As far as a legacy goes, says IBM chairman Sam Palmisano, “I just want to leave the company better than I found it.” Judging by IBM’s successes over the past decade, Palmisano, who was CEO of IBM until he stepped down earlier this month, did just that. During an interview with Wharton management professor Michael Useem, Palmisano discussed the sale of the company’s personal computer business, the PricewaterhouseCoopers acquisition, how a big company can encourage innovation, and what he learned from his mentors, among other observations drawn from almost 40 years at IBM.
Below is an edited transcript of the conversation.
Michael Useem: I am at the headquarters of IBM here in Armonk, N.Y., with Sam Palmisano, who joined IBM in 1973, became chief executive in 2002 and today — having stepped down as chief executive — continues as chairman of the company. Sam, it’s my privilege to have a chance to talk with you. I’m going to pick up on that moment when you did become chief executive of the company in 2002. Reflecting on those early days, what did you see as the biggest challenges for your leadership?
Sam Palmisano: When you first take over, it’s hard to separate your leadership from the company itself…. I was president for a period of time, about 18 months, and I had run all the businesses along the way. I’ve been here 40 years now. So it isn’t like I didn’t have experience with the operations of the IBM company. But as Lou [Gerstner, CEO of IBM from 1993 to 2002] said to me, and as I said to Ginni [Rometty, newly appointed CEO of IBM]: “Until you’re in it, you can’t describe it.” You start out just trying to manage the company, which is a big complicated thing, even though you grew up in it. So your first reaction is, I have to keep the performance going.
We had a wonderful financial performance; we had righted the course financially [when I took over]. I didn’t believe at that time we had done the business transformation. Remember, we had gotten ourselves in trouble. We missed the shift because of the PC, we missed that client/server shift and got ourselves financially in trouble because of that shift, with margin pressures, restructuring the company, etc. So we had been through a lot of financial transformation or change, but not business-model transformation. I really believed in the beginning that I had to keep the business going, [and] at the same time start the transformation of the business model. I didn’t think the business model as it was at that point in time was going to sustain itself over the next 10 or 15 years.
Useem: Why not?
Palmisano: Well, primarily because of technical trends and the macro-economic environment. By that I mean, besides the technology trends, the dotcom bubble had just collapsed. So all of the valuations in tech had been reset because of the bubble. Also, there was excess inventory because of the bubble. Everyone in the industry was telling themselves that it was going to return. The PC would return. It just was a cycle, an economic cycle. We believed at IBM, and I really strongly believed myself, that it was a systemic shift, that this platform that had propelled the industry for 15 to 20 years — which these platforms do; that’s their course normally if you look at the history of our industry — had run its course, and it wasn’t going to be the future. And so if it wasn’t going to be the future, we needed to shift to the future because we had learned a lesson. We didn’t shift because we missed the PC shift, even though we invented it. We didn’t exploit it. So I thought that was important.
And then the other [point] that was pretty obvious [then] but now is extremely obvious is the fact that the world was going to economically begin to integrate. These emerging countries were going to become, as they are in 2012, the lion’s share of economic growth. We needed to get the company positioned to take advantage of that, both participate in the markets as well as access the skills and resources, build the relationships — all the things [necessary] to really take advantage of those kind of opportunities.
Useem: I’m going to pick up on something and ask a question about how you saw the future five or 10 years out better than many other people in the technology industry. To transform the company to become what it should be looking that far out, you need an appreciation for what’s out there that is better than a lot of your competitors. Many want to become more savvy about where the industry and the markets are going. Here at IBM, you probably have done that better than most out there. How did you come to know what that future entailed?
Palmisano: I think on the technology side, we have a wonderful research organization. I know that a lot of people under business-model pressure really curtail research investments. We obviously have not. We still spend $6 billion a year on research and development. But it’s a huge brain trust. So we do this thing called The Global Technology Outlook. It’s a 10-year view. We argue about these trends. There are real debates at the top of the business. It’s almost like a faculty environment. You know, it’s a peer review in a sense. The research scientists come in and they say, “These are the technology trends.” The business guys will argue that they don’t see it that way, or what’s the business model impact of that trend — the usual debates that you would have. And it goes on.
