Adding It Up at IBM
CFO Mark Loughridge has been at the forefront of the technology giant's remarkable transformation.
The modern CFO aims to run a top-performing finance operation and take a lead role in setting strategy. Mark Loughridge, '82, who last year was named to the No. 1 spot in the Wall Street Journal's first-ever ranking of CFOs, does just that. The Journal cited Loughridge's skill in communicating IBM's complex story to investors and developing a detailed financial roadmap - setting ambitious but achievable long-term objectives against which the company builds its strategies. Loughridge, who was named senior vice president and CFO in May 2004, assumed added responsibility for enterprise transformation in July 2010.
Loughridge has been at the forefront of IBM's reinvention from the computer behemoth known as Big Blue to a nimble and diversified provider of hardware, software, and IT services. He started at the company in 1977 as a development engineer and rose through the ranks. He was assistant controller during the company's darkest days of the early 1990s when the company's inability to adapt to changing markets combined with a series of strategic missteps to threaten its viability. In the remarkable turnaround that followed, IBM showed that big companies can return from the brink and learn to continuously transform. In a recent interview, Loughridge discussed his journey at IBM.
Chicago Booth Magazine: How did you tackle the problem of communicating the IBM story in the period after the company sold its personal computer business?
Loughridge: After the sale of the PC business, investors continued to say that we were hard to model compared with more "pure play" technology companies.
We believed we could provide more clarity and transparency, and align our investor communications with our long-term view of the business, which is based on the central premise that IBM has a high value model that grows profit, earnings per share, and cash to ensure we can invest in the business and provide returns to shareholders.
The long-term investor now understands the model and can see the progress we are making. That has been a real change. We don't get comments anymore that, "IBM is too complex" or, "I don't understand IBM."
CBM: You also developed a roadmap to show investors exactly how IBM would grow profits and operating earnings per share, first through 2010 and subsequently through 2015. How has this been beneficial?
Loughridge: The roadmap is a framework and a consistent set of long-term objectives against which we can build out strategies and drive our business in the short-term. Like most large organizations, IBM always has had both a strategic and execution planning process. The roadmap gives us an added dimension. It provides a disciplined framework for investing in higher value areas and shifting away from commodity or nonstrategic businesses.
CBM: After years of dominance, IBM suffered a debilitating downturn, attributed to a series of missteps, perhaps most famously, allowing suppliers Intel and Microsoft to retain proprietary technology for personal computers. Fortune magazine in a 1993 cover story dismissed IBM as a "dinosaur." What was it like during that period?
Loughridge: It was very, very tough. Most people don't realize that [in 1993] we were close to not being able to make payroll, that we had 50,000 to 100,000 employees that we could not afford, or that we had four or five major sites that had to close. We were scrambling to negotiate a $10 billion revolver with the banks to secure the balance sheet. In a three-year period, we had $16 billion in accumulated losses, the first losses in the history of the company.
CBM: Who led the recovery - was it newcomers or incumbents, or a combination?
Loughridge: Lou Gerstner joined the company as CEO in 1993 [after heading RJR Nabisco]. We explained the depth of the problem and I think he was quite surprised that it was as bad as it was. There was a mix of new executives that joined IBM and the existing executive team had a lot of capability and talent. It was a period of gripping events on a day-by-day basis. The corporate staff never went home. I remember weekends when everybody was in the office by 8 a.m. on Saturday and stayed until noon on Sunday.
CBM: What were the first steps taken to start turning around the company?
Loughridge: IBM had become an international company. Organizations in Japan, France, Germany, Brazil, and Canada were powerful. They had their own boards of directors. But information was held close to the vest. Could France tell you a lot about IBM France? Absolutely. Could we tell you about our operation in France, let alone all the 170 countries we operated in? No, we couldn't.
As we wrestled with that cumbersome and unmanageable information system for a couple of quarters, we finally came out with a set of action plans that put every single account in the world in a central accounting information system. We said, "Look, we're going to manage the information centrally, but share it broadly for collaborative problem solving."
We built one information system, one information structure, seamlessly around the world. Once we did that, we could do the accounting, then move to doing the planning. And once we could do the planning, we could do the forecasting. Once we could do the forecasting, we could establish the global structure that underpins the way we do business today.
CBM: Did you ever consider leaving IBM?
Loughridge: Even though the work was tough, it was really quite invigorating. As we began to make progress, that was very, very rewarding. To be a part of that turnaround team was a great experience. It was probably one of the best experiences that I've had in my career.
CBM: When did you know you were out of the woods?
Loughridge: It was one step at a time. By 1995, we had stabilized the balance sheet and were starting to generate free cash flow. I would say by the end of that three-year period, we were probably still in the sick bay, but we were no longer on the endangered list.
CBM: You took over as CFO just when IBM sold its PC business to Lenovo. How did you approach that decision to sell?
Loughridge: It was difficult, but it was the right decision for IBM. We get out of businesses when they no longer fit our strategy or our model, but we have great partnerships today with companies that have taken these opportunities forward. As a result, we are better focused and able to fuel our continuous transformation.
