Under the Big Gray Cloud : It Once Was the Model for Success. Now, With Layoffs and Plunging Sales, IBM Is a Model for Corporate Mistakes

ON A WARM SPRING EVENING IN MANHATTAN, EXECUTIVES FROM INTERNAtional Business Machines’ top 100 corporate accounts and an army of several hundred more IBM lieutenants gathered at the Crown Plaza Hotel for a dinner celebrating the upcoming release of a key piece of new software for the company’s personal computers. As the more than 500 guests swooned over their desserts of hand-dipped chocolate swans filled with a frothy raspberry mousse, IBM Chairman John F. Akers walked to the podium.

In his right hand, he held a glass of 1987 Semillon from Chateau St. Michelle. Raising it slightly, he acknowledged how rare it was for the chairman of IBM--a company known far and wide for its teetotaling practices and a company that, until only last year, ordered its employees not to return to work if they had a lunchtime drink with a client--to be toasting his best customers with a glass of wine. As the audience laughed appreciatively, Akers explained the purpose of his bold act. “This is the new IBM.”

It was no idle gesture for the boyishly charming, silver-haired Akers. Since taking over the reins of IBM seven years ago, Akers--who declined to be interviewed--has struggled with only limited success to forge what is arguably the most massive corporate reincarnation in American business history. But four reorganizations later--after getting rid of more than 60,000 employees, eliminating huge chunks of its whopping 10 layers of middle management, retraining 30,000 staff bureaucrats for more useful work, closing 10 plants, “empowering” workers to follow their business instincts, spinning off two divisions into separate business units and making a huge public show of fawning over customers--IBM is still suffering shrinking profits and sliding sales. The company posted a $2.8-billion loss in 1991--its first ever.

Now, just three years shy of IBM’s mandatory retirement age of 60 and a far cry short of his goal, Akers wastes no opportunity, day or night, to preach his gospel of corporate change and redevelopment. “We’re trying to change the habits of an awful lot of people,” Akers confessed a few years ago. “That won’t happen overnight, but it will bloody well happen.”

The sixth chief executive in IBM’s remarkable 78-year history, Akers is following many tough acts. Perhaps no IBM predecessor cut a wider swath through American business history than its late founder, Thomas J. Watson, a crusty business visionary who turned three nearly bankrupt manufacturers of scales, time clocks and tabulating machines into a company that popularized the technology known as the computer and forged a great American business, admired around the globe as an example of U.S. ingenuity and corporate benevolence. Watson’s indelible stamp on IBM is captured by his official portrait from the 1940s, now hanging in IBM’s former headquarters in Manhattan, which shows him staring into the camera, unflinching, unsmiling. At the top of the photo, centered well above that stern gaze, is the simple one-word motto he gave IBM: THINK. Over the years, the photo has become a much-satirized corporate caricature, yet for its time, it symbolized the no-nonsense purposefulness of IBM, its supreme and quiet confidence.

Seeing that photo now, one wonders how a snapshot of IBM’s corporate persona would be composed today. Could Akers stare as confidently at the camera as Watson did? And just what would that motto hanging behind him be?

Rethink?

Think again?

Think some more?

FEW COMPANIES HAVE ATTEMPTED A GIGANTIC METAMORPHOSIS WITHOUT THE prodding of federal regulators or the requirements of new owners. Fewer still have been the size or possessed the grandeur of IBM, a company that generated sales of $65 billion last year and, at its peak in 1986, had 407,000 employees in 130 countries. How IBM, still the world’s largest computer maker, negotiates its attempted rebirth should offer tremendous grist for other American mills, including such giants as General Motors, Citicorp and Xerox, also struggling to regain their former market superiority and corporate pride.

Gone is the notion that sheer size and vertical integration of business operations are enough to survive. Now companies must be agile and quick enough to respond to changing technologies and fickle consumer tastes, but still large enough to fend off the Japanese industrial giants intent on muscling into their markets. Gone is the implied “lifetime employment” commitment that many companies, including pioneer IBM, once made to their workers. Now companies across the country are embracing the motto “lean and mean,” downsizing their ranks through early-retirement incentives, forced retirements and layoffs. Furthermore, rapidly advancing technology, emerging markets and changing customer needs require companies more than ever before to adjust their product offerings--before their competitors beat them to it.

If IBM can’t meet these new standards--and its last six years of muddling suggest it can’t--it may just become the General Motors of the information industry: a once-proud leader reduced to following in the wake of its nimbler and and more savvy competitors.

