Podcast: The Rise, Fall, and Reinvention of IBM, With Jim Cortada

June 14, 2021

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IBM shaped the way the world did business for decades, driving the government’s technological innovation, competing to build the first PCs, and adapting to service economy. Few people know IBM’s fascinating history as well as Jim Cortada, a senior research fellow at the University of Minnesota and the author of IBM: The Rise and Fall and Reinvention of a Global Icon. He spent 38 years at IBM in sales, consulting, managerial, and research roles. Rob and Jackie sit down with Jim to discuss how IBM’s strategies led to its biggest successes and failures, and how these decisions shed light on global history.

 

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Rob Atkinson: Welcome to innovation files, I’m Rob Atkinson, Founder and President of the Information Technology & Innovation Foundation. We’re a DC-based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF—from the broad economics of innovation to specific policy and regulatory questions about new technologies.

Jackie Whisman: And our guest today is Jim Cortada, who is a senior research fellow at the University of Minnesota and the author of IBM: The Rise and Fall and Reinvention of a Global Icon. He worked at IBM for 38 years in sales, consulting, managerial, and research positions. Welcome, Jim.

Jim CortadaJim Cortada: Thank you. Delighted to be here.

Jackie Whisman: We’re happy to have you. Your book is so interesting because, aside from maybe you and Rob, I don’t think too many of us spend a ton of time thinking about the ins and outs of IBM. But, as you lay out, for decades, the company really shaped the way the world did business. And I would love to hear more about what prompted you to write the book, your process… it’s all just so interesting.

Jim Cortada: I came into IBM with a Ph.D. in history. So I was always going to be interested in the history of the company, the history of my customers over the years, the history of issues. And so, coming into IBM, I also discovered that IBM had a fabulous archive that had been around since the 1960s with tons of material, that nobody else had looked at other than advertising, marketing, and the legal community. So I said, “Wow, there’s an opportunity here.”

So I began to collect material in anticipation of someday writing a formal history of IBM. Several have been written, but increasingly, as I learned about IBM’s history, I found them wanting in one way or another. Long story short, I knew I couldn’t really write a formal history as long as I was an employee of the company. But for 25, 30 years, people had said, “Well, Jim, when are you going to write the history of (The History, as they would say,) of IBM?” And I said, “Well, eventually.”

When I left IBM, I began to think seriously about writing this history. I had already written a number of books about the history of information technology in the industry. So, putting together the outline and what have you over the course of about 18 months led me to conclude, I was now ready to write the history, that I had enough material, that I had enough maturity, and also distance from the company. That’s very, very important. You cannot walk out of a major job, say in government or in another corporation, and immediately write about it and have the perspective that distance provides. So I refused to pick up a pen or type anything about IBM for two years. And then when I started to write, I wrote very quickly. The story just jumped out very rapidly. I had all the research materials, the books, the articles, the footnotes, all that kind of material. And so, I actually wrote this thing, the first draft, very, very quickly as a result of that.

Rob Atkinson: So Jimmy, by the way, for our listeners, you mentioned other books you have. I have in my office—which I haven’t seen in a long, long, long time—but in my office is your three volume set on the history of IT, which is, I forget the title of it. You remember, you know...

Jim Cortada: Oh, The Digital Hand.

Rob Atkinson: The Digital Hand is a play on the invisible hand.

Jim Cortada: With Al Chandler’s permission, I flew to Boston to meet with Harvard historian, Al Chandler, the Dean of Historians, who had written the Visible Hand, which is the major work on how modern management operates. And I asked for his permission to use The Digital Hand title. He said, “You don’t need my permission.” I said, “Yes, I do need your permission and your blessing.” And he had stolen his title from Adam Smith, the Invisible Hand.

So the arrogance of my using the title was due more to the fact that computers fundamentally changed the nature of work. And that was really the subject. I looked at 18 industries specifically, how did computers change the nature of work? And that’s how we got to the title. And he blessed the title. He said, “Okay, it’s a good title.” He read the first volume when it was in manuscript form. He said, “Yeah, this is going to work.” And then soon after he died.

Rob Atkinson: Chandler to me is the premier historian. If one wants to understand American 20th century business and evolution, there’s nobody better than Chandler. I think more people should read him. I knew a fair amount of history about IBM. I knew for example, that the government was involved in various parts of IBM or helping or intersecting with them. But I was struck by just how important it was. So for example, I think it was the 1890 census when Herman Hollerith, who was one of the original sort of founders, if you will, of IBM, his punch card machine. You talked a lot about the critical role of the federal government in purchasing mainframe computers. There weren’t many people who had the wherewithal to buy mainframes and the feds back in those days with the Cold War was one of those. Can you say a little bit more about, obviously it was the genius of Watson, Thomas Watson Jr. and Sr. It was their genius that, and Holdsworth, that built this amazing company. But the federal government played an enabling role. Can you say a little bit more about that?

Jim Cortada: The federal government was IBM’s number one customer for over a century. Let’s begin with that. The technologies that IBM developed and sold could only be acquired by organizations that had big data requirements, data requirements that were complicated to work with, and had the financial wherewithal to pay for it. That’s what made IBM so important, both to the federal government on the one hand, but federal government for IBM. In fact, at one point IBM had an entire division set up whose sole purpose was to service the federal government with over 10,000 employees in it—just to give you a sense of magnitude. And they didn’t cover the entire waterfront. They just covered the needs here in Washington, DC. So, just kind of keep that in mind. Just about every major development in computing was funded at the risky, early stages by federal funding. All of the military agencies funded, at one time or another, IBM’s—and everybody else’s, not just IBM. And of course, ARPA, and then DARPA, everybody’s familiar with that as the Pentagon. And so on.

