Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround

This is one of my recommended MUST-READ book written by Louis V. Gerstner, Jr., the CEO who famously transformed IBM from near collapse in the early 1990s to one of the most admired company now. Louis Gerstner has written the book in such a straightforward manner and he made his points clear through his actual experiences in IBM. I recommend reading this book as Louis Gerstner's insights and experiences are based on actual events and not written by academics or interpreted by observers. This way, we can understand the rationale behind the decisions taken by the same person who made it and not interpreted by another person who may completely miss the point. In addition, decisions made in the real world are often different from the scenarios imagined by academics. In real world, decisions need to be made with limited information and also within a short time. I am also fascinated by the way he managed to turnaround the elephant that is IBM especially with its entrenched culture, diverse backgrounds, etc. It is certainly no small feat to be able to do so and if IBM can be transformed, any company can definitely be re-aligned towards sustainable growth and profitability. This proves that anything is possible with the right mindset and focused direction in life.

The following are excerpts from the book which I often re-read and have found it extremely useful in real-life management:

1) .........importance of cash in corporate performance - "free cash flow" as the single most important measure of corporate soundness and performance.

2) The importance of managers being aligned with shareholders - not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company - became a critical part of the management philosophy I brought to IBM. (This statement appears prophetic now especially after the 2007/2008 financial crisis where investment bankers who are happy to gamble for short-term gain is one of the main reasons behind the speculative frenzy leading to the crisis. In the aftermath, it is recommended that the compensation structure should be devised in such a way that rewards should be based on long-term performance rather than spectacular short-term gain followed by a more spectacular bust).

3) ...........relentless publicity seeking generates a lot of coverage, and may even help the company in the short run, in the long run it damages corporate reputation and customer trust.

4) ..........eliminate bureaucracy fast. (Some organisations may not realise it but generally, as an organisation grows, it will becomes more bureaucratic simply because people usually has more confidence in arriving at a decision if it goes through more processes - a dangerous trap. For organisations, I believe in Muhammad Ali's "float like a butterfly, sting like a bee". An organisation should be nimble and not weighed down by bureaucracy and able to make critical decisions fast. Not easy to achieve but we should always strive to cut down bureaucracy and not increase it as our basic management principle).

5) Louis Gerstner's management philosophy and practice:

a) I manage by principle, not procedure.
b) The marketplace dictates everything we should do.
c) I'm a big believer in quality, strong competitive strategies and plans, teamwork, payoff for performance, and ethical responsibility.
d) I look for people who work to solve problems and help colleagues. I sack politicians.
e) I am heavily involved in strategy; the rest is yours to implement. Just keep me informed in an informal way. Don't hide bad information - I hate surprises. Don't try to blow things by me. Solve problems laterally; don't keep bringing them up the line.
f) Move fast. If we make mistakes, let them be because we are too fast rather than too slow.
g) Hierarchy means very little to me. Let's put together in meetings the people who can help solve a problem, regardless of position. Reduce committees and meetings to a minimum. No committee decision making. Let's have lots of candid, straightforward communications.
h) I don't completely understand the technology. I'll need to learn it, but don't expect me to master it. The unit leaders must be the translators into business terms for me.

6) Publicly crucify shortsighted proposals, turf battles, and backstabbing. This may seem obvious, but these are an art form in IBM.

7) Expect everything you say and do to be analysed and interpreted inside and outside the company.

8) Find a private cadre of advisors who have no axes to grind.

9) I've had a lot of experience turning around troubled companies, and one of the first things I learned was that whatever hard or painful things you have to do, do them quickly and make sure everyone knows what you are doing and why.

10) Fixing IBM was all about execution.

11) Qualities which Louis Gerstner look for in his management team - clarity of their thinking and whether they had the courage of their convictions or were weathervanes ready to shift direction if I scowled or raised an eyebrow.

12) The sine qua non of any successful corporate transformation is public acknowledgement of the existence of a crisis.

13) A successful company must have a customer/marketplace orientation and a strong marketing organization.

14) .........while you can force anything down the throat of an organization, if people don't buy the logic, the change won't stick.

15) I knew that at the time it was important to reduce our overall number of employees, but in a crisis it was even more important to retain our most promising people.

16) ..........fewer paternal benefits, but a far larger opportunity for everyone to participate in the rewards of our success through variable pay programs, stock-purchase and -option plans, and performance-based salary increases.

17) ..........over time the information technology industry would be services-led, not technolgy-led. (In my opinion, this is equally applicable in the field of professional consulting from accountacy, medicine to engineering)

18) ..........services businesses are much more difficult to manage.