I think that probably a lot of companies had those debates. I don’t think it was anything in the technology that we were seeing that others weren’t seeing. We just decided to act upon it. Others chose not to act upon it. I understand that, because when the PC thing came along, when we almost failed, we saw the trend. We invented it with Microsoft and Intel. But we didn’t exploit it because we were wedded to the past, the business model called the mainframe. There were people, phenomenally successful in the PC era, who were wedded to a business model. And I said, “Well, what is Act Two?” In IBM’s case, this is like Act Five because we’re 100 years old. But a lot of companies have a hard time seeing what I’ll call Act Two because they get so wedded to the product, so wedded to the financial rewards of their business model if they’ve been successful, and they just don’t see. Or if they see, they have a conservative view upon acting. They’re slow to act.
They think, well, maybe it’s wrong, maybe it’s really not going to happen. I’m making so much money in this business, do I really want to take the risk of transformation? Can I get the people there? These are all questions that you’re going to ask yourself before you take this on.
Useem: Let me ask if you were haunted, as you did take charge back in 2002, by the near death experience that IBM went through in the early 1990s, when Lou Gerstner came in and got the ship back on course. But that was pretty tense there in 1993 and 1994. You were there at the time. To what extent did that near death affect your thinking as you took charge in 2002?
Palmisano: You learn the impact of missing the shift. We all knew it because you could put it in stark terms. We went from a peak of about 412,000 people down to a bottom of 217,000. So 200,000 of our friends were no longer here. Most people at companies that didn’t have the balance sheet or the cash flows of IBM would never have made it. They wouldn’t have gotten through it. But because of the strength of our balance sheet and our cash assets and things, we could get through that and deal with all the restructuring charges that we had to take. So you learned [from] it.
If you look at the history of IBM — and since this is our centennial year, I have been studying this anyway, just getting prepared for the centennial — if you go back to the Watsons, what they were really good at is they didn’t miss the shifts. They always moved to the future. Even though it was a father and a son, they moved from scales and meat weighing and all that, cheese slicing machines to tabulators to office products, typewriters, selectric typewriters to modern computing, that’s what the son did to the 360, huge bet on the product with the 360. Bet the company at the time like an entrepreneur would. Different than you’d see I think in a large company today, but it was the father/son. They rolled the dice. And so that became the modern computing era. But that’s what it was.
The impact of missing the shift — you see it all the time, especially in technology industries because most of the companies are so young. So if you look at a lot of the people who have a great start, they could run for 10, 15, maybe 20 years, but then there’s no Act Two. The founder, the entrepreneur retires, what have you…. And then there isn’t this Act Two. So if they don’t come back, management comes in, but they really struggle with moving to the future. That’s the challenge. I just think technology’s more ruthless as an industry because it’s not forgiving, versus other industries where it’s not as abrupt and as harsh in its correction.
Useem: You know, among the ways that you transformed the company, 2002 through today, were some of these landmark decisions — for example, to acquire PWC [PricewaterhouseCoopers], to sell the PC line back there in 2004/2005, to get into the Cloud before some other people did. Talk a bit about how you reached those critical transformative decisions.
Palmisano: I think they’re all different in a way…. Pricewaterhouse was really about the fact that we felt the technology was going to become embedded in the business process.So it was going to be buy a computer and apply a computer. There was no separation…. We saw that occurring. So we needed more knowledge of the business process. When we did the PWC acquisition, we had a good valuation for it, but besides that … people asked me, “Well, what was this all about?” I said, “Well, we’re already the largest IT-services company, so it’s not about being bigger when you’re the largest; it’s about having assets and skills we didn’t have.”
PWC had really deep insight in health care and financial systems and the like whereas we understood technology, we understood how to apply technology to a banking system or to the health care system. But we didn’t know the process of a payment system or trading derivatives or what have you, the deep process knowledge. The colleagues who came from PWC gave us that knowledge. We married it to the technology guys. We married it to the research, and it led to a lot of the things that have become Smarter Planet. But that’s what we were missing. So we were trying to add to a technology gap or a skill gap in that sense.
