business

Jack Welch: "The Opportunities Are Enormous"

Now a humble pensioner, GE's newly retired titan directs his legendary candor at everything from Enron to the HP-Compaq merger

BusinessWeek Senior Writer John A. Byrne, co-author of Jack: Straight from the Gut, reunited with former General Electric Chairman John F. Welch on Dec. 6 at a BusinessWeek conference in San Francisco. In a wide-ranging interview before an audience, Welch spoke about topics as diverse as his mother's influence on his leadership style and current topics, such as the meltdown at Enron, the proxy battle over Hewlett-Packard's attempt to merger with Compaq, and the chances for an economic recovery next year. Here are edited excerpts from their conversation:

Q: Jack, some of the most fun we had together during all those hours of working on the book were our discussions about the influence your mother had in your life -- and how it defines and informs many of the ideas and management philosophies you've had over the years. Tell us about that hockey game and when you were a senior in high school.

A:

Well, for those of you who haven't read the book -- I'm a shameless hawker, so I'll be out here hawking it -- but this is the story of an only child to an Irish mother. I was born when she was 40 after many years of her trying to have children, so I became the apple of her eye and everything I did turned out to be either a cheer or a kick. And one of the things that happened to me -- I have a speech impediment, a stammer, and I would stammer and I'd come home a little concerned about my stammer because I was in school. She'd say, "Jack, that's no problem at all. Just because you're so smart, your brain works faster than your tongue."

And she convinced me of that and I ended up believing it. And it was that sort of stuff that went on forever in our relationship. This particular hockey game -- I was captain of this team that was pretty mediocre. I had scored two goals. We were in overtime. It was 2-2. The other team scored quickly in the first overtime period. And we lost the game 3-2. It was the final game of the year and I had an Irish fit. So I threw the stick across the ice and skated into the locker room after I picked up the stick.

Meantime the team had been in the locker room, getting undressed. The coach was consoling everyone and I skated in, sat down, started taking my skates off. The door flies open. My mother charges into the locker room. She grabs me by the shirt, picks me up, and says, "You punk. If you don't know how to lose, you shouldn't be playing the game."

And that's turned out to be an interesting part of my management style -- which for years has been hugging and kicking, and I guess John's little opening anecdote sort of reflected that.

Q: I think your mother provided a sense of self-confidence. What about facing reality?

A:

My mother would say, "Jack that's the way it is. Face it."

That's the way it is. One of the problems we all have is hope -- "I hope it'll get better." Hope is a nice word in a romance. It's not a hell of a good word in business. And trying to get people to face reality and see the world the way it really is is an absolutely critical aspect of leadership, in my view. And every one of you in this room has to deal with that because there's always somebody [saying], "It'll get better tomorrow. Let's wait it out," whether it's personnel, whether it's Mary or Joe. "Let's give 'em six more months. They've been there 20 years. You know the situation. Let's hope they'll change."

Let's hope that the economy will pick up tomorrow. Plan that it won't! If it does, it's all good news.

Q: And even now, in a worsening economy, some of the things that we see companies doing go to the heart of facing reality. For example, across-the-board cutbacks of people or freezing wages so that you don't have to sacrifice jobs. What do you think of concepts like that?

A:

I hope I don't offend anybody in the room, but I think it's the worst idea possible. I think every leader has an obligation -- the absolute obligation -- to treat everyone fairly. But they also have the obligation to treat everyone differently. Because people aren't all the same, and the last thing you ever want to do, in my opinion, is let the best in your organization be treated like the worst in your organization. It does nothing for your future.

So at a time like this, differentiation is more important than ever. In difficult times your best must be hugged, loved, kissed, rewarded, paid -- everything. And your worst must be the people that leave, because your best are going to take you to the next game. And the idea of let's all share the pain equally, or let's freeze salaries altogether -- it's ass-backwards. It's absolutely ass-backwards.

And to be managing in that way is just frankly -- it's a sign of weakness. People aren't the same. Business is, in my opinion, all about the team that fields the best players. It's not about an idea. An idea goes away. Somebody catches up with it. It's not about a widget.

Q: So you're saying while you're laying people off you should be giving raises to your best people?

A:

Absolutely. Absolutely! They should be feeling great about everything. They should be feeling that they have to find a way to get things done tomorrow. There are more opportunities out there today in tough times than there are in good times. There are more companies to acquire, to grab. When there's change, there's opportunity.

