A lumbering giant tries to get fit to keep up with fleet-footed rivals. By Peter Wilsher.
IBM, whose initials in many countries are still almost interchangeable with the word "computer", is suddenly under worldwide attack. After decades in which it was regularly the world's most profitable company and the unquestioned core holding in every sensible US investor's portfolio, its market share is slipping, its Wall Street valuation has slumped by almost 50%, it has lost its Triple A credit rating, its chairman John Akers has told his senior managers that he is "sick and tired" of listening to their customers' complaints, and last Christmas it reported the first full-year loss in its 80-year history. Its efforts to fight back are transforming every aspect of the way it has been used to doing business, and its subsidiary here in Britain, with its £4-billion annual sales and near 15,000 employees, is right in the eye of the storm.
IBM (UK) also went into the red for the first time in 1991. After shedding 2,600 staff, and setting aside £184 million for re-scheduling and redundancy costs, it ended up £124 million on the wrong side of break-even. But in some ways it was quicker than its beleagured parent in seeing trouble coming, and preparing its counter plans.
Some 16 months ago Nick Temple, a London-born systems engineer who had risen fast through the IBM international hierarchy, was brought back from Paris with instructions to initiate a wholesale shake-up. By May he had agreed the key elements of the new strategy, both with his immediate UK boss, Anthony Cleaver, and with the top echelons back in Armonk, New York. In July, his ideas were warmly endorsed by Akers himself during a flying visit to the Portsmouth headquarters (soon after the world had learned, through a widely-leaked memo, just how unhappy the IBM top man was with the performance of the rest of his empire). And then, in January this year Temple was appointed chief executive, with full responsibility for putting his proposals into effect.
After a generation of almost unchallenged dominance, the giant known as "Big Blue" (from the colour chosen for the huge main-frames which still account for the largest part of its earnings) was starting to develop some alarming signs of old age. It had become arthritically slow, charged its many critics, in responding to its industry's ever-accelerating speed of change. It has lost out, in product area after product area, to younger. leaner, fleeter-footed competitors like Compaq, Sun Microsystems and Digital Equipment.
Even when its unrivalled research strength gave it some real technological edge, as with the advanced but deeply disappointing OS/2 operating system, it could take years to bring the results effectively to market, by which time it was often already too late. Yet until very recently it was still being accused of arrogance, self-satisfaction, poor communication with its customers and wide-ranging lack of sympathy for their needs. Dealing with its bureaucracy, said the head of one of its own associated software consultancies, was like swimming "through vast pools of peanut butter".
It was against that background that Temple started to frame his reform programme for the UK, which in many ways IBM's most ferociously competitive market-place. Britain's free-trading philosophy and its mouth-watering proximity to Europe make it a magnet for every computer, chip and software provider in the universe, while the length of its current recession puts them all under unprecedented pressure merely to survive. Everyone recognises that the difficulties faced here - and any successful solutions that are devised for them - are likely to sort out the industry's winners and losers for years ahead.
Essentially, the Temple blueprint fell into six key parts. First he wanted to build up the direct sales force so that the majority of his people, at any given time, were not sitting in remote offices but out in the field talking to potential buyers, and helping to define and resolve their problems. The ratio of sales to support staff, which stood at 1:1 when he arrived back last year, was targeted to move to 3:1 by this spring, and the switch is now largely complete. Simultaneously he instituted a programme aimed at achieving a 20% improvement in staff effectiveness, measured not necessarily in sales volume but in speed of response and quality of service. In pursuit of that goal, he reckons he has already cut the number of layers of management in the UK pyramid from seven to four, and elminated roughly 90% of the bureaucratic garbage that used to clutter its internal communication channels. The last 10%, he admits, may be rather harder to shift. But Michael Moore, who looks after data-processing for Mocatta and Goldsmith, the City bullion dealers, and is chairman of the IBM (UK) Users Group, is already an admirer. "He promised to cut out the crap," he says. "And to a very large extent he has succeeded."
The next important strand involves a greater concentration on computing services. This is at present the fastest growing sector of the industry - developing custom-tailored software, advising on systems integration and the ever more advanced use of information technology, and even occasionally taking over the management of a client's installation. Temple is progressively redeploying staff to build up the numbers thus engaged from the 400 he found when he arrived to something more like 2,000. As a customer, though, Moore is rather less happy about this development. It means, he points out, that a lot of people are now being asked to pay for something they were used to getting free, and with margins paper-thin in this area the end result may not be worth the competitive candle.
The same may apply, in the short-term, to the company's new, but perhaps rather belated discovery of the small businessman and the professional partnership. Temple has now added a commercial sector, aimed deliberately at this market, to sit alongside the more traditional and heavyweight areas like manufacturing, banking, finance and large government institutions. But given the gloomy clouds still sitting over the High Street retailers this may take some time to pay off.
More immediately effective are likely to be the two big structural innovations which round out the Temple programme. On the product side he has reshaped the various manufacturing units responsible for items like memory-storage, open systems or workstations into a series of self-contained and semi-autonomous profit centres. And similarly, with marketing, he has moved a long way from the old pattern of geographically-based, general-purpose branches. The emphasis now requires a much more specialised and business-oriented stance, where the particular demands of, say, local government or the public sector, can be met by a team of experts with 100% understanding of the customer's problems.
Underlying the Temple thinking is a vision of revivified IBM, no longer plagued by sluggishness and overweight, but broken up into a series of what he sees as the equivalent of 100-person companies, where everyone knows what he or she is personally responsible for, and there is no room for even a single ounce of excess fat.