To me, PC was culturally hard, but simple economically. I mean it was the easiest business decision I’ve ever made. Now how you do it and who do we partner with, that was complicated. But when you looked at the PC and where it was headed — and again this is 2002/2003, we did the transaction I believe in 2005 — when we ran the model you could see it was going to become consumer. We were positioned in the enterprise. Dell was also enterprise. HP was more consumer because of their printer business. Then you had the Toshibas of the world, the Acers of the world. You had a lot of guys who were very consumer oriented. But Dell and IBM were primarily the enterprise guys, and so was the old Compaq, but Compaq then moved to HP which became more consumer.
When you saw this thing moving to consumer, you could see that the economics of the business were not going to be as attractive as they were, and they already weren’t great. I mean they really weren’t. You were looking at operating margin of four-percent business, a three-percent business without subsidies from Microsoft and Intel. And people say, “Well, what do you mean by subsidies?” So it’s in all the Justice Department suits, so it’s not like it’s not public information when I say this. I mean it was “What do you mean subsidies?” “Well, just read this filings. You know, it’s all there. We’re not making it up at IBM.” We happen to be part of it so we understood it, but it’s not a great business. And it was going to be under pressure because of moving to the consumer space, more consumer electronics-like than enterprise-like. So the things that we could do, robust engineering, the great mobile think pad weren’t going to be as valued in that space. And so that was a simple economic decision. The complexity of the decision was whom to partner with, who should we sell the asset to, could you get it approved? That was phenomenally complex.
Useem: Let’s dwell on that for just a second in that arguably a vital feature of anybody’s leadership is the ability to think strategically, to appreciate all the pieces and all the players out there. I know you had talked with TPG [a large private equity firm, formerly Texas Pacific Group] about acquiring the PC line.
Palmisano: Yes.
Useem: You thought about Dell. Ultimately, you sold to China’s Lenovo, which had been a purely Chinese company up until that point. Why did you pick Lenovo?
Palmisano: .… If you look at it tactically, the easiest transaction for us would have been a private-equity transaction. These guys know what they’re doing. TPG’s a very professional firm. We know the guys. There are others as well [such as] General Atlantic. They’re guys who are really good at this stuff, they know exactly how to conclude a transaction to get it right, very little issue with government approval, straightforward financial transaction.
However, when we looked at it, we came to the conclusion that China was in a huge space. We were small there, even with the PC business in the company, IBM China. If you looked at the economic model of China with the goals of the government, they were trying to expand beyond just being a domestic manufacturer, the largest manufacturing company in the world, the big outsourcer for manufacturing. That was the government’s ambition, Premier and President, Wen [Jiabao] and Hu [Jintao], that was their goal.
We do believe that part of the role as a company is [getting] permission of society to operate. Well, you need to partner with the societies where you operate. You just can’t be anti the society and expect a partnership. And so we felt that strategically, and I felt very strongly about this, this was a better strategic transaction for IBM, even if the economics maybe weren’t as attractive. But long term, this would be a better deal if we could align with one of their champions, i.e. Lenovo.
Now that added a whole other level of complexity. There were a lot of people who advised me that it would be really hard to get this done. Their advice was right. It was hard to get this done. They were not misguided. But they also believed we could get it done, but it was just going to be hard. And so we took a shot and it worked out.
So we were fortunate enough to be able to have a partner, Lenovo, close the transaction from a deal perspective. We worked with both the U.S. and the Chinese government, both sides, to get the thing through. It was complex but both governments ran a fair process…. It should have been approved and it was approved. As long as it doesn’t become politicized — that’s a whole different discussion. We didn’t think it would become politicized. It was a PC after all. I mean it wasn’t some big national secret we were selling. All this stuff was manufactured in China anyway. So it wasn’t like we were giving something away they didn’t already have. But we were fortunate that the process didn’t get politicized, because if it had become politicized, it might have become a different outcome.
Useem: These decisions to acquire PWC and to sell off the PC line really helped define your leadership of the company. Another defining element, I believe, is bringing to IBM a commitment to develop leadership throughout the ranks. And if Lou Gerstner’s signature or stamp on the company was to transform the culture, I think one of yours has been to think about, to focus on, building leadership among the some 50,000 managers you have. Why had you early-on chosen to give it that focus, and how does that work?
Palmisano: Well, it goes back to the business model. I believe, and I believed then, that you can’t run IBM from here. We happen to be sitting in our corporate headquarters at Armonk today for the audience. You can’t do it. And it’s 170 countries today, 426,000 people, different cultures, different religions, different local priorities. You need talent to do that, and you need people who can deal in a complex global world.