CBM: How would you describe the subsequent decade of reinvention?
Loughridge: We spent a decade becoming what we call a Globally Integrated Enterprise. In brief, this multinational model essentially replicated the operational footprint of IBM in every region we do business. In a GIE, you have a go-to-market footprint and focus in every country, but we create shared, globally integrated functions where they make the most sense, based on expertise, performance, cost, and other factors.
When we move into a new region we don't have to recreate the IBM footprint, and can immediately deliver our scale advantages and expertise, and the local team can focus on the client.
CBM: IBM's growth has been fueled by a few key growth initiatives. How would you describe them?
Loughridge: We have four major growth initiatives aligned with major shifts in technology and demographics: growth markets, cloud computing, business analytics, and Smarter Planet.
Growth markets is a focus on fast emerging countries where we see not only rapid growth but also investment in critical infrastructure that will buttress the future.
Cloud is a new model of delivering IT services. It's driving new levels of efficiency and very different economics that enable new kinds of applications and business models.
Business analytics is a common thread through all of these. It's the idea of harnessing data, gaining insight, and integrating that into everything you do.
Today, the tremendous amount of data, particularly unstructured and uncertain data from mobile devices and social networks, presents both a huge opportunity and a real source of complexity. Each of these areas requires sustained investment in technology, capability, and skills.
While we were acquiring analytics capability, like SPSS, an offshoot of the University of Chicago, we also were building capability organically. In fact, we have more than 400 mathematicians in IBM Research and have built what is probably the largest math algorithm department in any publicly held company. It's the integration of these capabilities into solutions for our clients that drives our success in the market.
CBM: IBM has aggressively marketed its Smarter Planet initiative. What does that involve?
Loughridge: Smarter Planet is what we call the transformation of business and institutional systems that have become instrumented and interconnected, and that would benefit from being more "intelligent" - from railways and equipment maintenance to retail front-office transformation and end-to-end commerce.
In New York, police precincts start every day with a data sheet. That changed the way the police department operates. Now supervisors deploy officers based on where they see problems emerging.
We're setting up systems in Rio de Janeiro to help the city get ready for the upcoming World Cup and Summer Olympics. City officials now can use analytics to react to storms, manage traffic, and alleviate crime. Smarter Planet is all-encompassing.
CBM: IBM's growth has been propelled by dozens of acquisitions. What is your approach for identifying and then quickly integrating these companies into the culture?
Loughridge: Acquisitions, like organic innovation, are a strong discipline at IBM and part of our model. We look for three things generally: Does the company have scalable intellectually property? Does it build on or extend a capability IBM already has? And, can it take advantage of our reach into 170 countries?
Historically, organizations run into trouble when they expect acquisitions to fulfill a new strategy or provide the basis for transformation. That is difficult to execute both operationally and in terms of reasonable financial returns. Our formula provides a balanced approach and has driven an excellent track record with more than 140 acquisitions since 2000.
We know from our analysis that we will be much more successful with ten $1 billion acquisitions than with one $10 billion acquisition. In addition, our acquisitions program has served as a proving ground for executive talent. We have as many as 10 to 15 integration teams going at once. In 2010, we integrated 17 acquisitions at the same time.
CBM: How has IBM's culture changed during your tenure?
Loughridge: IBM has changed certainly in every dimension of diversity. The most profound shift recently has been working across the cultures of 170 countries as we become much more globally integrated. One impact of building capability throughout the growth markets is that half of our employees have been with IBM less than five years. A strong culture is the key more than ever to making IBM work despite the differences and distance between individuals.
CBM: IBMers were known for wearing a corporate uniform of a dark suit and white tie. That's no longer the case, right?
Loughridge: It's funny that people still think of that. Certainly that hasn't been the case for at least 20 years. If you walk around the lab, or one of the big research facilities in IBM, you're going to see cutoffs and sandals.
CBM: How has the role of the CFO at IBM changed since you assumed the job?
Loughridge: As you would expect, not only the CFO role, but IBM's finance function has changed dramatically, positioning us to better assist in the transformation of the company as a whole. A decade ago about 70 percent of our work involved collecting and managing data and managing processes while 30 percent was in high value areas like deep analytics and decision support. That ratio has essentially flipped so that most of our team members today are trusted advisers to the business.
CBM: How did you come to begin your career at IBM? What piqued your interest in finance?
Loughridge: I started my career at IBM as an engineer in development after graduating from Stanford in mechanical engineering. I went back for my MBA at Chicago Booth to broaden my skill set and perspective. When I returned to IBM, I went into operations and strategic planning, which at IBM is a very close discipline to finance. The organization is called project pricing. It is essentially the financial management of the product category from origination through the complete product life cycle. A perfect match for me, and I never looked back. I never thought of being the controller or CFO.
CBM: What lessons from Booth have resonated with you, or have you been able to apply in your career?
Loughridge: I think the attention to the data to interpret business issues. I learned that discipline at Chicago and have relied on it across many opportunities within IBM.
CBM: Did you have some favorite professors?
