E-Biz Blue

The story begins on a wet lawn. Back when Lou Gerstner was working as a director at McKinsey & Co.

The story begins on a wet lawn. Back when Lou Gerstner was working as a director at McKinsey & Co., he was cutting his own grass. The blade seized up, and when he reached down to unclog the mower, the blade snapped forward and sliced off the tips of two fingers.

The next part of the story is the stuff of legend, and it's been floating around in various circles inside IBM ever since Gerstner took the reins in 1993. The myth--or reality, as no insider has the guts to ask him, and he hasn't granted an interview to the trade press this year--is that Gerstner picked up his missing digits and took them to the emergency room. And there he left them, as the story goes, rather than waiting for them to be re-attached, because he had to go to a meeting.

The story surfaces occasionally in private meetings with Big Blue executives. More than anything else, it's indicative of what's changed at IBM. With e-business as the engine, the company is driven; it's in the lead, and it has no intention of letting distractions interfere with its market position.

Indeed, even as the company takes a few lumps on Wall Street (its stock has dropped more than $30 in recent months), nobody mistakes this IBM for the complacent company that people knew in the 1980s and early 1990s.

Those days certainly are gone. Gerstner's predecessor, John Akers, surrounded himself with marketing people who would rather "yes" him to death than say what really needed to be done. Software development had come to a virtual standstill, and the company was unable to get key products like OfficeVision LAN or AD/Cycle out the door-ever. Nor could it respond quickly to market changes, like empowering the desktop.

These days, Gerstner is backed by a long list of innovative managers who regularly challenge the status quo. They include IBM Global Services expert Steve Huhn, alphaWorks evangelist John Wolpert and Internet dynamo Jane Harper.

Gone, too, are the days of independent political fiefdoms inside the company. In the pre-Gerstner days, if you couldn't get the backing of various kingpins, you didn't get a product out the door. Just ask the initial team that built the RS/6000 and had to contend with the AS/400 group.

And most of all, gone is the 1956 consent decree that IBM signed with the U.S. Department of Justice. That agreement, which is set to be phased out completely by 2002, once blocked IBM from setting up a services division using the IBM moniker. It also compelled the giant to strike deals with Microsoft and Intel for its PC components, and we all know who got the best of those deals.

Much has changed, and it all revolves around e-business. At a meeting in Bal Harbour, Fla., in February, Gerstner and his 300-person senior management group arrived at two very significant decisions. The first was that IBM committed itself to becoming the leading supplier for e-business--a move that received buy-in from all major business units within IBM, including vertical industries, as well as all major geographies. The second thing the company's leaders did was agree to act together and move as one company.

"We agreed that we need to all get together and said we need to organize all activities together," says William Zeitler, general manager of sales and marketing for IBM's Software Group. "Today, versus nine months ago, everyone is aligned around a goal of making ourself the leading supplier of hardware, software and services."

While politics never will be entirely eliminated from a company that has some 300,000 employees, there was--at the very least--a clear statement of direction that involved all of IBM. If that sounds obvious, consider this: It was the first statement of single purpose for IBM since it threw its weight behind computers instead of punch-card machines in the late 1940s.

In the months since that meeting, virtually every part of IBM's business, except for mainframes and servers, has been picking up steam and bringing products to market. And many have been doing better primarily because sales involve more than one division. Though currently experiencing a Y2K-related dip, AS/400 sales, for example, jumped well into the double digits last year, largely because they were being sold as Notes servers. DB2 on NT sales, meanwhile, increased 50 percent in 1998, while DB2 on Unix increased 45 percent, says Janet Perna, IBM's general manager for data-management solutions.

And for some of the business units that have longstanding growth problems, IBM has cut some aggressive deals that again involve multiple divisions. Sources say the main reason Cisco Systems agreed to OEM IBM components was so that IBM Global Services would include Cisco products in its solutions.

IBM's profitability remains relatively flat--its profits will grow modestly to about $8 billion this year-but at least it's growing. For the most recent quarter, revenue increased 5 percent to $21.1 billion. That's a sharp contrast to the early part of the decade, when it was bleeding red ink.