Just a few years ago, IBM’s current predicament would have been unthinkable. In the 1960s, IBM so dominated the data-processing business that to many its name became synonymous with computer and its punch cards a symbol of the cutting edge of automation and efficiency worldwide. Indeed, IBM became so big, so successful that, only slightly more than a decade ago, federal trustbusters were threatening to break up the company to level the playing field for the rest of the nation’s struggling computer makers.

But in the 1970s, the computer industry’s old order began slowly, and imperceptibly at first, to crumble. After defining the market, IBM attracted hordes of competitors, from Japanese behemoths, such as Fujitsu and Hitachi, that were intent on crushing it, to dozens of young, nimble and money-hungry American start-ups, such as Apple Computer and Sun Microsystems, that were content merely to steal away little bits of its huge business.

Stunning technological advances throughout the period encouraged the competitors, currently estimated by IBM at more than 50,000 worldwide, to offer low-cost, state-of-the-art computers, undermining IBM’s seeming lock on the marketplace. If IBM saw the changes--and that remains a matter of some debate--it certainly didn’t appreciate their full impact until the mid-1980s, at least a decade after IBM’s share of the worldwide computer market had started to shrink from well over 50% to less than 35% today.

Why didn’t IBM executives see or adjust to their changing landscape? Quite simply, analysts and management experts say, business was too good for IBM for too long; executives didn’t believe it could ever be otherwise. Blessed by decades of stunning success, IBM’s corporate culture, once the envy and model for the rest of American business for its strength, efficiency, depth and commitment, had become so inwardly focused and inbred that it was blind to the harsh realities of its business environment. Further, its employee ranks had became so stultified and bloated with “yes men”--workers refer to the vast layers of 25,000 middle managers as “The Big Gray Cloud”--that messages of gloom and doom from the field forces were squashed before they could make their way up the chain of command.

“IBM executives were breathing their own exhaust for too long,” says C. Quinn Mills, a Harvard business professor who has studied IBM over the years. “The disaster IBM has sustained it has largely inflicted on itself. They had a good thing going, but they held on to it for too long.”

In a desperate scramble to cut IBM losses, Akers announced in December that the company’s divisions would become more autonomous, like separate companies. But industry observers are not impressed.

“A lot of us feel sorry for IBM,” says Mike Simmons, the executive in charge of technology purchasing at the Bank of Boston and one of IBM’s large corporate customers. “It’s not just that their business is hurting and times are tough. It’s that they don’t even seem to know how to fix their problems. It’s not for lack of trying. They’re certainly doing that. But they just can’t seem to get it right. They’re inept at fixing their business.”

ON THE EAST SIDE OF NEW YORK 9, ABOUT A MILE SOUTH OF POUGHKEEPsie’s IBM mainframe manufacturing plant in the idyllic, tree-lined Hudson Valley, two stone pillars mark an otherwise nondescript driveway. Only small brass signs on the pillars mark them as the gateway to the IBM Country Club, the largest and fanciest of three such facilities IBM operates for all its employees. For $2 per year for each family member, employees have unlimited access to baseball diamonds, tennis courts, swimming pools, basketball gyms, a shooting gallery, bowling alley, 18-hole golf course, weight room, aerobics studio and dining room.

“So what don’t I have?” asks Rick Leonard, a 33-year-old manager of test-equipment operators at the Poughkeepsie plant. “I can go to the country club. The benefits are terrific. I’ve liked IBM since the day I got in the door.”

IBM has historically been recognized as among the best employers in corporate America, and its employee-benefits packages are regularly ranked among the most generous. But even beyond the regular benefits--including a work-at-home program and subsidized long-term health care--and the country-club-style extras, the best known, most cherished tradition at IBM has been its commitment to full employment for its workers, a practice dating back to founder Watson, corporate America’s most outspoken supporter of Franklin D. Roosevelt’s New Deal.

For decades, anyone signing up to work at IBM knew that, barring total incompetence or malfeasance, he could count on having a job for as long as he wanted it. IBM publicly touted this “no-layoff” practice to attract and retain the best employees, and executives maintain today that the company has not yet abandoned this time-honored tradition. However, as IBM has eased more than 60,000 workers out the door over the past five years and released plans to push out at least another 20,000 more employees in 1992, it has become increasingly clear to the remaining work force that the “hired for life” ground rules have shifted dramatically.

IBM brass acknowledge that times have changed. “We are not altruistic. We are running a business,” says Stephen Schwartz, IBM’s senior vice president heading the company’s new push for quality production and practices. Despite appearances, “This is not a country club,” he says.