We had this thing called Globally Integrate the IBM Company, Lower the Center of Gravity, which meant we’ll delegate more decision making down. It wasn’t just an efficiency statement. A lot of people say, “Well, you’re doing that because you want to get rid of overhead.” Of course we need to get rid of overhead. We need to be competitive. That’s obvious…. Some people don’t connect that without the talent on the ground to actually operate the company and then have the business systems that can do the analysis without having thousands of people do the analysis for them, the analytics. And of course we should be good at computer models, given the business that we’re in. But nonetheless, you have to connect the two.
So we felt it was really, really important that we develop that skill base. So we invested in numerous programs, but many of the programs were beyond just traditional management development, and a lot of it was to give people global perspective, because if you’re going to globally integrate the company and you’re going to expand in all of these markets, they need to be able to operate in a multicultural environment. One of the things we actually came up with was called the Corporate Citizen’s Core. We took younger people in their careers and said, “Go off and work in Ghana or Tanzania or these emerging places, Nigeria, what have you, Philippines, and work with NGOs or the government. Through the foundation, do worthwhile projects. But establish relationships. Work in a multicultural team” — because the team was formed from young talent all over the world — “and spend six to nine months doing that, and then come back and teach your colleagues what you’ve learned and we’ll have more teams established.”
That was at the early manager level. At the executive level we created these things called Get Teams to go out and decide how we should enter Egypt, or what we should do to transform lowering the center of gravity. We sent those guys around the world. The goal was to give them an IBM project, but then put them in a multicultural environment.
I worked overseas before. I was in the old model. Go off. I was in Japan. I mostly worked at IBM Japan at the tail end. I was in our Asian operation. So I learned what it was like to work in a non U.S. country at IBM Japan with, those days, 23,000 Japanese and two gaijin [foreigners], the CFO and myself. I was the operating guy. I learned a tremendous amount about how you have to work in a different culture, which was much harder than just the business problems we were trying to solve. So I was very sensitive to the importance of that — that just because people are uncomfortable with English as their native language, that doesn’t mean they don’t have a lot to say. How do you communicate all those subtleties of language and culture? And so it was really, really important.
If you believed like we believed — and it’s obvious today that most of the economic growth was not going to come out of the G7 — that was a demographic statement. People say, “Well, what do you mean by that?” I said, “Well, it’s obvious, because if you say once these governments decided they were going to engage in the global economy and the middle class was going to emerge, it had to be.” If you have 400 or 500 million people entering the middle class, they’re going to have to have health care systems. They’re going to demand clean water. They’re going to want a banking system. They’ll have debits and credits. They’ll buy homes. That’s what happens. And so that’s what we do. We do all the IT associated with all those things. So that was obvious, right, that this was going to occur, and people argued the stability of the governments and all that. But if you take a long return view, which we did, we felt that we might as well get ahead of the curve.
You needed people. That was the economics of it. The business model was to globally integrate IBM and operate as one, not 100, companies. And then you needed the people who had the management acumen and the cultural sensitivity to do that. We spent a lot of time, and we do spend a lot of time and money on that. I think the best example of it is this most recent succession we just went through. Ginni [Rometty] was great. She earned the job. She’s been here for 30 years. She’s been all over the company just like I had been all over the company. There were lots of other candidates for the job, but she won, to her credit.
Useem: Let’s dwell on that for a second, around the issue of mentoring and coaching. I know that an axial principle of your leadership here is to provide lots of coaching and lots of mentoring. Looking back on your own career prior to 2002, who would you single out as the most important mentor you had along the way?
Palmisano: Well, it’s interesting, because so many people helped me. The key … is you have to be a good mentee. Because you have to listen. And what happens as you become successful is you forget the ingredient of being a good mentee, which is listening to the people who are mentoring you. But I’ve had obviously lots of previous managers, previous CEOs John Akers, Lou Gerstner, other guys on the outside who are always willing to help. If you ask and listen, people are always willing to help you.