This is the time for your best to be looking at opportunities. I think the company I left will make more acquisitions in this quarter than they have made in the first three quarters. I think the opportunities are enormous right now -- if you believe there will be a tomorrow.

In every company, differentiation is never more important than it is in times of trouble, and that's the time when everyone tends to go to the well and equalize rather than differentiate. It's ironic. I don't know whether it's human nature or what it is, but it's at this moment.

The other thing is...layoffs. I think you have an enormous obligation in a layoff -- an enormous obligation to be fair, to look at yourself in the mirror, [and ask] did you treat the people fairly, did you pay them well, and then it's over. Because those people are gone. You've got to be treating the people that are going to be there right because they are the ones that are going to carry you forward.

And I've talked to a lot of young CEOs in California who are mourning, who are spending all their time over those that have left rather than those that are staying. I'm not trying to be harsh here. I'm not trying to be Attila the Hun in this conversation. I'm trying to tell you that what counts is the team that you're going to put on the field tomorrow, not the team you just cut from the squad. And sports teams do it every day.

Q: One of the things that you said -- since this is a digitization conference -- you admit that you nearly retired [as] a Neanderthal, that you came to the e-party late. One of the things you say is that when it hits you, it really hits you. Can you talk to us a little bit about the evolution of your thinking on digitization -- how it affected you and is affecting GE?

A:

As everyone in this room knows, knowledge of the Internet was inversely proportional to altitude in the organization and age. And I unfortunately had both of those things going against me in understanding exactly what the impact would be of the Internet. Once I got involved in it, I saw it. It became clear to me. As you know, I was giving those presentations around the country trying to convince Fidelity and Putnam and all the other investment houses that the Internet was really made for big companies.

Big, old, and getting it is a hell of a lot better than new because [the Internet] was not a new business. This was a new technology, and this technology -- people were still selling the way they always sold. They used to sell from a wagon to somebody. Now they were selling a different way. But the facts are somebody had to satisfy a customer and somebody had to buy it and somebody had to make it and offer it.

There was a different medium and better way and more efficient way of doing it. So once we got to understand why Big Old could get it, we went down a path of three things. One, we copied the dot-coms. We went into the option game, but we never wanted to have an intermediary in front of us. So the idea of bringing in -- and no offense to anybody else here -- the Commerce Ones of the game, or these other guys who showed up and got between us and our suppliers -- anybody who did that ought to be shot. Your suppliers are your key. Why hand these guys your supplier base?

Q: Or your customers, right?

A:

That's the other side, the sell side. We're Six Sigma, with a global supply chain, with a global system. Why would you want to get somebody in the middle of it and teach him it? We're not some kids who have gone and put together a Web site with an auction for 17,000 bucks in four weeks. We realized that it wasn't Nobel Prize work, and once we realized it wasn't Nobel Prize work, we followed it up with every business running their own auction.

This year GE will auction some $15 billion on the Net globally and we'll do it ourselves with our own systems and our own supply chain and our own thing. On the sell side, the same thing. We never wanted somebody between us and our customer. We were never going to give somebody else the game. So we copied them and did that.

But the biggest opportunity for big companies has come by far in the digitization of internal processes. The savings that are occurring in big companies -- and are going to occur -- are so enormous.

For example -- the old system of the customer, the salesperson, the customer-service rep, and the plan. The customer wants to know when they're going to get the delivery, the salesperson says to them, "let's check with customer service" and...they lie by a day and somebody else lies by a day, and eventually you've got all these people on the phone.

Today most of our customers in several of our businesses have total track-and-trace [capability]. They know exactly where their things are, and the customer-service organizations are cut in half and the efficiencies are enormous.

Q: It would be helpful to talk a little bit about -- I know you hate this sometimes -- the operating system as it relates to how you launch digitization in a $130 billion company, with 22 business units around the world. How did you get on the digitization bandwagon, how did you get the company to move quickly on it?

A:

Well, I believe that in any initiative, you can't have a flavor of the month. When you believe something is profound in a company, you can not be a logical leader. You have to go to the lunatic fringe. There is no way that logic is what you need to change people.

Your e-business leaders have to be your very best, and they had to come out of the marketing manager, the head of R&D. The minute you put anybody that isn't the best in charge of something you say is important, it dies.

So it starts out as a seed and the seed becomes a flower, only because you put your very best people [into it]. It's back to that first point. This whole thing is about fielding the best team. So when you say an initiative is important, you've got to go to your absolute key leaders, the people that everyone in the organization looks to, and put them in charge of the issue. Put them absolutely in charge of the issue because then the organization will say they mean it.