To be sure, IBM hasn’t “laid off” anyone, in the strict sense of the words, because, explains Walton E. Burdick, IBM’s senior vice president for personnel, that would require the company to join unemployment-insurance funds in each of the 50 states, a costly expense that the company has avoided with its no-layoff practice. However, increasing numbers of employees are being induced--often forcefully--to leave as the company struggles to reduce its expenses to compensate for its lowered sales levels and to satisfy Wall Street critics hungry for more profits.

“We used to have the attitude that if you were cheerful and tried your best, we would try to find a place for you,” says Robert C. Timpson, vice president and general manager for IBM’s northeastern area, as he looks out over a sunny, wind-swept Central Park from his 39th-floor office in mid-town Manhattan. “Now we’re saying that we fundamentally can’t do that anymore. No matter how cheerful you are, we can’t afford to keep you.”

The new “get tough” policy intensified last year, when all managers were ordered to rank each of their employees against their peers. Those in the bottom 15% were to be let go or, in IBM’s terms, offered a “management-initiated separation.” Although the program is certainly weeding out some employee “dead wood,” there is a rising chorus of complaints inside and outside the company that the induced separations are aimed primarily at IBM’s older workers, people who have been with the company 20 or 30 years and whose technology training and skills are the most outdated.

Stories abound of older workers, who once consistently earned top rankings from their superiors, suddenly being told that their performance has slipped and then being offered IBM’s latest separation package, called an “Individual Transition Offer.” The ITO, as it is known, spells out how much money and what kind of benefits an employee will receive if he or she agrees to leave and signs a legal agreement promising not to sue the company for wrongful termination. If an employee refuses to accept the separation terms or sign the agreement, he or she is automatically given the lowest possible job-evaluation score, which automatically halves the severance they are entitled to receive.

A 56-year-old sales manager on the East Coast--who, like most IBM employees interviewed, requested anonymity--had been with IBM for 29 years before being told by his boss 15 months ago that his performance was “inadequate.” Despite years of being rated a 3--on a scale of 1 to 5, with 1 being best--the sales manager, the father of five who had been earning an average of $90,000 annually, says he was told that he would be given a 5 unless he agreed to leave the company by the end of 1990. Feeling stymied and trapped, he accepted a severance package that gave him two weeks pay for each year of service. But he says he was given no precise reason why his work was lacking. “I was replaced by a much younger guy who is making $60,000 a year,” he says.

Richard Rathemacher of Atlantic Highlands, N.J., was among the first employees to feel the brunt of the new policy in 1987. Then 55, Rathemacher took the separation package when his boss threatened to lower his performance rating to a 5. Then he sued IBM for age discrimination, a move he believes later prompted the company to insist that workers sign the agreement promising not to sue. Late last year, a jury awarded Rathemacher $315,000. IBM, which denies the age-discrimination allegations, is appealing the award, the first discrimination suit of any kind the company has lost.

“I asked for examples of where my work was lacking, and I couldn’t get any,” says Rathemacher, who had been with IBM’s field force for 30 years and was unable to find work after he left. “The company wanted to cut costs, and they determined they could do so among older employees more easily than among younger ones.” A similar age-discrimination suit was filed in November by a Florida man who had been an IBM salesman for nearly 24 years. “I know I was treated differently than younger workers,” says Edward Rudd, 50, who has not found a job since being laid off last March. “I was put out to pasture.”

Older workers are not alone in feeling the pinch of IBM’s new attitude toward its employees. Akers told workers last year that he was “raising the bar” on employee performance (IBM-ese for increasing the minimum level of acceptable work). Their performance is expected to improve each year, and if it doesn’t, they could be subject to termination.

But while middle- and lower-level employees were feeling the squeeze, IBM’s top managers were given salary increases of up to 33%, and Akers’ own annual cash compensation jumped to $2.6 million. It didn’t sit well with the troops. A flurry of complaints exploded throughout the company’s computer-message system: “Akers got a raise, and they’re raising the bar for the rest of us,” griped one worker.

EVERY CORPORATION OR BIG institution has its own slang, those colorful, descriptive terms that capture the essence of a particular situation or group of people. Things are no different at IBM, where multiple management layers are known collectively as the “Big Gray Cloud”--or BGC for short.

It is these people, the middle managers, an estimated 25,000-plus men and women, who are the primary targets of much of the employees’ wrath and management’s frustrations. The management corps has also been at the center of the turmoil generated by the company’s efforts to streamline procedures, shorten the chain of command and delegate more decision-making responsibility to the workers closest to the customers. It is these managers who are blamed by employees for sugar-coating bad news as it makes its way up the corporate ladder, and they also have been accused by the top brass of stalling reforms drafted in the executive suites. And it is these people who are losing their jobs faster than any other single group at IBM.