I find that people aren’t always willing to listen…. You have to be able to want to be mentored. It starts with that. I see it so often. That is the key. But you have lots of role models along the way. People who were always a good role model for me [were those who] never put themselves first. They always put their institution or society or their enterprise first. And usually they get better results. If you say, “Well, why does it work?” [It’s] because you get people more excited because they can contribute versus an individual trying to take all the bows for the team. And so you could say I’m comfortable in that style. But if you put that aside for a second, I actually think it’s a more successful product at the end of the day.
Useem: Let’s go back to John Akers, who was chief executive through 1993. If you can single out one thing that you picked up from John, I’d like to hear about that. Then separately for Lou Gerstner, who served before you from 1993 through 2002. And then just to complete the question, as you’ve worked with your successor now, what did you pass on to her that, in your view, was among the most critical coaching elements you provided?
Palmisano: You’d probably be best asking her…. She’s the recipient of my tutelage. I’ve learned a lot from everybody, and one of the things that John did that was most impactful to me, anyway, is he’s the one who sent me to Japan. I was in his office because we had this program at the time. He had been the executive assistant to [CEO Frank] Cary as [John] Opel [had been to CEO] Thomas J. Watson, Jr., so it was one of these things where they groomed young people. It was part of management development. So you worked for the chairman or the CEO as his flunky, basically. You did learn a lot, but you were his flunky. I mean you weren’t chief of staff or something. I’m not trying to glorify the position….
I was being offered all kinds of very significant promotions in the U.S., and John [Akers] said, “No, you should do this. And there’s a guy over there [who is] “a great executive and he’ll teach you a lot and I want you to go work in IBM Japan.” And I said, “Japan? There’s no structure to the job. I mean is there a position?” “Nope, you’re working for him. He’ll figure something out.” “When do I go?” “You’ll go first of the year.” And I had kids and family, you know, all this sort of stuff.
What he was teaching me is that if you’re going to be successful, you’re going to have to learn to operate in all these different kinds of environments. Going back and doing something comfortable, even if it’s a big position in the United States, is not going to prepare you for the future. So to get prepared for the future, you need to really put yourself in an uncomfortable space. Not all advice is always communicated, but you could see it. “No, you should just go do this.” And that was exactly what it was.
Useem: So that was from John. And then his successor, Lou Gerstner, what would you single out there?
Palmisano: The thing I learned about Lou is that other than his phenomenal analytical capability, which is almost unmatched, Lou always had the ability to put the market or the client first. So the analysis always started from the outside in. You could say that goes back to connecting with the marketplace or the customer, but the point of it was to get the company and the analysis focused on outside in, not inside out. I think when you miss these shifts, you’re inside out. If you’re outside in, you don’t miss the shifts. They’re going to hit you. Now acting on them is a different characteristic. But you can’t miss the shift if you’re outside in. If you’re inside out, it’s easy to delude yourself. So he taught me the importance of always taking the view of outside in.
The other thing Lou does extremely well is always take the opposite position, even if you believe the position that’s being represented to you was the correct position. He used to do that, and it drove a high level of discussion really, or debate, and you got to a better conclusion. He was really good at it. I don’t know if it was the McKinsey training or whatever. …; Even when it seemed obvious to all of us, he would take the opposite position. So therefore you had to go through the analysis to make sure that your conclusions were correct, that your convictions were supported with data and those sorts of things. So outside in, John was more personal development. So completely different things.
I think the key with Ginni, which I’ve tried to coach her through — and it’s the most important measure — is leave the enterprise better than you find it. That should be your measure of success. Don’t get absorbed in the external metrics of success. I mean, yes, our stock has done extremely well. Terrific. I mean we like that, obviously. Everyone’s been rewarded because of that. But the company is much better positioned today. We have better talent. The brand is stronger. We’re much more innovative. We have deeper client relationships than we did. That’s why large investors have come in because they see what we have is more sticky, to use their terminology. So the company is in better shape. So think about the next 10 years, not the next 10 quarters here. What can you do to leave your company in better shape than you found it? And it’s not about you, the CEO, it’s about the enterprise.
She’ll do that. I think she’s that kind of personality. She’s not absorbed in herself. She’s absorbed in how do I take this thing to the next level. A lot of the stuff — analytics, Smarter Planet — we’ve just begun. So there’s so much ahead of us. Going into Africa. We just started. People say, “Well, what more can be done?” We’ve just entered Africa. It’s going to be the next China in 10, 15 years. Those kinds of things. Smarter Planet, we have thousands, we started with 100 references; we have thousands. We should have tens of thousands before this thing is all said and done. It really is about that. I think it’s the most important thing.
