of a colleague. "He wanted to know what I thought of people who were above me," says one. "It was tremendously flattering but also tremendously frightening." At meetings, Gerstner gradually sized people up. He says: "There's no question that, during the first year, there were some attempts to feed me intellectual arsenic--some bad ideas, some pet projects."
He ended up with an interesting mix of IBM veterans in top operational jobs--the current cast averages 30 years apiece at the company--and some outside catalysts like CFO York, who has since decamped for Kirk Kerkorian's Tracinda Corp. In supporting roles, mostly staff jobs, Gerstner reached out to key people from his past. David B. Kalis, his senior public relations man, and Lawrence R. Ricciardi, his general counsel, were both at American Express and RJR. Abby Kohnstamm, head of marketing, had been at American Express. Thoman, who replaced York as CFO, has worked almost in lock step with Gerstner since their McKinsey days. Isabelle Cummins, his protective, charming executive assistant since 1978, tried to retire in 1994 but is now back part-time at Gerstner's side.
This was an important blend of people for a free-agent CEO. The veteran IBMers gave Gerstner ballast and indispensable technological know-how. His own team shored up IBM management in areas where it was weakest, he says. But they also fulfilled another role. "Having done this three times, let me tell you, it's pretty lonely parachuting into a company all by yourself," he says. "It's extremely helpful having some people you can shorthand and rely on because you know them well."
Gerstner is trying to impart to IBM the urgency he seems to have been born with. His career-long obsession with money, status, and a desire to get ahead may well reflect the lack of those things during his unglamorous working-class childhood in Mineola, Long Island. He was the second in a family of four boys. His father was a night superintendent at an F&M Schaefer Co. brewery. His mother worked as a real estate agent. The family lived in a brick house in a section of town so modest their front yard offered a clear view of the green Mineola water tower. "My parents worked enormously hard to put four children through college. We didn't have a lot of money," says Gerstner, in a rare comment about his childhood. Recalls his older brother, Dick: "My parents drove us to excel. From the first time we got report cards, the question was: Why not all A's? It started with me as the oldest. If they were letter grades, they were to be all A's; if number grades, 90 or above."
All the boys were achievers. Dick, two years older than Lou, was a career IBMer and top executive until undiagnosed Lyme disease derailed his career; at one point people thought Dick might be the Gerstner who would replace John Akers. James, three years younger than Lou, became an executive at Bristol-Myers Squibb. He died of cancer nearly five years ago. Joseph, 45, is a lawyer at Westinghouse. The boys attended Chaminade High School, a competitive Catholic school run by Marianist brothers. "Most parents of kids there were not well off," recalls Robert C. Wright, head of NBC, who was two years behind Gerstner. "Not dirt poor, but not that well off. The brothers had a formula that worked. They really knew how to educate young boys."
Chaminade was every bit as demanding as Mr. and Mrs. Gerstner--and probably more unforgiving. Teachers announced grades as they distributed tests to the students. Everybody knew where he stood in the pecking order. Then there was the discipline. "It was not psychological," recalls Wright. "It was straight in your face. 'Do it once, stay late. Do it twice, leave school. Do it three times, we'll throw you out.' And there was physical discipline--they wouldn't hesitate to give you a solid slap."
Gerstner was "a pretty serious student and pretty serious about extracurricular stuff," says Wright. "He seemed very important." The Chaminade brothers funneled their graduates into Catholic colleges; Gerstner sidestepped them by accepting a scholarship to Dartmouth. Classmates there remember him as smart and single-minded. He was generally well liked, but even then his abruptness was apparent. "He did not tolerate fools," recalls classmate Stephen Spahn, headmaster of a private school in New York. "If somebody showed weaknesses, he'd say, 'That's not very smart.' If somebody made a statement, Lou would say, 'Back it up.' Others would have been softer about it. Lou didn't care." When he was tapped for the elite senior honor society, the Casque & Gauntlet, which honored the ideals of Arthurian chivalry, he was known as Sir Kay, who, according to Bulfinch's Mythology, was a "rude and boastful knight."
Gerstner went to Harvard business school and then to McKinsey, in the launch of his high-octane career. He was already a strategic thinker, but 13 years at McKinsey took his skills to a new level. "Lou didn't know much about banking," says John Medlin, chairman of Wachovia Corp. "But you described your situation, and he picked up very quickly what needed to be done." Medlin says the strategy he devised with Gerstner's help was "the cornerstone of what we did for the next decade."
In 1968, Gerstner married Elizabeth Robins Link, a sweet-spoken, well-mannered Southerner from Danville, Virginia. He couldn't possibly have strategized a better match; at dinner parties and on the golf course, Robin is the spoonful of sugar that makes his medicine easier to take. The Gerstners have two children, Louis III, 24, and Elizabeth, 21.
