Lou Gerstner Digital Transformation Change Master

Lou Gerstner – IBM’s Digital Transformation Change Master

If the 2016 Australian eCensus hadn’t been such a disastrous failure most people would not have known that IBM had provided the digital transformation services to the Australian Bureau of Statistics. As a result of the debacle IBM suffered immense reputational damage plus incurred a large payout in compensation to the Australian Government with two senior IBM staff being shown the door.

It takes one back to the first time IBM showcased its digital transformation services at the Atlanta Olympic Games in July 1996. Of the seven large systems IBM used to cover different functions, the only one to fail was the system providing sporting results to the world-wide press.[1] What was meant to be a marketing triumph for IBM turned out to be a public relations disaster with the fiasco reported in great detail across the world.

What is interesting is the fact that this, the largest intranet to be built at that time, was assembled by a company which had no involvement in the Internet two years prior. The awakening of IBM to the new age is a remarkable story of how two middle-level managers took it upon themselves to lead IBM out of the wilderness.

Lou Gerstner Meets His Challenge

IBM had become like a music-publishing company run by deaf people.
– Paul Carroll, Big Blues: The Unmaking of IBM[2]

Louis V. Gerstner, Jr. took up his position of Chairman and CEO of IBM in April 1993. Gerstner was the first outsider to take on this role since Thomas Watson Sr. had joined the company in 1914. Gerstner had been a customer of IBM when he was the CEO of American Express and earlier at RJR Nabisco, but otherwise he hadn’t been involved in technology companies. What he did have was a track record as a change agent and this was something the members of the IBM Board believed was desperately needed.

At that time IBM was a basket case. For years mainframe sales had been the mainstay of the company but sales were dropping off dramatically due to aggressive competition and the move by the industry to networks where IBM had little to offer. The management was out of touch with the needs of the market and had no realistic strategy to address the issues.

In 1992, IBM’s revenues were $64 billion but had lost $5 billion. 1993 was going to be far worse with a loss of $8 billion. The company was heading toward insolvency.

Irving Wladawsky-Berger, a senior IBM executive, now retired, explains the situation IBM found itself in the early 1990s:

As often happens, our success made us arrogant. Hubris led us to believe that we were the marketplace, and therefore did not need to listen to or work closely with others outside the company, since our people had all the answers. And, as always happens when arrogance and hubris are involved, we were severely punished by the invisible hand of the marketplace and almost went out of business.[3]

Gerstner had a major challenge to turn the company around—fast.

After spending the first few weeks meeting with employees and customers he made the decision to dramatically lower the price of their mainframes to become competitive again. This is what customers wanted to hear and IBM was quickly back in the mainframe business albeit with reduced revenue from each sale.

This meant there had to be a corresponding reduction in expenses to the tune of $8.9 billion. Business processes were highly inefficient and so a major company-wide reengineering projects were initiated. It also necessitated the reduction of employment by 35,000 people.

An early discovery by Gerstner was that company’s advertising was chaotic with a mix of messages going out via more than seventy advertising agencies in the U.S. alone. He created a corporate marketing function that didn’t exist before and hired Abby Kohnstamm to head it up. She and her small team researched advertising agencies and recommended Ogilvy & Mather to be their sole, world-wide advertising agency. She was able to convince senior management of the need for change by plastering the wall of the management meeting room with examples of the mixed messages coming from the existing agencies.

On another front, Gerstner’s predecessor, John Akers, had decided the way forward was to separate the company into independent businesses. One of the first strategic decision Gerstner made was to reverse that decision on the basis the industry needed an integrator to bring together the products and services the customers needed. IBM had invented many of the current technologies but others, especially Microsoft and Intel, were now driving the market. Gerstner’s view was IBM still had much to offer and keeping the company together would mean they were ideally placed to perform the role of an integrator or services company.

Becoming a services company would require many changes to the organisation and there was a major stumbling block in the way: IBM’s culture. Here was a culture internally focused, bureaucratic, and actively discouraging leadership at all levels. Gerstner didn’t waste time in initiating changes which shocked some managers and employees but were welcomed by many others. The whole change transformation process would be a major challenge lasting many years and Gerstner couldn’t do it alone. As Gerstner explains:

In fact, in the end, management doesn’t change culture. Management invites the workforce itself to change the culture. Perhaps the toughest nut of all to crack was getting IBM employees to accept that invitation. Many used hierarchy as a crutch and were reluctant to take personal responsibility for outcomes. Instead of grabbing available resources and authority, they waited for the boss to tell them what to do; they delegated up.[4]

Much had been achieved in stabilising IBM’s position in the first year of Gerstner’s tenure but much more work would be required to become a force in the IT industry again.