I understand that the whole time I was in the job, the external measure is very short-term oriented. It’s earnings and stock performance. They’re distorting compensation today tied to that. It’s a huge distortion, my personal opinion, which will only destroy value in the long term. And that’s driven by people who don’t understand value creation, either third parties or government organizations that are looking for something simplistic to measure and then reward something complex. It won’t work. We were blessed in a way because we came up with this long-term model, the 2010 roadmap, and now the 2015 roadmap. We were lucky that we could convince the investor that it was good and it made sense. If we hadn’t been able to persuade them, then of course we would have had to change. But the investor and I agreed on the 2010 roadmap. They had all said we could never do it. We did a year in advance in a terrible economy and said, “Well, incredible.”
Now they look at the 2015 roadmap and they say, “Well, they’re going to beat that. They’re well ahead of that already.” That’s their conclusions. But my only point is we came up with a methodology that fit where you could take that longer-term view. You could focus on the company. Stock is up 100%, so it did create shareholder value. We’ve outperformed everything.
Useem: We want to pick up on that and make the statement that your leadership of the company, the forward looking, the outward looking in, is really a product of many events over your lifetime and your career. So I’m going to ask here with a couple more personal questions on that. You came out of college, you joined in sales back in 1973, IBM your first job out. You did have an opportunity to try out for the Oakland Raiders.
Palmisano: Yes.
Useem: On a very personal frontier here, have you ever had a regret that you didn’t actually give that a try at the time?
Palmisano: No. I tell you it’s a quick, funny story. We were playing Division 3 football, which is below the Ivies even. Nonetheless, you know, we’d play Fordham and Columbia. We’d have a really hard time…. Friends of mine actually did try out for professional football, but they were receivers and punters and things…. I asked my friend, “So what was it like? What do you think?” And he said, “The position you’re playing, like a center or a defensive end, we made it two weeks as receivers, you’ll be dead. They’re going to kill you.” And so I said, “Well, maybe I just don’t want to do that… So I never had any regrets about that at all. I just don’t think I had the physical characteristics to have been successful….
Useem: Let’s turn that around. With a great interest in football in your college days, not to mention music and history, how has sports, music and history informed how you have led in the years since then?
Palmisano: If you go through all those characteristics, history does give you a sense of perspective. You see things in a continuum of time…. I grew up with the Watsons, but then I studied the Watsons, not just because of the centennial. Then we got back into the values. I had read the book, [Watson’s A Business and Its Beliefs], when I first took over [at our] first annual meeting, even though I had to read it as a new employee. So I went back through all that stuff again. You have this inclination to understand and study what worked in the past, understanding that it repeats itself. I’ll give you a good example.
Post World War II, the Watsons expanded into a lot of the European markets at that point in time, expanded IBM’s global footprint well ahead of its time. Opened up facilities in Berlin and places like that. But then of course as NATO and Europe reconstructed itself, we had the huge benefit of those decisions that the Watsons had made, later, but certainly a huge benefit associated with that. Today, the correlation is that Ginni’s creating the growth market units, the Chinas, the Brazils, the Indias, the Russias, the eastern Europes, the Africas. It’s the same thing: Expand the footprint beyond just where you’ve been concentrated historically. So you can see how that repeats itself.
In sports, and even in music, you learn the importance of orchestrational teamwork, because if you don’t work together, it doesn’t work, right? Especially in sports, you learn competitiveness. You realize that you have to work together, you have to in many ways — I was in selfless positions. I mean literally center defensive end is a selfless position. I was in the orchestra; I wasn’t the star performer. I was in a pit with a miner’s helmet and a light reading music, playing. My role was not exactly a big role. I was just in literally the pit with a light on my head trying to read the music with 20 other people, whatever it happened to be. So you accept it for what it was. I was never the star performer. So you were always in a role, and you were always trying to be a part of this entity or team that made things successful. So I think that has an effect.