Gerstner became McKinsey's boy wonder: its youngest principal at 28, one of its youngest directors at 33. J. McLain "Mac" Stewart, a senior partner, helped him into the right clubs and onto the right boards, grooming him to take over McKinsey's vaunted American Express account and to act as adviser to James D. Robinson III, the new chairman and CEO. Gerstner and Robinson clicked. In 1978, at 35, Gerstner joined Amex as executive vice president and head of the charge card business.
American Express was facing increasing competition in charge cards and traveler's checks when Gerstner arrived. He packaged the businesses with all sorts of bells and whistles in a comprehensive Travel Related Services company that became Amex's star performer in the Eighties. "When Lou came, he was viewed as this brazen know-it-all," recalls Edwin M. Cooperman, who ran Travel Related Services with Thoman after Gerstner left. "He was not received warmly. But he turned out to be the brightest businessman I've ever worked with. He went in and had brainstorming sessions. The whole first year, it was a constant project. We came up with ten or 15 goals, and by the end, we knew where we were in our goals better than we knew where our kids were."
The "Membership has its privileges" campaign began during Gerstner's tenure, and he became one of the fiercest defenders of the charge card's Tiffany image. "I learned a big lesson from Lou," says Shelly Lazarus, chief executive of Ogilvy & Mather, who was working on the account at the time. "Once you've set a strategy, you never, ever violate it. Nobody ever got a free card, a discounted card, bundled pricing. Lou would say, 'This is a violation of the brand, and we're not doing it.'"
While Gerstner's record at American Express is a testament to his ability to rev up a mature business, it also raises a big question: If the wind changes after he has set a course, can he adjust? By the second half of the Eighties, plenty of people--cardholders and merchants--were saying to heck with the costly privileges of American Express and opting for bank credit cards. Partly because Gerstner felt that offering credit cards would hurt the brand, Amex came late to revolving credit. Gerstner says the strategy was right at the time, but the delay has haunted Amex for years. The company finally introduced the Optima card in 1987, but it's still trying to catch up; last year was the first time in a decade that Amex's share of card spending didn't decline.
People who knew Gerstner well say he was upset when American Express bought Shearson in 1981. Gerstner says his concerns were strategic, not personal, but the arrival of Shearson's crew put more distance between Gerstner and the top. He had been considered Robinson's heir apparent, but now Shearson CEO Sanford I. Weill was named president of American Express. Recalls someone who worked with Gerstner then: "Lou wanted to examine the proxy to see where his salary ranked." Weill left a few years later, but Gerstner became impatient as problems began to mount and Robinson held on. By 1987, Gerstner was casting about for his own business to run. He made a pitch to United Airlines, which was looking for a CEO. But United was dealing with a fractious union, and some believed Gerstner would be wrong for the job. "I thought it would be oil and water," says a person familiar with the situation.
Then, fresh from a $25 billion leveraged buyout, along came RJR Nabisco in March 1989. It presented not only a suitably formidable challenge but a suitably formidable pay package: the chance to take a large equity stake, a $14.6 million supplemental payment to make up for accrued and expected benefits Gerstner was leaving on the table at American Express, plus a chance to crack that elite CEO club, in which membership really does have its privileges.
Gerstner got high marks for crisis management at RJR. He provided steadiness and focus after the freewheeling, free-spending, prebuyout days of his predecessor, F. Ross Johnson, and he steered the debt-laden company through the collapse of the junk bond market. He never flinched at tough decisions. When tobacco chief Jim Johnston recommended taking a huge write-off, he says Gerstner's response was, "If it's the right thing for the business, then we've got to do it." It was an echo of what Gerstner had heard Friday mornings at Mass at Chaminade.
Underlings either loved or hated his style. "He's an acquired taste," says Jason Wright, a senior vice president of worldwide communications at RJR. "He gets everybody to buy in on a strategy, and then he doesn't micromanage. If you expect to be stroked, forget it. You understand what he wants, and then you don't have to sing 'Kumbaya' about it."
His lifestyle is as unflamboyant as his management style. "Lou is not interested in going to the Super Bowl," says Johnston. "He is not interested in meeting movie stars. He is not much interested in meeting heads of state. Lou plays golf." But he does have an imperial air about him. At RJR he was picky about who could ride on the corporate jets and even about where they sat. A desk where he worked at the back of the plane was called "the throne." Says Johnston: "There's an element about Lou I don't get, given how talented he is. He is incredibly concerned about stature, particularly his own."