19) Consumer product - marketing and merchandising mattered.

20) I came to see, in my time at IBM, that culture isn't just one aspect of the game - it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value. Vision, strategy, marketing, financial management - any management system, in fact - can set you on the right path and can carry you for a while. But no enterprise - whether in business, government, education, health care, or any area of human endeavour - will succeed over the long haul if those elements aren't part of its DNA.

21) What you can do is create the conditions for transformation. You can provide incentives. You can define the marketplace realities and goals. But then you have to trust. In fact, in the end, management doesn't change culture. Management invites the workforce itself to change the culture.

22) I wanted people to focus on customers and the marketplace, not on internal status. (A fine art. I believe a little bit of internal status would motivate employees to add further value to the company if a proper merit system is in place. It is like rewarding a soldier for his valiant effort. The reward would mean less if nobody knows about it. I am guessing that what Louis Gerstner has in mind is not abolishing titles but to appreciate input from everyone irrespective of titles when it comes to solving problems).

23) ...........use of plain language that one's customers easily understand.

24) My kind of executives dig into the details, work the problems day to day, and lead by example, not title.

25) .........insisted there would be few rules, codes, or books of procedures.

26) .........all high-performance companies are led and managed by principles, not by process.

27) Success in a company comes foremost from success with the customer, nothing else.

28) Not that planning and analysis are wrong - just not at the expense of getting the job done now.

29) People don't do what you expect but what you inspect.

30) Successful people would commit to getting things done - fast and effectively.

31) The work-a-day world of business isn't about fads or miracles. There are fundamentals that characterize successful enterprises and successful executives.

a) They are focused.
b) They are superb at execution.
c) They abound with personal leadership.

32) History shows that truly great and successful companies go through constant and sometimes difficult self-renewal of the base business. They don't jump into new pools where they have no sense of the depth or temperature of the water.

33) ........how difficult it is to get large organizations to give meaningful resources and attention to matters that offer little or no benefit to quarterly results, but which are critical to long-term success.

34) Execution is really the critical part of a successful strategy.

35) No credit can be given for predicting rain - only for building arks.

36) I believe effective execution is built on three attributes of an institution: world-class processes, strategic clarity, and a high-performance culture.

37) The best leaders create high-performance cultures.

38) Leaders who don't demand uniform and fair adherence to good principles and policies lose their effectiveness.

39) Most industries follow the law of diminishing returns - i.e., after a certain point it costs more to increase your market share against entrenched competitors than you get in return.

40) Closing down the investment bankers is a nonstarter. (Louis Gerstner's recommendations on fixing the financial system which has seen some spectacular crashes)

41) Owners who are close to the managers, owners who cannot sell their stock on a whim, owners who must see a company through a complete investment cycle - they are the most powerful force for ensuring effective corporate leadership.

42) Chasing revenue at the expense of real earnings is one of the most telling signs of a weak management team.

43) If I were the head of research at a securities firm, I would urge my analysts to focus on the following five points in determining shareholder value:

a) Is the company a major force in a growing market or market segments? (Remember Warren Buffet's wonderful observation: "When a manager with a great reputation meets a company with a bad reputation, it is the company whose reputation stays intact.")
b) Is the company holding or increasing its share in those segments, and is that share gain the result of sustainable advantages (cost, technology, quality)?
c) Is the increased share resulting in growing cash flow - cash flow after all expenses, not the notorious EBITDA (earnings before interest, taxes, depreciation and amortization),  and not pro forma nonsense?
d) Is the company using that cash flow in a wise manner?
- avoiding macho or bleary-eyed acquisitions
- reinvesting in research and development, marketing, and other critical areas in the company.
e) Does the management team walk the talk of aligning with the shareholders? Do executives own significant amounts of stock (as opposed to just holding options)? Do they return cash to their shareholders in the form of dividends or share repurchases?

44) The future of IBM is in its human resources - our performers - and not in appearances and titles.

45) Committees can become dangerous organisms. They should never be used as decision-making bodies. Their main purpose is communication - up, down, and across. They should meet infrequently with focused agendas, and they should be disbanded regularly to protect against the view that committees play important roles in successful institutions. They do not. Personal leadership and task-specific teamwork drive our success.

46) We needed to focus on critical things, but we also needed to celebrate victories and heroes.

In summary, a must-read book! The philosophies which guide Louis Gerstner in his successful turnaround of IBM is equally applicable in any organisations around the world. As Louis Gerstner puts it, it is the principles which mattered and not processes. Happy inspiring people around you.