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IBM executive discusses company’s history of transformation at Centennial Lecture

The ups and downs of business

It’s difficult to imagine a world without IBM. But that was close to reality in the early 1990s when the personal computer market was beginning to skyrocket. The technology juggernaut failed to stay attuned to the larger solutions that businesses demanded.

The root of IBM’s problem stemmed from the fact that it had 13 divisions - nicknamed Baby Blues - each run in a decentralized manner, with a focus on bringing in revenue.

“We were not very successful,” said Mark Loughridge, ’82, senior vice president and the company’s chief financial officer for Finance and Enterprise Transformation. Loughridge spoke in May at Gleacher Center as part of the company’s Centennial Lecture series held on college campuses around the world.

The emphasis on revenue came at the expense of the company’s founding goals, which were to develop solutions that bring customer satisfaction and profits. In 1991, the bloated company’s balance sheet showed its first loss in history, Loughridge said. “We used to get together on Thursday nights and say, ‘Are we going to make payroll?’ Imagine that, the IBM Corporation unable to make payroll.”

The company’s problems were highlighted in its 1992 annual report, which stated that, “Each business must be competitive in its own rights, sufficiently independent so the possibility of separate ownership could be evaluated.”

“I can’t imagine this,” Loughridge said. “We are going to put it in the annual report that the objective is, in a sense, to grow these businesses so they can be later divested. What does that have to do with your base business? What does that have to do with building a value structure for your clients? What does that have to do with you providing them that continuity over time?”

To right the ship, under then-chief executive officer Louis V. Gerstner Jr., the company centralized each unit’s accounting under the corporate CFO, which allowed IBM to better understand the state of its business and compete more effectively in the global market.  IBM then returned to focusing on the integrated solutions that built the company, Loughridge said.

With their priorities realigned, “We controlled the information,” Loughridge said. “Now we could put together global brands, a global business. We could see what was ahead of us. We would see how we were performing.”

Division executives who stoically held on to their decentralization mindset lost their jobs. Thanks to a “$10 billion revolver” from several banks, the company was able to stay afloat long enough to right its balance sheet, said Loughridge. “Honest to goodness: No $10 billion revolver, no IBM.”

“From those days, things started to change,” Loughridge said. The company has since regained its financial footing and its industry leadership position. It continues to transform as technology, business, and society evolve.

A history of bold moves

Loughridge took the lecture’s attendees on a tour of the company’s history, starting from its beginnings in 1911 as the developer and manufacturer of time-keeping and punch card systems for businesses. Then headed by Thomas Watson Sr., who placed an emphasis on research and development, the company adopted the International Business Machines Corporation title in 1924. By 1929, 90 percent of the company’s product line was created by the R&D department: “That’s pretty remarkable,” Loughridge said.

The company endured when Watson Sr.’s son, Thomas Watson Jr., took the reins in 1956 and soon adopted the company’s System 360 line of computers, which used compatible software, peripherals, and seamless upgrades.

Previously, “the peripherals were built into the existing platform, so you couldn’t use them on new platforms,” Loughridge said. “The products lacked the ability to scale and drive efficiency. The conclusion was to move to System 360. It was called System 360 because the idea was it had 360 degrees of compatibility.”

Perhaps most striking, Loughridge said, was that Watson Jr. turned his back on the company’s current product line, even though it held a leading position among computer makers: “I can’t believe he did that. There was no chance of going back if it had all gone overboard.”

But, Loughridge said, “It did pay off. Revenue grew four times over the decade. And we went from 29th to fifth on the Fortune 500.”

After Loughridge’s talk, Irving Wladawsky-Berger, a former IBM engineer, spoke about the development of Watson, an artificial intelligence machine that uses IBM’s DeepQA technology to answer questions posed in natural language.

In February of this year, the machine played on Jeopardy! and bested the game show’s two largest all-time winners. Wladawsky-Berger said the game show was the perfect opportunity to showcase Watson’s future use as a help desk assistant, for example, or a health care diagnostic system.

“With human language, it’s all open-ended,” Wladawsky-Berger said. “There is no limit. There are no rules. You can ask any question. In Jeopardy!, you have this element of being unstructured, you have this element of being totally open-ended. And then you add the element of subtlety, where the meaning can only be distinguished when you put things in context, which is the way a human operates.”

“I enjoyed learning about Watson. I think it’s innovation in the most critical way,” said Manav Bansal, a student in the Evening MBA Program. Bansal said he attended the lecture specifically “to learn more about IBM, Watson, and meet IBM employees.”

—Patrick Ferrell

—photo by Beth Rooney