And they will go for it. Most organizations fail in driving change. For example, look at quality programs. Everyone has had a quality program. Everyone who has ever been in business has had a quality program. Generally they put Harry, who is three years from retirement, in charge of the quality program, and they get banners to go around the room -- "Quality is our most important concern." And Harry, old Harry, comes plodding out to lead the charge.

He hasn't got a prayer. The organization yawns. They are practically in the sack over it. It doesn't work -- until you take your youngest, best, perhaps next CEO, put him in charge of it, make it work. This isn't rocket science. When you give a signal, you better back it up with your best.

Nobody is too important to lead the initiative you say is important. Think of that. No one is doing something in your business -- getting a sale, having a key customer, working on an R&D project -- doing anything that's more important than something you say is going to change the company. Because if you say it's going to change the company, you better back it up with every single action because the organization knows exactly what's going on.

Q: Tell us how you think September 11 changed things -- changed the world, changed business.

A:

One thing it's changed is...attitudes. The galvanization of the country is incredible. I've been on 17 college campuses from the East Coast to the West Coast in the last two months talking to 1,500 students at a time. And you walk down a campus today and you see flags hanging out of windows and they're not burning.

It's a big deal. And kids are focused on jobs. Real jobs. On doing real things. And there's an enthusiasm and a lack of cynicism that is unbelievable. It's the '50s -- it's the '50s all over again, and it's remarkable.

Now clearly globalization has taken a hit in that there is some sand in the gears because most of us have supply chains that are all over the world that we've had to lengthen. Travel has been curtailed to some extent. But I don't think that's -- if we can get terrorism under control, that's not going to be a long-term impact. I think, though, without question, the issue of globalization will be highlighted again.

And I hope everyone in this room believes as I believe that globalization is in fact the only game in town that will give the have-nots what the haves have.... Ireland is the best example. Go to Ireland today and see a booming economy that came because jobs came from the U.S. Jobs came from Europe to make Ireland a greater place.

The Irish are worried now because Gateway announced they're moving a plant to India and they're saying, "What do we do now? Globalization is killing us." They've just been benefiting for 20 years from globalization but now they're concerned that Gateway is moving to India. They have to move up the food chain just the way we have here. As we've lost jobs in one industry after another, the low value-added jobs, we created the lowest unemployment we've had in our country in the '90s. So it works. India. China. Eastern Europe. Go to Prague, Warsaw, or Budapest. They are different cities than they were.

Now it hasn't cured everything. Globalization hasn't cured cancer. It hasn't touched parts of the world like Afghanistan. And we're going to have to solve some of these problems. But globalization is the best game in town.

There are three crowds against globalization. There's the labor unions in the developed countries. I think they have a reason to be concerned, and they have a reason to voice concerns because jobs are being moved. The environmentalists, I don't think they have the slightest reason to be concerned because every time you move a plant to a new place you upgrade the neighborhood. You put in global standards. You put in modern plants. And all the plants around it get improved.

And of course, the anarchists -- I don't know what they think. But generally speaking, globalization is going forward, and I think that everyone in this room has got to believe in globalization because it is getting what the haves have.

Q: In the last two weeks, we've seen an incredible meltdown of a major corporation -- Enron. What do you make of that? Who is to blame?

A:

You really put me on the spot here. I'm reasonably familiar with that situation, having done a lot of business with them over the years. Enron changed as a company. Enron was an oil-and-gas producer, a utility provider, an energy provider. And a pretty solid, very solid, first-class deliverer of oil and gas and energy.

Enron did what I did in a way, and I got screwed up with that too. I bought Kidder Peabody, which was an investment banking firm, in the '80s, and I got into trading and things like that. We had a rogue trader called Joe Jett who had trades that we didn't understand and we reported $400 million of false profits because we didn't really get the business.

Well, Enron jumped from their core business into a trading business. They went from people in overalls and wrenches who ran pipelines and utilities to a trading business where people wore suspenders and had $10 million salaries. And when you change cultures that profoundly and you don't know the business and you hire a whole new team to come in and do it and get some early success which feels good, in this business, it proves once again that culture absolutely counts.

I didn't buy a Silicon Valley company in the '90s, and we had some opportunities to buy some medical companies and other things, because I didn't want to pollute a GE culture with the pollution of Silicon Valley.