IBM Discovers the Internet

IBM first became involved with the Olympic movement in 1960 when it provided punch card machines. For the February 1994 winter games in in Lillehammer, Norway, IBM provided full-blown computer systems to allow news services to publicise the results of events.

At that time David Grossman was a young IBM engineer assigned to assist Cornell University in the use of their new IBM supercomputer. He was one of the first to be using the Mosaic graphical web browser that had recently been released. In browsing the web he discovered that Sun Microsystems was creating webpages showing event results of the Games coming from the IBM system via a news service. Here was an example of ambush marketing whereby Sun’s name was appearing on the webpages when they were not a sponsor of the Games. Grossman alerted IBM’s marketing department and after intervention by IBM’s lawyers, the Sun logo no longer appeared on the webpages.[5]

Grossman also discovered something more concerning; no one he had spoken to in IBM’s headquarters marketing team had any idea of what the Internet was about. “I was shocked. I came from a progressive computing environment and was telling people at IBM that there was this thing called UNIX, there was an Internet. No one knew what I was talking about,” he said later.[6]

Most low-level employees might forget about such a situation and simply get on with their assigned work. Grossman was different. He felt embarrassed he was working for such high-tech organisation that was ignorant of what was happening in the outside world. He had to do something so he made contact with the Senior Vice President of Marketing, Abby Kohnstamm, who agreed to meet with him.

The next week he made the four hour journey from Ithica in central New York State, to IBM’s headquarters in Armonk, not far from New York City. Three people were present at the meeting: Abby Kohnstamm, Dr. Irving Wladawsky-Berger, then head of IBM’s supercomputer business, and John Patrick, a member of the strategy task force. Patrick was the only person present who had used the Internet but hadn’t seen a graphical web browser before. He later explained the impact of the Dave Grossman’s demonstration:

It was an eyeopener. I couldn’t spend enough time with Dave, learning more about the web. The more I learned, the more excited I got. While many people saw the web as entertaining, Dave saw it as making data universally accessible through the browser. He convinced me that this would turn the world upside down—that the web was going to redefine information technology.[7]

Patrick immediately took steps to hire Grossman as the technical leader of his small team. Grossman was happy he had found an ally who would not only open doors to key managers within IBM, but could take over the leadership role in seeing IBM take the Internet seriously. It would, however be a long journey taking some five years.

Lou Gerstner was one of the first senior managers see a demonstration and he was supportive. This was just the sort of initiative he was looking for from his people. Other senior managers were dismissive, asking, “How do you make money out of it?”

Patrick soon found there was an underground community of people within IBM who were involved with various projects based on the Internet. Between a few of them the ibm.com website was developed and launched in May 1994. At that time there were less than 3,000 websites in existence.

The following month Patrick attended Internet World in San Jose, California. He could see this was a key forum IBM should be part of and made an on-the-spot commitment—without any authority—for IBM to have a stand for the Fall Internet World in Washington D.C. in December 1994. It would cost some tens of thousands of dollars for the biggest stand available. He didn’t have the money in his budget but he knew he could find it somehow. He explained it this way, “If you don’t occasionally exceed your formal authority, you are not pushing the envelope.”[8]

Back in IBM, Patrick and Grossman continued their evangelising throughout the organisation and getting support from divisions to contribute both funds and staff for the forthcoming Internet World show. This was just the beginning of a long road ahead.

Gerstner’s Digital Transformation Strategy

The drastic cost-cutting measures during 1993-94 together with the competitively-priced mainframes meant that IBM was profitable again by the end of 1994. Almost 100,000 employees had been let go during the previous two years. Gerstner knew he couldn’t rely on mainframes for the future growth so now was the time to find something that did.

In late 1995 Gerstner made two major decisions which would have major implications for years to come.

In October he decided to make network-centric computing the core of IBM’s strategic vision and appointed Dennie Walsh to lead the program. Dennie, who headed up IBM’s service organisation, had been advocating for IBM to expand into a much broader services provider for several years.

Then in late November Gerstner asked one of IBM’s most respected technologists and head of IBM’s supercomputer business, Dr. Irving Wladawsky-Berger, to form the Internet Division. Wladawsky-Berger recalls what he did next:

One of my first calls as soon as I left the meeting with Lou had been to John Patrick to ask him to work with me in organizing the new division and our Internet strategy. John understood the power of the Internet and the impact of the near-universal connectivity it was ushering in better than just about anyone else, and he had been working tirelessly for a number of years to get IBM involved with the Internet. John became VP of Internet Technology and was a crucial partner in everything we did over the next several years.[9]

Dave Grossman also joined the division and was then loaned out to corporate marketing to develop the website for the 1996 Summer Olympics in Atlanta. This was the first time that IBM was taking over systems integration responsibilities and in many respects was a giant experiment into unknown territory. No website of that size had been built before. Eventually 100 people joined Grossman’s development team.