To gauge how far he has managed to proceed down that road a good place to look is Basingstoke, where Adam Johnston was picked out 18 months ago, as one of IBM's local high-flyers, to take some of the first tentative steps into market specialisation. At that time he was based in Nottingham, a fairly typical branch, except that the biggest customers, unusually, were a couple of major national retailers, Boots the Chemist and Sears. Local government, though already seen as moderately important, accounted for barely 7% of turnover, and figured with little more prominence in the life of the rest of the 21 IBM offices which took an occasional, fragmented interest in the affairs of their local town halls, he was flattered to be picked out by Cleaver to head up a new unit looking after "local authorities and health", but mainly because it presented an unexpectedly early upward step in his management career. Otherwise it seemed only a slight variant on what he was already doing.
That illusion lasted for about five months, until the May 1991 publication of "The Temple Plan". At that point health, where the clients are hospitals, budget-holding GPs and NHS managers, was hived away to a separate unit, and Johnston's team was left to concentrate exclusively on the challenges and opportunities presented by Britain's 514 assorted counties, regions and municipal boroughs. The difference this made, he says now, was little short of revelatory. The old branches, where he cut his executive teeth during the early and middle 1980s, were primarily concerned with marketing. They advised, and often loftily told the purchaser what he needed to buy from the IBM product catalogue and then just passed the orders along to the appropriate manufacturing and installation units.
But that is now history. What Johnston runs today is a full-scale business, with its own corporate structure embracing everything from security staff to finance director. It has its own R and D, for example, in the shape of a market development unit whose job is to anticipate future opportunities, like the massive prospective expansion in community care, and start working up products, particularly in the software area, so that they are available as soon as the nation's social service directors get clearance on their budget requests. It has manufacturing, with a big Council Tax programme already packaged and on the shelves against the day when Poll Tax finally bites the dust. It has a Market Operations group, charged with working the optimum way to sell when the crucial spending decisions, though collectively running into billions, are divided out among a small army of committee chairman, chief executives and IT managers.
More important than any of that, he reckons, is that in less than a year, his staff has evolved from a collection of narrow individualists into a mutually supportive team. "I have 12 managers reporting to me, all different, all doing different jobs, but all recognising that we're in it together and depending on each other for results."
It is far from the easiest territory to colonise, at a time of budget-capping and intense pressure to hold down public spending - especially in a market long cultivated and near-monopolised for the former national champion" ICL. But Johnston is certain he is now making headway, and is especially proud of netting the oil-rich Shetland Islands authority "which is so remote and isolated that under the old system we should have had a job getting anyone to authorise the air fare."
So far, so good, seems to be a fair verdict; and there is impressive progress to be reported, too, on other significant Temple initiatives, like his determined effort to link staff pay and promotion prospects to a carefully worked-out assessment of "customer satisfaction". This relies on an elaborate system of surveys in which purchasers are asked to rate every aspect of the service they have been given from delivery-promises to the politeness and efficiency of the girl on the switchboard, and response rates, according to Johnston, who is an enthusiastic convert to the system, have been gratifyingly high. Now we are working on the fine-tuning."
Unfortunately, though, there is a limit, to what can be achieved within one subsidiary of a multinational monolith, and there is little conclusive evidence, as yet, that IBM as a global entity has definitively mended its ways. No fewer than four of its most senior executives - two of them confidently nominated as potential future chairman - resigned in the first two months of this year, and everywhere policy differences appear unresolved.
The sheer size of the operation remains awesome. It contains within itself, for instance, the world's largest personal computer company, a software business five times larger than its former ally (and now arch-rival) Microsoft, and a disk-storage producer that dwarfs everyone else in that vital niche. Yet it is regularly wrong-footed, reaching the market either too late or with the wrong product at what turns out to be a non-competitive price. It still produces half the world's mainframes, where demand is virtually static; but in mini-computers, which now almost match the dinosaurs in power, and far outdistance them in flexibility, its share is a bare 15%. In PCs, where "IBM compatible" remains the standard that almost everyone but the Apple Macintosh stable is forced to follow, its own actual penetration is down to a lowly one machine in 10. In laptops it is still struggling to establish a worthwhile presence, and the US launch of its first notebook, announced for this February, was mysteriously postponed - possibly because it was slated in Europe, where it has now appeared, as overweight and too sophisticated for its potential customers' needs. While the global information technology market grew by an annual 15% through the later 1980s, IBM managed only a meagre 6% and in 1990-91 even went into reverse.
Drastic changes have been instituted in an attempt to stop the rot. The company once famous for its aloofness is now enmeshed in a web of alliances - most notably with Apple and Motorola in a high-profile bid to develop new high-powered chips and open-systems operating standards. The latest is with France deeply-troubled Bull, whose Zenith brand of notebook computers even mighty IBM says it will be happy to sell under its own name. But that, in itself, is a development which would have been quite unthinkable, even two or three years ago. So would last year's decision to give the various product groups like memory storage, not only a higher degree of commercial autonomy but the freedom to sell their equipment on the open market.
All these moves may well be highly sensible, and the basis for another half-century of IBM triumph. But the changes of tack have been so frequent and violent recently, and the turnover in people and job-descriptions so kaleidoscopic, that unless more solid proof of recovery is to hand, customers, investors and trade rivals are at one in preferring to suspend judgement. Michael Moore, of the UK User Group, probably speaks for all of them when he says: "What I need to see is a couple of years of stability. Then I'll start to believe they are really back on track."