At RJR, as at American Express, some Gerstner-era strategies proved more successful over the short run than the long run. He and his team worked hard to shore up RJR's top brands--Winston, Salem, and Camel. They also buoyed profits and market share by pushing more aggressively into the low-end cigarette business. Things were going well enough by the end of Gerstner's tenure that RJR began laying the groundwork to split apart its food and tobacco units--a plan that began crumbling on April 2, 1993, one day after Gerstner arrived at IBM. On that day, immediately known as Marlboro Friday, RJR's archrival, Philip Morris, said it was slashing the price of its flagship brand. In press reports, Philip Morris blamed Marlboro's market-share losses on RJR's move into low-priced cigarettes. The resulting price war ravaged RJR's profits, tanked its stock, and helped ensure that the RJR buyout would go down in history a resounding flop.
Call it fate, but none of that happened on Gerstner's watch. Fate had bigger problems awaiting him in Armonk. At IBM he would have a chance to perform all the tricks he had learned along the way: crisis management, strategic gymnastics, business makeovers. "Lou revels in complexity, and this is five-dimensional chess," says Ricciardi, IBM's top lawyer. "We buy from competitors. We sell to the same competitors. We sue competitors. We've got complex relationships."
At first Gerstner wasn't interested in IBM's complexity. Gerard R. Roche, chairman of the executive search firm Heidrick & Struggles, says that when he approached him about IBM, Gerstner replied, "Don't bother me now. I'm busy." Says Roche: "He insisted that any meeting be on non-RJR time, and then it turned out that all his time was RJR time." The recruiters were tenacious. IBM director James E. Burke, retired CEO of Johnson & Johnson, spoke to him, and also enlisted Vernon Jordan, who had been on the boards of American Express and RJR with Gerstner, to apply pressure. Some IBM board members had serious concerns about his lack of technological know-how. But, says Burke, "Lou was tougher than nails. Hard things needed to be done, and I knew he could do them. We needed somebody who was by instinct, training, and interest very strategic in his thinking. Everybody knew that was one of Lou's hallmarks. He thinks strategically about everything. I once asked him if he thought strategically about his dog."
The recruiters told Gerstner he had a moral imperative to take the job. He must do it for the good of the country. That worked. Said one individual involved: "It appealed to him and to his ego, his larger self--this concept of serving society as well as making money and being successful." He would, of course, make a lot of money: a $1.5 million salary, a $1.1 million bonus, options for 500,000 IBM shares, plus a payment of $4.2 million to cover forgone RJR benefits. His contract also insulated him against RJR's plunging stock by guaranteeing him a minimum price on 3.5 million shares he owned or had on option.
At IBM, Gerstner shares the wealth; recently he distributed the biggest bonuses in company history. Several people interviewed for this story say that while he may be sparing with rah-rahs and attaboys, he expresses approval eloquently with pay. He is also known to be an aggressive negotiator on his own behalf. When dickering to join IBM, he wanted stock options on one million shares. He got "only" the 500,000. But after that he pushed insistently for more, and by 1996 had built himself up to a total of 825,000, in which he recently had a book profit of $69 million. In mid-March came the news, filed in IBM's latest proxy, that he was granted another 300,000 options. One unusual point about the new grant: It includes a delayed vesting schedule that doesn't begin until 1999 and runs through 2002. The rationale, says the proxy, is "to encourage Mr. Gerstner to remain at IBM for an extended period."
Gerstner says it's right and good for executives to have equity in their company. But even some admirers find his aggressiveness about pay unsettling. At a dinner with top executives and their spouses in fall, 1995, Gerstner rubbed some people the wrong way by blatantly talking about how much they'd all reap as a result of the dramatic runup in IBM's stock, according to two who attended. "It was inappropriate," said a long-time IBMer.
Gerstner's treatment of his brother Dick also bothered all-in-the-family IBMers. Warm, gregarious, and popular, Dick Gerstner was the epitome of the old IBM. He began his career in 1960 as an industrial engineer, rose to become the head of IBM's Asia Pacific Group, and in 1988 was chosen to fix the troubled PC business. Even before taking his new job, he had become sick with a mysterious illness that essentially kept him out of work for three years. It was diagnosed as Lyme disease, but not before he had undergone two spinal surgeries. Dick left IBM in November 1992, but came back for a 90-day consulting project that gave him a "ringside seat" to Lou's arrival.
Dick remembers the brothers' first meeting. "It was a little spooky for both of us," he says. "Lou and I both felt it didn't make sense for me to stay. I was ill. I hadn't worked much in three years. I was part of the team that had messed it up. The last thing Lou wanted was somebody from the old guard who happened to be his brother." Beyond that, Dick says, he was ready to leave. "Everybody was asking me what Lou was like and how should they part their hair. It was madness. I was very happy to see my three months come to an end." Even so, Lou Gerstner's position struck many IBMers as hard-hearted.