Although there were some embarrassing system failures during the Games, the project successfully demonstrated to doubting IBM insiders the possibilities of the Internet. Grossman was short-circuiting the normally lengthy process of having to put up a case for resources and then spending several years perfecting a system before it might or might not be released on to the market. As Grossman admits, “I used the Olympics as a front basically. What I was doing, without telling anyone, was getting computing resources. I also thought the fastest way to get IBM to change was to work from the outside in.”[10]

Two years later the prototype website that Grossman and his team built was released by IBM as the WebSphere Application Server.

IBM Global Services commenced offering hosted web servers to customers from 2000 on. Many of the e-Business products IBM offered customers resulted from the experience of its own digital transformation during the 1990s.

During this period Wladawsky-Berger worked closely with Ogilvy & Mather in producing a series of memorable and entertaining ads, for the e-Business campaign, some of which are still available on Youtube.

The Internet Division closed in 2000. It’s job of educating and prompting divisions within IBM to embrace the Internet was done. By this time IBM Global Services had world-wide revenues of $33 billion with a backlog of projects of $85 billion and had grown to 150,000 employees.

John Kotter’s Transformation Change Model

The Gerstner story is a real-life example of John Kotter’s 8-step transformational change model being followed step-by-step. (See my previous blog post, John Kotter – Leading Change Guru.)

John Kotter’s 8-Step Process for Leading Change

John Kotter’s 8-Step Process for Leading Change

And if you get to read the story of the Emperor Penguins in Kotter & Rathgeber’s book, “Our Iceberg is Melting”[11], you can picture Dave Grossman playing the role of “Fred” and John Patrick as “Alice”. Perhaps it’s not a coincidence that Kotter called the head penguin “Louis”.

What Happened to The Key Players in IBM’s Turnaround?

Lou Gerstner resigned as CEO at the end of 2002. The Global Services business contributed 44.8 percent of the total revenue of $81 billion for the year. He had quickly achieved the turnaround to profitability he had been hired to do. He had changed the culture to be more outwards focused and had encouraged people like Grossman and Patrick to lay the ground for IBM’s long-term growth.

He didn’t retire, though, and is actively engaged in a variety of interests, ranging from U.S. education to supporting the treatment of disease and the Memorial Sloan-Kettering Cancer Center.

John Patrick became Vice President for Internet Technology and left IBM in 2001 after a 34 year career. He founded a consulting business called Attitude LLC. To add to his many awards, in 2008 he was named an IEEE Fellow “in recognition of his leadership in technical and policy development of the World Wide Web.”

David Grossman went on to be appointed to the prestigious position of IBM Distinguished Engineer. He left IBM in 2007 to follow up his passion to became a professional photographer.


1. David Kirkpatrick, “IBM’s Olympic Fiasco Department Of Groundless Optimism,” Fortune, September 9, 1996.

2. Paul Carroll, Big Blues: The Unmaking of IBM (New York: Crown Publishers), 3.

3. Irving Wladawsky-Berger, “Leadership in a Time of Crisis,” (blog), posted January 19, 2009, http://blog.irvingwb.com/blog/2009/01/leadership-in-a-time-of-crisis.html.

4. Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? Leading a Great Enterprise Through Dramatic Change (New York: PerfectBound, 2002), 187.

5. Bradley Johnson, “IBM Slaps Sun For Olympics Ad,” Advertising Age, May 2, 1994, http://adage.com/article/news/ibm-slaps-sun-olympics-ad/87347/

6. Gary Hamel, Leading The Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life (Boston, Ma: Harvard Business School Press, 2002), 160

7. John R. Patrick, Net Attitude: What It Is, How To Get It, And Why You Need It More Than Ever (Palm Coast, Fl: Attitude LLC, 2016) Kindle ebook.

8. Hamel, Leading the Revolution,163.

9. Irving Wladawsky-Berger, “The IBM Internet Division,” (blog), posted November 28, 2005, http://blog.irvingwb.com/blog/2005/11/the_ibm_interne.html.

10. Hamel, Leading the Revolution, 167.

11. John Kotter and Holger Rathgeber, Our Iceberg Is Melting: Changing and Succeeding Under Any Conditions (New York: St. Martin’s Press, 2005).

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