You need to be competitive. There’s no doubt that to survive the job of CEO for 10 years or even for any period of time, you have to have stamina, resilience and you have to be competitive and have some self awareness, because [otherwise] you can’t get through the ups and the downs. There are a lot of ups and downs.
Useem: Let’s take that forward with this question. In almost 40 years at the company, a decade as chief executive, you’ve made hundreds of major decisions. Looking back on your bigger decisions, what was the toughest single decision, and why was that hard to make at the time?
Palmisano: The hardest decision for me was not the PC. Everybody [says]: “It had to be the PC.” It really wasn’t because it was so economically straightforward. The hardest decision for me was dealing with the pension problem [in the mid-2000s] because you were touching the fabric of the business…. Our pension liability was bigger than our revenue. We had to make a change. It’s obvious to us, the senior management of the company. It should be obvious today to state and local governments and federal governments and the like. It takes a lot of courage to be able to make the decision because you’re touching so many people. So you have to [act] with fairness.
I won’t take you through all the details of how we did it, but we made sure that certain populations that could have been more severely impacted than others, we gave them a more attractive transition because it was fair. It didn’t make it easy for anybody. We eliminated all the executive plans as well, so everybody was affected, top to bottom. But again … our liability was bigger than our revenue. People said, “Of course you had to make the change.” But at the time, it was controversial. There were going to be special bills in the legislature called the IBM amendment that were being sponsored by people in the legislature. We almost ended up in the Supreme Court. Now you look at the states and you look at the federal government problems today with pensions and you say, “Well, it’s obvious. They’re bankrupt. It’s obvious.” Well, nobody’s making the change.
It was a really hard, gut wrenching decision because you’re touching so many people’s lives. You know you have to do it or you’re not going to survive. You could be an airline or a car company. You have a role model out there that says, “If you don’t, this is what you are.” I got it. Okay? You don’t want to do that. But you still have to do it. And it could be that you could push it off to your successor. You could. I just didn’t think it was the right thing to do. And politically, the political timing was not so great…. Today I think it would be easier because everybody sees what the [problems] are. You’ve got to look at the problems. But then this was well ahead of when they became obvious to society.
Useem: Sam, you were not shy about making the big decisions, facing up to them, getting them done, executing around them. As you have coached others, mentored people who have come up through the ranks in the company, is there a line of advice that you can offer to help them face up to, and make, tough decisions? How would you phrase that if you were with a mentee?
Palmisano: If you don’t put yourself first, they are easy decisions to make. It’s not about you, and I mean this in all sincerity. Because if you’re worrying about your reputation or your legacy or whatever — you put something first beyond the institution — then it’s hard because your reasoning is clouded, because you’ve got these dimensions of thought that aren’t based on reality because it’s your own personality. But if you just look at it and say, “No, it’s not about me; it’s about the future of the IBM company. How does IBM stay sustainable for the next 100 years?”…. For me, it was always easy.
But you can see people who dwell with that all the time. You can watch them make this trade off between themselves and the institution. And whenever they make that trade off, when you bias it to yourself versus the institution, then it gets really hard and you make the wrong decisions. You’ve got to be able to almost put yourself in this third party state … as if you’re just a temporary steward in time. And that’s what you are. You’re not the charismatic leader. You’re not going to be the messiah. You’re a business guy. You’re a temporary steward of a wonderful institution, and your role is to preserve the institution. It’s not about yourself. And if they pan you, they pan you. If they’re going to pan you, okay, fine, so be it. Don’t read your press clips. I learned that in sports. Never read your press clips.
Useem: Among your biggest decisions along the way, made every year actually, is to continue to invest in research and development. Your R&D budget is one of the biggest out there in our universe. In making that decision, it’s pretty obvious that you’ve committed to the future of the company through technology and innovation. Stepping back from that, do you want to share with us some of the secrets of remaining innovative here at IBM?
Palmisano: The key is, if you want to be rewarded with higher margins, you have to do unique things. You can’t do what everybody else does, right? So that’s why in technology, it’s research. I think it’s true for any business, by the way. If you don’t do anything, my question is why would they give you their money? Why would they invest in you? Why would they work for you? Why would society let you operate? Why would they give you their money as a client? You have to do unique things, which means you have to innovate and you have to invent, right? So that’s the key. You have to start with funding it, and you have to have the smart people.