The facts are we had engineers -- now if you're in Silicon Valley and you're running a company, it's fine. You're all polluted, imperfect. [LAUGHTER] [APPLAUSE] No, you're in a culture and it's fine. But I've got engineers in Milwaukee developing CAT scanners and MRIs that are the envy of the world, and they're making X amount of money. And we don't have to give them BMWs to hire them, and they like what they're doing.

They come from Purdue and Illinois and Michigan, and places like that, and they're terrific, bright people, and I didn't want to have to explain to them that the people doing the exact same work out there had to make twice what they were making because housing costs are more expensive in the Valley and all these things, because you can't do it.

No one, in my view, at Enron leadership or its board cheated or anything else. I think what happened was they got into a culture they didn't understand, and culture counts. When I got into one I didn't understand, we screwed it up. We [were] lucky it was small enough. We sold it and got out. And got out alive. But it could have eaten us up if it were a bigger thing. This thing [at Enron] got bigger than the core business and it ate them up.

Q: So Jack, what kind of odds are you putting on the HP-Compaq merger? [LAUGHTER]

A:

You know, if I were still working I wouldn't comment on that. [LAUGHTER] But since I'm a pensioner, I'll give you some thoughts -- damn you! -- because I have been thinking about it and I'll talk about it philosophically.

What's happened here is horrible. Hewlett-Packard -- and I know there are Hewlett-Packard people here -- decided that they wanted to make change occur in their company. And their board decided that. So they went out and hired somebody to come and make change. That woman by all appearances was making change. The economy hit Hewlett-Packard like it hit a lot of people.

But that board bought into that. Whenever change takes place, there are an enormous amount of resistors in the corporation. They're under rocks. They hate the change. But as long as the board and everyone is unified behind the CEO, they're all with it.

An outsider coming in to make change has a lot more difficulty than an insider making change because the [outsider] has no built-in constituency. When I made change in GE while I was a lunatic, I had a third of the people who liked lunatics. Two-thirds of the people didn't, but we had enough critical mass -- and I also had a board cheering me on every second: faster, do more, let's go!

When they decided to make the Compaq merger, that board had plenty of time to deliberate. They deliberated and they made a decision to buy it. I don't know whether that's right or wrong. But they made that decision. What I can't stand is the fact that after a unanimous vote of the board, somebody on the board afterwards decides to go public and have a conversation about what a bad idea it is and starts to vote against the deal they voted for.

That, to me, is unpardonable. It's a sin. It's corporate governance at its worst. And I feel for the CEO.... Resistors are coming out from under the rocks now to say, "Well, the CEO was not good anyway. It was probably a bad idea. Wasn't that good. Let's go back to the good old ways."

Q: So this is a deal that's going to get done or not?

A:

I don't know the inside. I just don't like the fact that a board changes -- pulls the rug out from a decision that they made in the middle of a change process. I don't know any HP people. It would be fun to talk to them.

But there has got to be havoc in the company. There has to be havoc because when the resistors see that little shining light under the door, then they have a shot to create trouble and get things back to the good old days. The good old days are never going to be here for any company. There are going to be new days. There are going to be good new days. But not good old days.

Q: Jack, some people are thinking that the economy is going to turn midway next year. What's your take on that?

A:

We have been in a downturn...almost 15 months now. Decelerating economy. With the interest-rate cuts, with the liquidity that has been poured into the system, with the stimulus package, the tax cut, we would have a recovery sometime next year under any normal economic scenario. We have overlaid on the economic scenario a psychological layer that nobody knows how to deal with.

Nobody knows the implications of terrorism.... What's victory in this war? When is terrorism contained? If -- God forbid -- the U.S. had to experience what Israel experienced last weekend [new bombings], all bets are off on this recovery.

Q: One last thing. Jack, it's been almost three months now since you gave up the top job. How badly do you miss it? I told [new GE CEO] Jeff [Immelt] everything has gone to hell in a hand basket since you got out of there.

A:

Well, that was nice of you. [LAUGHTER] No, I don't know what it would be like if you weren't in love with your successor, but it's the most liberating feeling in the world to be out. I can say what I think of Enron or HP. I can do all kinds of things. I was pitching mattresses this morning on a local radio show here because I was talking to a radio guy about the book and he said. "Now here, give this commercial." So I ended up with a Sleep-Rite mattress commercial that I was reading. [LAUGHTER]

So you never know how diverse your career can be at moments like this. I think it's wonderful. My life has always been the next page, not the last page, and I think retirement was made for me.

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