Q&A: "We Have Reinvented Ourselves Many Times" (extended)

Last year, when Sam Palmisano took the top job at IBM Corp. (IBM ), pundits figured he would settle in as the caretaker of former CEO Louis V. Gerstner Jr.'s strategy. Not Palmisano. He's blazing his own trail. The new CEO is streamlining management, emphasizing teamwork, and rejiggering compensation-starting with his own. At IBM's snow-covered headquarters in Armonk, N.Y., and in an e-mail exchange, Palmisano talked with BusinessWeek Computer Editor Spencer E. Ante about his mission to make IBM great again.

Q: What inspired you to try and make IBM a great company again?


IBM is one of the few companies in the world where people refer to themselves as IBMers. There's an attractiveness about being part of an institution that can do great things beyond generating financial results and paying a lot of money.

I kept thinking about an approach that would energize all the good of the past and throw out all the bad: hierarchy and bureaucracy. Get rid of all that trash. People stay at IBM for pride. It's about appealing to the pride of the people of IBM to go drive to the next level.

Q: Was there a specific incident that got you thinking about this?


There really wasn't a single incident or event that got me thinking abou this, but it really began to come together in my mind over the last two or three years. I guess I had concluded that we had done certain things right. We had stabilized the company, we had made several important acquisitions, and we were gaining market share in lots of areas. So now was the time for the next transition at IBM. History shows that we have reinvented ourselves many times in the past, and this is a very logical transition to make at this time.

Q: How are you going to measure IBM's greatness?


I think about it in four or five dimensions. If you're leading the industry agenda, you should be gaining share in your core segments. In the financials, there should be real consistency in earnings. It's about cash flows and balance sheets. It's the flexibility to fund the IBM pension fund for $4 billion. Why? Because it's the right thing to do, and you can afford to do it. It's being an employer of choice. People want to be here and want to make a big difference. So it's attrition rates. And the last dimension is being viewed as a valuable citizen. Getting people involved and using their skills to help local communities, whether that's Austin, Texas or Stuttgart.

Q: Are you remaking IBM's core values?


No. Think about the early days of IBM. Bold moves. Diversity. I think 28 years before it was legislated, we paid equal pay for women. There was a lot that was great in the old IBM. These Watsons did not play to lose. In 1933, Thomas J. Watson Sr., gave a speech at the World's Fair, "World Peace through World Trade." We stood for something, right?

The DNA of the IBM company is what it always stood for. But get rid of the bad in the DNA, which was rigid behavior, starched white shirts, straw hats, singing company songs. I lived it. I sang the songs. That caused us to become insular, focused on ourselves. Beating up your colleagues was more important than winning in the marketplace. Lou [Gerstner] did a lot to knock all that down.

Q: Why are you betting so much on the e-business on-demand vision?


We really saw a convergence of events. If you take a macro view of the world and you make an assumption that for the next several years worldwide economies are going to grow low single digits, every major corporation in the world is going to have a productivity agenda. That's where it's going to be.

So when you say they're going to have a productivity agenda, what will they be reaching for or seeking for a solution to solve a problem? On-demand captures that. We're just positioning ourselves to capture this demand. And the other side of it, customers are looking for direction. So now we're providing direction. The model of the past is not going to repeat itself.

Q: You seem awfully optimistic?


It's important that people like myself are optimistic about the future. We need to get the world thinking about corporations, governance, our economy, our leaders, in a different dimension. I lead by example. I'm not trying to lecture other people. It's important from a broad economic perspective that people feel good about the U.S. It's hugely important to Japan. Germany doesn't turn [around economically] without the U.S. and the U.K.

Q: Why did you ask the board to cut your 2003 bonus?


If you say you're about a team, you have to be a team. You have to walk the talk, right? I can't have a big gap between me and my team. We're talking about a pool of money that the board historically allocated to the chief executive. I recommended the board take the money and give it to the top officers of IBM. [There are] more than 20. The board will determine the exact size of this pool [and will determine bonuses] based on teamwork.

Q: When I spoke to Linda Guyer, the head of the IBM Alliance, the worker rights group at IBM, she said money is the king of everything now, loyalty means nothing. They have a number of concerns. One of them is: They would like more flexibility on mandatory overtime.


They don't want to work overtime, they don't have to work overtime. In services, you have a choice. You know, but if the work needs to get done, you might consider it an opportunity to work overtime.

There's countries in the world that say that you shouldn't work more than 33 hours a week, 35 hours a week. I mean, that's wonderful, but it's hard to be successful in the IT industry working 35 hours a week.

[At this point, Palmisano's face turns red. His voice rises. And he pounds the table twice to emphasize his point.]

We are what we are. We're in a crazy industry. And when you're in this industry, you've got to bust your ass to win. And we're going to bust our ass to win. I don't care what the s--- she says. Right?

Q: What are your financial goals?


We can make earnings because we're going to become on-demand. We don't have the same dependency in our business model. I don't have to be a rocket ship. I have to generate great cash flows, high return on investment capital and consistent earnings per share with transparency and integrity in the financial statement. That's all I have to do. I don't have to give speeches about reforming the world. I don't have to yell about expensing stock options.

Q: How will you get the whole company behind this strategy?


You form smart people, you get teams, you incent them with team-oriented bonuses and compensation. You pick a milestone and then track the hell out of it. And if there's a problem, address it immediately, not...you know, don't let it fester. Get it together, solve it. And then move forward. Don't dwell on things.

Q: Why are you so hot on teams?


One of the reasons why overall we're executing better is because of this structure. People won't wait anymore to come into a scheduled Corporate Executive Committee meeting. Also, we want to expose people to other career paths. So by having them engage in these teams, they get to see a whole different portion of IBM that they hadn't seen before early on in their careers. So it was developmental as well as speed.

The most important thing is really a culture of letting people feel that they can make a difference, and then therefore they have to make decisions. The biggest inhibitor that we find in the motivation of our people is their ability to affect a big entity.

Q: How do you balance your new job and family time?


It's incredibly tough to find the right balance. The workload just never lets up. On weekends I get up early and work until the kids get up. Then I go do whatever the family wants to do. People at IBM are used to getting e-mails from me early in the morning and late at night. On weekends, Sunday afternoons have pretty much become work times for me. It comes down to my family and IBM. I pretty much say no to everything else. I know it makes some people mad when I can't attend their events, but at least I'm consistent on that point.

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