“Big Gray Cloud is a notion that makes sense to me,” says Executive Vice President Schwartz, a member of Akers’ inner circle. “(Lower-level) employees pick up the message quickly; top management get the message quickly. But it takes a long time to communicate through the management levels in the middle. Not because they are bad people, but because the system is so big. Middle-management levels slow the process down.”

This was not an easy realization for IBM, which had long prided itself on maintaining one of the highest manager-to-employee ratios--it used to be one manager for every 12 employees--in American industry. But over the past five years, IBM has eliminated about 9,500 management jobs in an attempt to reduce the number of layers between Akers and an entry-level employee--from an average of 10 down to seven. Sales representatives in the field once belonged to branches presided over by a marketing manager who reported to an account executive who then reported to the branch manager. Now a sales rep reports directly to the person in charge of the branch office. At the very top of the company, Akers is now just three levels above the seven area general sales managers who oversee U.S. sales, two steps closer than he was just 18 months ago.

In addition to getting rid of middle managers, IBM executives say they have begun to tie employee pay raises to the company’s profits. “In the past, few people in this organization even knew the ‘P’ word. Certainly no one outside headquarters was allowed to talk about profits,” says Timpson, the general manager of IBM’s northeastern area and one of the much-maligned middle managers. “Now we have branch sales managers setting their own prices and being judged by their profits. Basically, branch managers are running their own Kentucky Fried Chicken franchise operations. It’s a huge change for us. “

So far, this much-heralded change has been felt primarily among the sales force, the army of men and women whose job it is to persuade corporate customers that IBM equipment, service and know-how are better than any other in the marketplace. Under the best of circumstances, it’s a tough sell. But IBM’s own policies and procedures--and, in many cases, higher prices--have often made it even more difficult.

For example, until recently, every time an IBM sales associate negotiated a sale with a customer, he or she had to prepare a “business case” outlining the reasons the sale should go ahead as planned. The memo was then forwarded to the “bid committee,” a special corporate staff whose sole job was to review potential sales and judge their worthiness. Sometimes it would take the committee up to two months to make a decision. Then, and only then, could the sales associate ink the deal. (Giving an unhappy customer credit for equipment that didn’t meet their needs also required a run by another headquarters review committee.)

These days, neither committee exists, but deals are still not closed fast enough to suit some of the sales force. “The No. 1 thing my customers want to know is how much it’s going to cost them,” says John Blasig, an IBM salesman in New York. “I’d like to be able to answer them on the spot, but I can’t. I have to pack up my bags, go back to the office, talk to a manager and then get back to them. My competitors don’t have to do that.”

IBM’s changes have only just begun to reach beyond the sales force. New-product development, an area crucial to the company’s future ability to fend off its competitors, is one area where IBM has some of its most demoralized and change-hungry employees. “Creating new products here is difficult at best,” says an IBM market analyst in New York whose new-product idea was scuttled by the BGC. “You have to develop a plan and send it around to the heads of all the existing units for their approval. Any one of them can veto it if they think it will somehow hurt their existing products.”

Even Akers has admitted that new IBM products have not rolled out the door fast enough or good enough to suit him. The IBM PC trailed Apple into stores but later dominated the market; the RS 6000, the company’s late-to-market engineering workstation, faces enormous competition; IBM’s laptop was released after its Japanese competitors had virtually cornered the market, and, while it is considered a good product, it is not a pacesetter. The laptop and workstation could have fared far better if IBM had moved faster and more decisively.

Says a Wall Street analyst who closely follows IBM: “There are more people at IBM trained at saying no than other companies have employees. They simply have only to ‘non-concur,’ and a project is killed.” Even with the new religion of “empowerment” and “decentralization,” there is still a fair amount of control and interference.

Consider, for example, the company’s approach to its automatic telephone-answering system. When the new feature was added to employees’ telephones in 1990, IBM distributed a pamphlet offering “the five secrets of success for a winning greeting,” a brochure that detailed how to record an appropriate voice-mail greeting. Then the company hired Bob Newhart to star in an instructional videotape outlining the same message. Later, auditors from the company’s Telephone Process Office made spot checks of employees’ greetings to make sure they conformed to the oft-offered guidelines. “They say they want to empower people, but they aren’t willing to follow it through,” says Dave Whittle, part of the sales force in the Washington area. “Or maybe they just don’t know how.”