Beyond that, you need a process that encourages it. So you need to let these guys come up with these ideas and give them some runway because not everything is going to be perfect. For example, there’s a great story around Watson, the Jeopardy machine, which is now a commercial. I’ve seen it. But the wonderful story was, because I go to research once a year and I tell these guys: “Show me what you’re thinking about. What’s going to change society? What’s going to change business? What’s going to be the impact to IBM?” So they had all these technologies. You can barely understand them, and I’m around this stuff every day. So I said to the guys, “You know, we need a game. We need something people can understand. How about a video game? They can play it and then we’ll give scholarships to the kids who win, to their schools if they get into a top schools. Wouldn’t that be great?”
So then these guys are off, and they’re at a bar and they’re watching Jeopardy. And this guy [David] Ferrucci…looks up and he goes, “You know, we could do that. We could do that.” So he goes into the head of research, it was Paul Horn in those days, and said, “Hey, we could do this. We could win that game. We could play Jeopardy and we could win.” And Paul goes, “Come on, nobody can do this.” ….[David said], “Just give me $10 million to get started.” It’s not a lot of money, I mean there’s $6 billion, right? So Paul goes, “Here, take the $10 million and go hire some people and see what you can do.” And then he came back in three, whatever it was, two, three years later and they invented this thing.
So you have to have a management system that encourages these people, and gives them a little bit of funding, not get carried away. Don’t give him $100 million to fool around. But give him some money to get him started and see where it goes. I think innovation also applies to the business model, like globally integrating IBM. Run it as one company and scale it. I mean you can do the same thing on business process too, by the way, as far as how we operate the company, applying analytics and all those sorts of things. But you need to give people the flexibility.
The problem is that if you trade it off, and … I feel strongly about this, but $6 billion a year, just think how many quarters we could have made cutting out the $6 billion. You know, we didn’t. We still had record performance. We had record, record and record. Record cash, record earnings, record this, record that, right? But we didn’t because we kept investing. You could respond to the pressures that are put on you multiple different ways. Easy thing for us to then do, just keep cutting that thing down. Other companies in tech have done it, and then you see what happens over time.
So I really go back to this creating the environment or culture of innovation. Put the enterprise ahead of the individual. You’re a temporary mentor; you’re a temporary steward of time. Look at yourself in the context — I guess that’s my history major — look in the context of history, which you are, not in the context of yourself at the moment, and you’ll reach a different set of conclusions.
Useem: You’ve presided for a decade over a company that has a more than 100-year history. I think you’ve had nine chief executives going back over 100 years. This is a company that indeed was built to last. As people look back on your reign here as chief executive of IBM, what do you hope they will see as your legacy?
Palmisano: I just hope, like I said, that I left it better than [when] I got there. If people would say that, adios. I’d be happy as can be. And then the other thing is that the ability to take IBM to more of these global markets, globalize the back office of the company. But most importantly, that’s how we got it better than where we were when I started, but that’s it. It’s too simple, I understand. As I say, it’s so boring and so old fashioned. It’s like our earnings. They’re so predictable and boring — there’s no surprise. I mean it’s so dull. It’s like 30 years old. Nobody thinks that way anymore, but I really do believe that. If you’re a company that’s 100 years old, be consistent in what you do. That’s a financial statement. Be consistent. No surprises. You’re 100 years old; act like you’re 100 years old. Don’t act like you’re 100 months old.
And then the other side of it is, just define it as, is the institution better off because of the time you spent there? And it’s like I said, it’s so boring nobody’s going to be excited about it. None of your students are going to go jump up and down and say, “I really just want to leave it better than I found it.” That is uninspiring…. You know, I have all these kids who go to those schools like yours now, so I understand what motivates them, what they’re taught. But for me it has worked. The only time that I think we ever got in trouble at IBM is when we missed the shift and/or people put themselves ahead of the company.
Useem: Let me close by thanking you, Sam, for your 40 years at the company, your decade as leader of the company, for helping us appreciate what it took to do what you’ve done. Arguably you took a company that was good under Lou Gerstner’s turnaround and made it great. I want to wish you will. You continue as chairman of the board here, and I wish you well for whatever lies ahead. So thank you very much.
Palmisano: Great. I enjoyed it. Thank you.
