Building New Profit Centres: The IBM Story
Today, IBM is mostly known as a software, consulting, and IT infrastructure company that holds one of the largest patent portfolios, generates healthy profits, and enjoys steady business growth.
But going back some 30 years, the situation was quite different.
In 1992, IBM was primarily a vendor of mainframe hardware and software, and its services business contributed only $7.4 billion to $65 billion in total revenue. The company was not profitable: a loss of $4.6 billion was reported that year.
Ron Scherer, writing for the Christian Science Monitor, commented that “it never used to rain on International Business Machines Corporation, the embodiment of corporate success. Now the company needs more than an umbrella—it is caught in a torrent of trouble.”
To extricate Big Blue, as the company is often referred to, from this torrent of trouble, the board brought in a new CEO, Lou Gerstner, the following year. Fresh at the helm, the new CEO looked for ways to reignite growth and turn a loss into profit.
Gerstner soon realized that IBM had significant know-how that was underutilized but could be used to exploit emerging market opportunities in services and technology supply.
IBM had always had a services arm, but this part of the business was mainly focused on installing and maintaining IBM products. What Gerstner understood was that the company’s expertise in servicing its own products could be harnessed to develop a broader services and consulting business that addressed growing demand for integrating technologies from various vendors with core business processes (fulfillment, logistics, etc.). IBM Global Services, the new services and consulting arm that Gerstner established, was vendor-agnostic. This marked a major departure from previous practices at IBM. Previously, the company would only work with its own products to solve its customers’ problems, but the new division was free to integrate third-party solutions if that was the best option. IBM moved from selling hardware and software licenses to selling solutions.
Another departure from established practice followed in the IBM Research Division. The output of IBM scientists and engineers was prolific and significant. Writing in Who Says Elephants Can’t Dance?, Gerstner’s own personal account of the IBM turnaround, he states that “IBM has more Nobel laureates than most countries do, won every major scientific prize in the world, and has consistently been the foundry from which much of the information technology industry has emerged.” The new leader fully appreciated his company’s capacity to innovate. But he also recognized a crucial shortcoming and concluded that the “IBM Research Division was far more fertile and creative than our ability to commercialize all of its discoveries. We are underutilizing a tremendous asset.” And this he set out to change.
As a first step, IBM started to sell licenses to its patents. But Gerstner then steered the company toward deeper monetization. IBM opened itself up to act as a subcontractor for other companies in the technology space, custom-designing and supplying microelectronics for other heavyweights such as Nintendo, Sony, and Apple. In this way, IBM generated revenue and profit from underutilized assets.
The repositioning of IBM under Gerstner appears to have been the natural consequence of his belief in “building great institutions around core competencies and unique strengths.” By recognizing, and then moving to monetize, its core competencies, IBM tapped into new sources of growth and revenue. By 1994, IBM was again profitable.