Barbara Ellis, program manager for quality in Manhattan and a member of the team responsible for helping field service representatives understand the company’s new policies, has sensed the skepticism. “We tell the field force to take ownership of their work, to make things happen,” she says. “But the most common question I get is, ‘Are we really committed to this? Or is this just another program and slogan?’ ”

AT A DINNER DANCE ABOARD a ship in New York Bay on a balmy evening last August, more than 100 past and present IBM employees sipped champagne and nibbled on roast beef, crab Newburg and chocolate cake while reminiscing about what was most likely their all-time best experience at IBM: creating IBM’s much-lauded and wildly successful personal computer and launching it in August, 1981. The party-goers were celebrating the 10th anniversary of the PC, which went on to become the single most successful new product launched by IBM in nearly two decades and the source of an estimated $50 billion in sales for the company.

Microsoft’s Bill Gates, the 35-year-old electronics whiz who became a billionaire by providing the basic software for the PC, was on the boat. So were members of the tiny original coterie of IBM employees who had been sent off to Boca Raton, Fla., to play catch-up with Apple Computer and to push IBM to the forefront of the PC industry. But although IBM’s corporate coffers helped underwrite the party, the company’s top brass weren’t invited.

“IBM executives really weren’t involved with our group,” Jeanette Maher, the former public-relations official for the PC group in Florida explained later. And that, in one pithy sentence, sums up a key element of IBM’s current problems and future challenge: Its best-selling product of the last decade was developed completely outside its traditional, bureaucratic and enormously slow creative process--but it did happen. But why only once? And can it be repeated?

The answers are far from certain. John Akers says he wants to create an IBM that is composed of faster-moving, more responsive and more independent business units, an IBM that is less hampered by its centralized bureaucracy and an IBM that can once again be the undisputed leader of the industry it created. Yet IBM’s actual performance has been steadily declining under his stewardship. Sales-growth rates since 1985 have declined, and last year, for the first time since World War II, sales fell below those of the year before, slipping to $65 billion from $69 billion. Profits, which peaked in 1984 at $6.4 billion, are in even worse shape. For 1991, the company recorded a loss of $2.8 billion. And IBM’s stock, which once traded as high as $182 per share, had been hovering in the $90 range for weeks after hitting a low of $83.50.

Wall Street analysts say the reason for the huge gap between what Akers apparently wants and what he’s getting is that the CEO and his top lieutenants don’t have the guts to take the measures necessary to get what they want, steps that many analysts say include nothing short of a dramatic--and risky--breaking apart of the entire operation into truly independent business units. They argue that even Akers’ latest move in December to splinter off two relatively small pieces of IBM’s huge mainframe-manufacturing operations--printers and data storage--into separate units is a half step, not the drastic medicine required.

Although Akers has said his moves announced in December are only the beginning of what he has planned, analysts say he has actually done very little so far to loosen the company’s tight, centralized control and create an atmosphere where each of IBM’s myriad business units can generate new sales and effectively compete, unshackled by the constraints of its bureaucracy, against its growing number of outside rivals. Even a bold new software-development venture with Apple Computer, while garnering reams of press last year, will take years to bear fruit.

“There is just nothing new here,” says Steve Cohen, an analyst with Soundview Financial in Stamford, Conn., who has been highly critical of IBM for most of the last five years. “Certainly IBM has shown that it can cut costs by cutting personnel, but it remains to be seen whether they can get their products to market faster and get more sales. I don’t see that happening.”

Some employees share the sentiment. “Despite all the changes, we still don’t have a vision to use the products we have or to create the products we need to,” says an IBM employee in New York. “We’re being run by the strategy du jour.”

Some employees note with a kind of grim irony that the Soviet Union broke up more quickly than IBM could loosen its corporate grip on the rest of its empire. “Increasingly, the IBM Corp. has come to resemble the classic model of a totalitarian state,” observes an employee from the Midwest. “The resultant product: rule by fear, and the collapse of any mechanism for the allowance of views other than those approved by the corporate state. Ultimately, this leads to the dissolution of the creative process and organizational chaos.”

“The real question is whether such a large entity can function in today’s world,” says Bob Djurdevic, a Phoenix technology analyst who dogs IBM’s every move. “You don’t just change the nature of the beast by decree. You can’t order a change in culture. IBM needs to spin off whole business units. It needs a radical change to be competitive.”

On New York Bay last August, the PC birthday celebration sounded a bittersweet paean to the past--and a bleak glimpse of the future: “Boca was the most unique experience of my time at IBM,” said one employee. “It’s never been the same since--never been as much fun, never as rewarding.”