IBM CEO to Step Down; He Led Big Blue’s Turnaround

IBM Corp. leader Louis V. Gerstner Jr., who became an icon of American business by transforming the once-battered computer maker into a steadily profitable technology behemoth, said Tuesday that he would step down as chief executive March 1, his 60th birthday.

The first outsider to lead IBM in eight decades, Gerstner joined Big Blue in 1993, when it was mired in a bloated bureaucracy that spoke its own language. Obsessed with selling big computers, the company was losing billions and facing investor demands that it split into pieces.

Gerstner casually remarked once while he was an executive at American Express Co. that he was sure he could find a profit somewhere at IBM. After assuming the helm at the Armonk, N.Y.-based firm, Gerstner cut tens of thousands of jobs, demanded that staffers pay more attention to customers and drove employees toward more profitable consulting contracts.

“He changed the corporate culture,” said Doug Garr, who wrote a book on the Gerstner turnaround. “He said if we want to survive, we’re going to have to compete against other companies that want to eat our lunch.”

Gerstner’s departure is part of a trend at the top of American businesses as baby boom leaders replace the old guard, such as Gerstner and General Electric Co.’s Jack Welch, another financially conservative, results-oriented leader.

In a farewell e-mail to employees Tuesday, Gerstner said that when he became CEO, he wasn’t sure he could turn around the company, let alone do it in just two or three years.

“All our hard work has brought IBM back,” wrote Gerstner, who will remain as chairman through the year. “Today, our strategies are correct. Our capacity to innovate is unmatched. Our culture is moving in the right direction. And we have restored the pride all of us feel in this company.”

Like most everything else he did, Gerstner picked his successor in a methodical way. He will be replaced by Chief Operating Officer Sam Palmisano, 50, who has run most of IBM’s top-performing divisions during his 29 years at the firm.

IBM didn’t say who would succeed Gerstner as chairman next year. It said Vice Chairman John M. Thompson would retire Sept. 1. Thompson, 59, built IBM’s software business and managed the acquisitions of Lotus Development Corp. and Tivoli Systems.

Investors would rather have more of Gerstner, who increased IBM’s stock value from less than $25 billion to nearly $180 billion. IBM shares fell $5.15 on Tuesday to close at $103 on the New York Stock Exchange.

Gerstner was a controversial choice for IBM when he took over in 1993, an outsider to the high-tech industry who knew little about its dynamics.

“There were real questions raised about whether someone not deep in technology could lead the turnaround,” said David A. Nadler, chairman of Mercer Delta Consulting, a management advisory firm.

The challenges facing Gerstner were enormous. From 1991 through 1993, the company lost $16 billion, one of the worst setbacks in U.S. business history. A bankruptcy filing was debated.

“It was a company that had undergone a precipitous fall from grace,” Nadler said. “This was the most admired company and perceived as the most successful company in the U.S., and then it found itself facing tremendous problems.”

Gerstner created another stir just months after becoming CEO when he engineered an $8.9-billion write-off and brushed off questions about his long-term strategy. “The last thing IBM needs right now is a vision,” he was quoted as saying.

He also surprised industry observers by refusing to break up the company.

Robert D. Austin, an assistant professor at Harvard Business School who co-wrote a 2000 case study titled “IBM Turnaround,” said Gerstner bucked the conventional wisdom that dividing up the organization was the only way to save it.

Gerstner instead decided that one of IBM’s remaining advantages was that it could offer customers a broad package of services and hardware, a path that has been belatedly taken by other computer firms.

Austin said Gerstner also zeroed in on instilling a customer focus at a company that had lost touch with its market. Gerstner set the tone while still fresh in his job, when executives asked whether he could make a brief visit to a gathering of IBM customers.

Instead of putting in the requested one-hour appearance, Gerstner stayed for the entire two days of the convention and urged other company executives to do the same. “They were suddenly all erasing their calendars and saying, ‘Yes, I’m planning to be there both days,’” Austin said.

Gerstner’s aloof manner and job cuts also triggered resentment, because the company had long resisted layoffs.

But IBM was soon making money again, earning $3 billion in 1994.

Gerstner’s accomplishments as an executive, Nadler said, put him among the top five figures in corporate America. “He’s the poster child for the value of general management skills and leadership,” he said.

Nadler and Garr called Gerstner’s work even more impressive than Welch’s, the much-celebrated former CEO of GE.

While Welch was a GE insider called upon to revitalize a fundamentally sound company, Gerstner was the rare example of an outsider who succeeded in transforming a company. “There are many more failures in that category than successes,” Nadler said.

Beyond the profitability that was Gerstner’s obsession, he loosened the tie in IBM’s stodgy uniform and revived the IBM brand, even using humor in commercials.

That helped attract offbeat but technically talented workers who otherwise would have considered only hip companies such as Microsoft Corp. and Sun Microsystems Inc. “He sent the message that if you were a guy with earrings or long hair, you could still work there,” said Garr, a former IBM speech writer.

Gerstner later showed admirable restraint during the Internet stock bubble. He steered the company to capitalize on the trend by providing the infrastructure and integration services to firms expanding on the Web, but didn’t invest heavily in dot-coms that went under or grow to depend on them for sales.

Some investors fault Gerstner for being too conservative in the last few years, using company money to buy back tens of billions of dollars in IBM stock and settling for slow sales growth.

“He might have been on cruise control a little bit,” Garr said.

But he will be remembered as the man who brought one of America’s biggest companies back from the brink.

Born in Mineola, N.Y., Gerstner was known for his versatility even before IBM. A Dartmouth College graduate and Harvard MBA, Gerstner launched his business career in 1965 with the McKinsey & Co. consulting firm.

He left McKinsey for an 11-year stint as a top executive at American Express and then spent four years as chairman and chief executive of RJR Nabisco Inc.

Gerstner’s turnaround at IBM drew worldwide attention. In June, he was awarded the title of honorary knight of the British empire by Queen Elizabeth II.

His major outside interest is education. Gerstner was co-author of a 1994 book on entrepreneurship in public schools, and he is co-chair of Achieve, a group of political and business leaders pushing for education reform.