Lou Gerstner at MIT

Leadership was the overriding objective of the graduate seminar I taught at MIT last Fall, - Technology-based Business Transformation, - which I will be teaching again in the Fall of 2008.  I told the students at our first meeting that I hoped the course would help them develop or enhance their leadership skills, so they can better deal with the complex systems, complex markets and complex organizations they will likely encounter throughout their careers.

In the course, we used Lou Gerstner's book "Who Says Elephants Can't Dance", which all students read and we discussed extensively in class.  Given my professional relationship with Lou, with whom I worked closely in his nine years at IBM, I invited him to come lecture to the class. He accepted, but due to health problems we had to postpone his visit. 

Lou’s visit to MIT took place on March 12.  While my class was not in session this semester, we scheduled a breakfast meeting with all students in Systems and Design Management (SDM), the program that most of my students belong to, a public lecture as part of the Dean's Innovative Leader Series at the Sloan School of Management, and a few smaller meetings.   

SDM is an interdisciplinary program between the School of Engineering and the Sloan School of Management, whose graduates receive a master of science in engineering and management.  To kick off our discussion, I read a paragraph from Lou's book, which I had used in the section on organizational culture in the class:

"I came to see, in my time at IBM, that culture isn’t just one aspect of the game – it is the game.  In the end, an organization is nothing more than the collective capacity of its people to create value.  Vision, strategy, marketing, financial management – can set you on the right path and can carry you for a while.  But no enterprise – whether in business, government, education, health care, or any area of human endeavor - will succeed over the long haul if those elements aren't part of its DNA."

Lou asked the students to reflect on how many companies had not been able to turn themselves around when a new technology disrupted their business model, not because they did not know what to do, but because the culture of the institution did not embrace the change.  He reminded us that while most companies say that their culture is about the pursuit of lofty goals like outstanding customer service, teamwork, excellence,  and shareholder value, most of the really important rules of culture are not written down anywhere.  Successful institutions almost always develop strong cultures that reinforce those elements that make the institution great.  But, when the environment shifts, it is very hard and painful for the culture to change.  The culture then becomes the key impediment to the institution's ability to adapt.

He told the story that early in his IBM tenure he made the decision that IBM was more valuable as an integrated company that could help solve complex problems and build solutions for clients.  He then realized that he needed to make sure that people in IBM worked well together as a team.  You could not integrate the company in front of the customer if it was not integrated internally.

But IBM was famous for its internal contention system, where units generally did not cooperate with each other.  He realized that to change the culture, he had to change the compensation incentives that had given rise to that culture.  Previously, IBM executives had been paid mostly on their own unit's performance, and thus had little financial incentive to work together across divisions.  Without changing the compensation system, difficult as that was, he could not address the impediments to effective teamwork.

So now, his director reports, the general managers who led the various divisions, would be paid 90% on IBM's overall performance and 10% on their unit's performance.  One or two levels down in the organization, the pay would now be based 60% on IBM's results and 40% on those of the unit.  When people saw the change, they realized that the new CEO meant it when he said that teamwork and cooperation were absolutely necessary across the whole company.

Later in the day, Lou gave his public lecture - Leadership is a Lifetime Journey - to an overflow audience.  He said that in his opinion, the concepts of line and staff management were outmoded.   A good organization needs good business line managers - responsible for the revenue and profits of their units, as well as good process managers.  The job of the process manager is to make sure that the individual processes of the organization - finance, HR, customer service, fulfillment, manufacturing, supply chain, IT and so on, were as efficient and high quality as possible.

Many companies do not pay serious attention to process management, and in fact allow different unit to each design and run their own processes.  The results are almost always bad.  Not only do the costs go up, because of redundant efforts across the company that could have been done globally for everyone, but different implementations of the same process make it difficult to integrate the company and share information and talent.  Moreover, when key processes are part of individual units, it will be harder to attract top talent, pay them accordingly, and give them the necessary scope of responsibility needed to achieve world class processes.

Lou focused most of his remarks on leadership.  The key quality you need for good leadership is passion - the urgency to attack and solve the complex problems that all organizations face.  You cannot delegate leadership and passion the way you can delegate management tasks.  It is critical that leaders roll up their sleeves and work closely with the teams addressing these complex problems - not as the manager presiding over the work, but as a trusted and respected colleague. 

He illustrated his point with an example.  When launching a new effort, the people doing the work will often schedule periodic reviews with their manager at fixed intervals - say every three months.  That is all wrong he said.  Most the major decisions in a new initiative will get made in the first few months.  If the manager is a true leader - he or she will work closely with the team during that critical period, and do so - to whatever extent is possible, - as a peer of the members of the group, going to their offices and conference rooms where the real work is getting done. 

I can attest that Lou practiced what he talks about.  In 1996, in the first twelve months of the IBM Internet Division, we made a number of critical decisions.  We decided not to get involved in the browser wars then raging between Netscape and Microsoft.  We embraced Java, even though the technology had been developed by Sun Microsystems, one of our fiercest system competitors.  We shut down a number of the efforts aiming to position IBM as an Internet content provider.   We started to develop what became our successful e-business market strategy.  Throughout that period, I had lots of informal, working meetings with Lou and others in IBM's senior management team, debating back and forth the pros and cons of the different decisions we were making.

Lou Gerstner's visit to MIT was very stimulating and educational for all of us.  As Sloan Dean David Schmittlein said, we had just had a master's class in leadership from one of the very best business leaders in the world.

Comments

[Ragu Bharadwaj]

Gerstner's lunch lecture was indeed one of the most practical leadership lectures I've attended. It made me realize what a sorry job we do at developing leadership and how the dots connect with long term performance.

[Masaya Haraguchi]

I work for advertising agency in Japan and
I've read your blog regurally since last year and often swayed by your opinion. From the starting to read, I've been wondering how you think about the business style of Lou Gastner. Because I sympathized his book.
Today, after reading your blog, I could deeply understand why I love to read both your works. I would deeply appreciate your implication.

[Makio Yamazaki]

Irving-san,Thank you for your nice blog. I leaned too many important things from your blog.
You said 「The hero need not die at the end, but he/she must undergo a change in fortune.
In addition, the tragic hero may achieve some revelation or recognition about human fate, destiny,
and the will of the gods」.
"Team-work" and "Organizational Culture" would be more and more important for us,
beacause of "The world is Flat".