From Big Iron to E-Business Juggernaut

Invest in R&D: the Solutions Perspective

Shortly after Gerstner arrived at IBM, he demonstrated his willingness to invest in the company's future, in the form of research and development, despite the company's mind-numbing losses. On the table was his predecessor's plan to dissolve IBM's research and development department. Again, Gerstner went in the opposite direction. He decided to keep the Watson Research Center (IBM's R&D lab) intact, and he instructed the researchers based there to spend more time on coming up with solutions to customers' problems.

Specifically, he pushed for R&D investments focused on the Internet. Gerstner recognized the incredible potential of the Internet as a driver of transactions early on, and he was so convinced of its potential that he was willing to reorganize the company around that idea:

If we really believe this, we're going to reprioritize all the budgets in the company. In a period of four weeks, we reallocated $300 million. We created the Internet division. It became the catalyst for change in the company.

Gerstner calls this his second "bet the company" decision (the first was keeping the company intact). Early on, he shifted 25 percent of IBM's R&D into Net projects, and in 1999 he increased that percentage to 50 percent (and by then the R&D budget had grown to an impressive $5 billion).

Increased R&D expenditures were only the beginning. The IBM chief was fiercely determined to remake IBM into a provider of complete solutions and a leader in what he called "network computing." This was no fad or bannerwaving exercise; instead, it was a company initiative designed to help the company remake itself:

The real leadership in the industry is moving away from the creation of the technology to the application of the technology.

Here are some Gerstner-like activities that you could implement in your own organization:

• INVEST IN THE FUTURE. Regardless of the current market environment, companies cannot afford to be complacent. Make sure that your organization is betting on the future by making the right investments now.

• WHEN MAKING "BET THE COMPANY" DECISIONS, MAKE SURE YOU'RE RIGHT. Gerstner called his $300 million decision to create the Internet Division his second "bet the company" decision. While no one has a crystal ball, bet the company only when there is compelling evidence that your decision is the right one.

• BE A TREND SPOTTER. Gerstner recognized that the future of computing would depend on "moving away from the creation of the technology to the application of the technology." He was right, and his understanding of that fundamental shift in his industry played a role in the IBM turnaround .

Gerstner did so many things right, and—as noted—pulled off one of the great turnarounds in corporate history. Business historians may not rank him alongside Jack Welch or Bill Gates, but a compelling case can be made that he deserves a place in that pantheon. His rare ability to see a situation for what it was and then bring about meaningful change made him one of the most effective CEOs of his day.

What Would Lou Gerstner Do?

Returning to the scenario that opened the chapter, what explains the downfall of your law practice? The firm got into trouble because you and your partners failed to heed the seismic changes that were transforming your community.

Let's recap: For years, your law firm thrived on real estate closings and providing legal counsel for small businesses. In the first years of the practice, you responded to the needs of the community by adding attorneys who could address those specific needs.

In recent years, however, your firm hasn't kept up with the changes that were taking place in your town. The three large corporations that came to town altered the area's demographics , and, along with it, the type of legal services the community required. Those changes made your firm almost irrelevant, and because you looked to the other attorneys inside the firm rather than to the marketplace , you didn't understand what was happening.

For example, while some of the younger people who moved into the area bought homes , most of them rented condos or apartments, which diminished the town's need for attorneys who could handle closings. When these young singles started getting married and setting up households, they sought out firms that could handle wills, prenuptial agreements, and similar legal needs. Your firm was not prepared to offer this kind of specialized service.

Furthermore, the surge in the town's business activity was accompanied by an increase in workers' compensation claims, one more specialty your firm did not offer. Furthermore, many of your small clients disappeared, as large chains caused some independents to fail.

Ironically, your firm's success was a chief contributor to its downfall; it was at the top for so long that you stopped doing the things that got you there.

Your biggest sin was thinking that you had all the answers. You held internal meetings, rather than focus on the marketplace. Had you focused on the needs of the community, you and your partners would have recognized the shifting environment. Lou Gerstner would have made sure that the firm was well informed about the changing needs of the community. He would never have stopped thinking about ways to solve people's problems, even if that meant replacing attorneys who were unable to do so.