The giant is back in a whole bunch of areas, armed with a raft of competitive products and services that span the smallest companies to the very largest and are focused on e-business. How it fares against new, more agile competitors remains to be seen. But there's a feeling inside IBM these days that it can win, and that's something that hasn't been there for decades.

Service With A Smile

Even the most cynical IBM watchers can't dismiss the company's outstanding performance in professional services-outsourcing, integration, consulting and, now, e-biz transformation.

The $29 billion IBM Global Services--formerly known as Integrated Systems Solutions Corp.--has stumbled at times. Prior to Gerstner's tenure, it had a nasty reputation for low-balling competitors. And even since Gerstner took the helm, it has botched its share of big projects and struggled to maintain profit margins, which are already low by product standards.

But you can't argue with double-digit annual growth (12 percent for Q3 '99), rising gross profits and a mind-boggling $51 billion-plus backlog.

"What Global Services did so well from the beginning was take advantage of the IBM brand," says John Halvey, an attorney who represented customers on some of IBM's biggest mainframe outsourcing contracts. "They were extremely skillful in leveraging their unique relationships with large customers. IBM didn't just know their management, they knew their clients on an historical level, so they were able to identify their needs and present them with the right solutions. In that sense, IBM was the first mover."

Halvey adds that in the same vein, IBM has grown adept at negotiating and implementing "sole-source" contracts, in which the vendor faces no bidding competition and has more opportunity to tack on high-margin services over the life of the deal. IBM's $6 billion outsourcing pact with Lucent Technologies is a classic example.

Still, IBM's past success in outsourcing is no guarantee of future profitability. The services unit today faces its stiffest challenge yet in becoming a profitable provider of top-down e-business services. In this new market, IBM is definitely not the first mover. Michael Shank, a principal in Global Services' e-biz strategy practice, sees the company weighing in once specialists like Scient and Viant have seeded the market.

"We come in after the engines have started," he says.

But when it does ramp up, Global Services brings a lot to the e-biz table. Mike Daniels, general manager of product support services, says IBM is one of the few providers that can marshal all the capabilities needed to implement a round-the-clock interactive enterprise. Those skills include provision of an external supply chain, order fulfillment, systems management, bulletproofing and strategy consulting.

Rebecca Whitener, a senior IBM consultant specializing in privacy issues, recalls a recent engagement for a banking association that was under the gun to craft a response to Congress on certain security questions. In desperation, the association turned to IBM, which pulled together a multidisciplinary, six-person team of industry specialists, technologists and privacy experts. The joint vendor/customer team met the stringent Congressional deadline.

However, that example notwithstanding, competitors believe that, on smaller jobs at least, IBM can be beaten on speed and nimbleness. The CEO of one $75 million e-biz integrator says on a couple of quick-turnaround projects, his firm outbid IBM, which was unable to assemble its teams fast enough to meet 90-day timetables.

Shank says not to worry. In the e-biz space, he insists, IBM will repeat its success in data-center outsourcing. "From our traditional base in hardware manufacturing, becoming a leading provider of outsourcing services was a huge step," concludes Shank. "IBM's transition to becoming an e-biz solutions provider is no more surprising than that."

Making The Elephant Dance

Ian Brackenbury remembers the shock when Lou Gerstner threw away the Red Book. The "foot-thick" manual detailed every step of every IBM process that could possibly occur and fostered an atmosphere that he remembers as "glacially slow."

"Innovating outside the process was strongly detrimental to the assembly line," says Brackenbury, an IBM fellow who joined Big Blue in 1974. "The pulse beat to IBM's internal needs. But now a big influence is what happens outside of IBM. For us oldies, the cogs grind a bit, but you can't stand within your own structure and say, 'Nobody move until I move.' The rate and pace of change today is unbelievable."

The loss of the Red Book stood IBM in good stead, because it was forced in 1994 to figure out what to do about the Internet. For example, when Brackenbury and other IBM technologists decided that Java was better suited for developing server applications than for "injecting technology" on the desktop between Microsoft's infrequent releases of Window