Loughridge: I particularly remember my accounting class with Roman Weil, statistics with professor William Wecker, and operations research with professor Willard Zangwill. All of these were challenging, data-intensive courses. I still remember professor Weil teaching us that accounting is the language of business. A great lesson for us all.
CBM: Why did you get involved in Booth's CFO Advisory Board and what is the importance of the CFO Forum?
Loughridge: The board is an opportunity to give back to a university that has done so much for me. The CFO Forum, (see Bringing Together Alumni CFOs), brings focus to an exciting career path. The academic perspective is complemented by the real-world experience of the many Booth alumni who are CFOs. It also is a great way to continue your education and build contacts with a very talented group of people, both alumni and academics.
CBM: What do you read for the job and what do you read to relax?
Loughridge: For the job I read the Wall Street Journal, Financial Times, and New York Times as well as the Economist, Wired, and Rolling Stone.
For personal reading, I've enjoyed a couple of books about Africa - West With the Night by Beryl Markham and Things Fall Apart by Chinua Achebe. I also enjoyed Shantaram by Gregory David Roberts about India and Angle of Repose by Wallace Stegner about the western frontier of the United States.
CBM: Other hobbies and interests?
Loughridge: I enjoy downhill skiing, boating on the Long Island Sound, and playing the guitar.
CBM: What keeps you up at night?
Loughridge: That 1993 Fortune magazine cover story, with IBM center stage and the headline "Dinosaurs?" is still haunting. The well-written article by Carol Loomis artfully contrasted a 1963 speech by then-chairman Thomas Watson Jr. on what it takes to be a great corporation to the predicament IBM found itself in. Watson argued that it is harder to keep a business great than to build it and, I have to say, in my experience, it is true. The only path as a business or as an individual is continuous transformation.
That said, I sleep quite well!
Chief financial officers today are taking on increasingly public roles, communicating complex decisions about risk management and capital allocation to a broad audience. Toss into the mix an uncertain regulatory environment, global instability, and a gyrating stock market, and CFOs face plenty of new opportunities to hone their strategic thinking.
At the third annual Chicago Booth CFO Forum, held April 3 - 4, at Gleacher Center, chief financial officers from the ranks of Booth alumni met to learn about cutting-edge faculty research and discuss issues they face in their high-profile positions. Attendees also had the opportunity to interact with students and, perhaps most importantly, forge new relationships and strengthen old ones with fellow CFO alumni.
The genesis of the forum came from suggestions by David Anderson, '77, CFO of Honeywell International Inc., and David Kirchheimer, '78, CFO of Oaktree Capital Management LP, about ways to connect chief financial officers who have a shared background - a Booth education.
"There are a lot of companies where the CFO is a graduate of Booth, which means the school is doing something right," Anderson said. "I felt that could really be a focal point for communication on topics that are relevant both for professional development and personal development."
As co-chairs of the CFO Advisory Board, Anderson and Kirchheimer work with the board's 10 other members - including IBM's Mark Loughridge, '82, and other prominent CFOs - to choose themes for the yearly forum and publicize the invitation-only event to alumni.
CFOs of more than 250 US corporations are invited to the forum. The companies, of which two-thirds are public, represent a variety of industries, including technology, financial services, retail, manufacturing, consumer goods, pharmaceuticals, and energy. Booth alumni are CFOs at 28 Fortune 500 companies, representing a market capitalization of more than $985 billion. Nine Booth alumni are CFOs at Fortune 100 companies.
Highlights of this year's CFO Forum included a discussion on managing "big data" and a panel session with a CEO, a board member, and a key investor offering their perspectives on how CFOs add value to a company. The opening session featured a presentation by Richard Thaler, Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics.
The annual event reinforces Booth's status as a top training ground for finance executives. "I think of this relationship as mutually beneficial," said dean Sunil Kumar, George Pratt Shultz Professor of Operations Management. "Not only do the CFOs benefit from discussions with Booth thought leaders, but also, our faculty learn from the financial executives attending the forum."
Because participation is limited to current CFOs, attendees are able to have candid conversations about the challenges they face. "There is complete trust and a high degree of shared values," Kirchheimer said. "It's energizing to engage with people outside the normal course of your job. The juices are really flowing by the time you get back to your desk in the office."
Booth also hosts regional CFO events in Chicago, New York, and Los Angeles to keep the discussions begun at CFO Forum sessions going throughout the year.
As an outgrowth of the CFO Forum, Booth is launching a one-week Executive Education program for prospective CFOs - executives who are at senior levels such as deputy CFOs, treasurers, and senior vice presidents. The inaugural program will be held May 20 - 24 at Gleacher Center, with topics including capital allocation, risk management, financial reporting, and strategic communication.
"The title of the role may be chief financial officer, but the person who occupies that role is really a strategic partner in everything the firm does," said program director Randall Kroszner, Norman R. Bobins Professor of Economics and a former governor of the Federal Reserve System. "We're trying to help people broaden from their specific experience into all-around high-performance leadership." - Amy Merrick
Or contact Catheryn Fuller for more information.