Perhaps. But IBM was dying with the heart it had, and Gerstner knew it. Ignoring tradition, he dismantled the company's geographic fiefdoms and mandated that it reorganize everything from development to sales along industry lines. He walked away from no-win businesses like IBM's online service, Prodigy. He went shopping: He bought Lotus, which, while pricey, gave IBM brand-name desktop software and groupware; and Tivoli, which bolstered its ability to build corporate networks.
Gerstner, being Gerstner, also pushed the limits of the possible: He accelerated product development--a decision met with a "big gasp," recalls Linda Sanford, general manager of the mainframe System/390 Division. But if you want to work for Lou, it doesn't take long to get religion. Employees in the PC business discovered this after Gerstner put Palmisano in charge just over a year ago. "The forecast was to lose a lot of money," says Palmisano. He quickly figured out that to make money, half of the division's products in 1996 would have to be new. Three weeks after taking the job, he realized it wasn't going to happen. He had spent a day at the center in Raleigh that develops and manufactures ThinkPads and commercial desktops. No one came right out and said, "There's no way we can meet our deadline," says Palmisano, "but they weren't confident." In typical IBM-speak, recalls Palmisano, they told him, "Well, yes, if all the planets line up on this day, potentially, potentially we can do it." Palmisano woke up in the middle of the night and knew this meant they would not. They could blow not only the quarter but also the entire year.
At 7 A.M., he began calling his team. "We've got to do this," he told them. "If we don't, we're going to have to kill our kids." ("I didn't really mean kill the kids," he says, "but you get my point.") He reassigned all his top executives: Guys who spent most of their time in conference rooms found themselves running test lines. He called a key technical executive out of retirement. The testing was speeded up. Palmisano ordered the sales team to begin pushing products, even though IBM hadn't begun full-scale manufacturing yet. One of his sales guys said, "Sam, if we do that and we miss, we won't be considered a reliable supplier." If we don't, Palmisano told him, "it's the same thing."
Six weeks later the PCs went out the door. For the only time this decade, IBM's PCs were first to market; Palmisano says they gained a share point in each of the last three quarters of 1996. He had a big celebration and showered his crew with bonuses--the first they'd seen in years. But he's cautious: "Ten months is not a trend. We have to continue to execute. These aren't slouches in this business."
All along, Gerstner has been teaching IBM a language it once spoke fluently but had somehow forgotten: marketing. In the good old days, IBM bragged loudly about having customers mollycoddled by the world's best sales force. To ensure that history repeats itself, Gerstner has made himself IBM's lead pitchman. He runs several "strategic conferences" a year for CEOs and makes frequent calls on peers to proselytize for the networked world and IBM's role in it.
As a spokesman, Gerstner has important admirers and detractors. Jeffrey Katzenberg says he has generously supported the DreamWorks digital-studio project. Two executives at another company were less impressed by their meetings. Gerstner spent so much time pontificating that they never had a chance to say what was on their minds. Says another executive on whom Gerstner has called: "He's the least effective salesman God ever made. He's got an incredible pomposity."
Wall Street couldn't care less about pomposity. What it wants from Gerstner is consistent growth with less suspense--in other words, fewer quarterly reports like the most recent, which showed sluggish revenue growth and sent the stock tumbling. In perfect blue-chip style, Gerstner would have IBM in as much control of its destiny as, say, GE or Coca-Cola. What the company needs, says Ricciardi, is "consistent margins and high-single-digit or, please, God, low-double-digit revenue growth. Our story then becomes one of earnings-per-share growth at 12%, 13%, 14% a year."
That won't be easy in this hypercompetitive industry. But Gerstner has at least gotten IBM off the bench and made it a player again. Says Grove: "A mix of technological know-how, business judgment, and good luck will be needed to build a profitable business in a networked world. I think Gerstner has the business judgment, and there are a lot of people in that company who can supply the technological expertise. Whether their calls will be lucky or timely, who knows? It's the same for any of us."
So now Lou Gerstner, boy wonder from Mineola, has his opportunity to stand next to industry titans like Jack Welch, Roberto Goizueta, and, yes, Tom Watson Jr., as a true-blue company builder. Nobody is blocking him, the way Jimmy Robinson did at American Express. Nothing is tying his hands, the way all that debt did at RJR. Completing IBM's resurrection will require not just arrogance and brilliance, but also luck--or divine intervention. Whether he'll take the chance is up to Lou.
REPORTER ASSOCIATE Joe McGowan