This went on for a well over a hundred years. This has been one set of activities. No set of activities involved, just doing the normal data processing. So for example, the reason why people got Social Security checks for the first 25 years or so was because IBM was the only company that could compete in time for the right technology to track all these records and to crank out checks from the Treasury Department for people starting in the 1930s. It was one of the greatest sales in IBM’s history. And then of course, in the Cold War, nuclear bombs required big computers and scientists. IBM had a ton of them and they kept recruiting them over the course of a century. So it was a symbiotic relationship that has worked all the way down to the present.

Rob Atkinson: You know, Jim, as I said before, there’s so much wonderful history and detail in this book that we could really spend days talking about it. But in one way, this book is a little bit like a Greek tragedy. It’s the rise of IBM through great leadership of great and unique leadership by Watson and Thomas Watson’s son. But, what was so interesting to me and particularly when IBM came up with what was called the 360, it was an amazing computer in the sixties. And it was a little bit of a bet the farm moment for IBM that Watson was willing to roll the dice on because it was an inflection point in computing and they got it. They put the money into it and then they were right up to the end, as you point out, not sure it was all going to play out and work out. And it was an amazing one. It did. And then they end up getting sued by the government for being successful.

But what’s to me almost as interesting is how IBM messed up the PC market. There were two things with the PC market. One, as you note in the book that the PC you could buy a 1995 was like the mainframe of 1975 or something like that. The second was Moore’s law. It should have been pretty clear. I mean, Gordon Moore came out with Moore’s law in the seventies. It should have been pretty clear to anybody that the processing speed and power of semiconductors and chips was keeping growing and they’re going to get more powerful. But anyway, the whole story was a lot of people know, IBM, they got into this after Apple came out with their Apple II, they decided to get into this. From my reading of it, they panicked a little bit. They thought, “Oh, if we don’t get in it right away, we’re going to miss the boat.” And so they ended up licensing the Microsoft software rather than developing their own operating system. And they ended up going with the Intel chip rather than developing their own chips, which they had the capability of. Would that have happened if Thomas Watson, Jr. had been in charge? And what was that all about? Was it just that they’d become too bureaucratic and too insular or something else?

Jim Cortada: A number of factors were involved. First, IBM had been tinkering around with distributed desktop computing for about seven years before the PC. So it knew what it was getting into. The first two machines they brought out didn’t work well, both in the marketplace and for IBM. IBM didn’t know how to sell little baby machines. Let’s just cut to the chase on that. And they learned that lesson in the mid-seventies. And so when they got around to introducing the PC in 1981, they used a slightly different model. Slightly in the sense that they, in addition to using the regular salesforce, they also use dealers, something they had never worked with before. So that was new, but it was innovative. But then in the second half of the 1970s, IBM’s customers kept coming back to the company and saying, “Listen, my people in the engineering department and accounting department, so they’re all going out and buying these little machines, Commodores, Apples, whatever it is. They don’t talk to each other. I’m going to have to maintain those. They’re getting mad at my data centers. You got to bring out a PC so you can rationalize the market and help me, your customer, manage and control these devices.” So IBM said, “Okay, we’ve got to do that.” In addition, they also saw what was happening with Moore’s law and also with demand in the marketplace. IBM always knew what was going on in the marketplace. Don’t ever underestimate that. They paid a lot of people a lot of money decade after decade. They always knew what was going on. What they did was they said they couldn’t produce the product using the normal rigorous product development process that IBM had developed by the end of the 1960s. It was going to be too slow.

So Frank Carey, the CEO of the company said, “Well, we’re going to have to come up with a different way to do this thing.” So he got a real senior executive who knew his way around the company, Bill Lowe, and said, “Bill, go figure out a different way to build a PC and get it into the marketplace quickly.”

Bill Lowe did that. Came back 90 days later and said, “I’m going to put this together with pre-existing parts.” Which by the way, was how computers were built in the forties. You went out and got radio parts and stuff like that. And he said, “I’m going to do the same thing again.” And so the CEO said, “Okay, I’ll pay for it. Don’t tell anybody in the company, because all the mainframe guys will come after you.” He rented space in Boca Raton, Florida, hired people, negotiated with Microsoft and other providers and so on.

And in a year, delivered the PC. And it was fabulous. Everybody loved it. I remember it was a right configuration and had just had the right everything. And within two years, IBM owned 50% of the market for PCs. So by any measure, by 1984, three years later, you’d say, “IBM, you did it again. You’re unbelievably awesome.”

What they messed up on was the fact that they didn’t control the software and the architecture through patents and copyright. And that had been purposely done in order to be able to get into the business. And some folks, like Steve Jobs and others, recognized that they needed to control the copyrights and the patents. And Bill Gates did the same thing with his operating system, which was the operating system that went into the PC. That’s why Bill Gates became a wealthy man.

He could just as easily have been just another programmer out there and IBM could have taken over that operating system. And it would have gone well. Bill Lowe told me about 10, 15 years later, and I can say this now because he’s passed on, that he wished he had grabbed the patents and copyrights, even though it would have delayed possibly bringing out the machine. And his take at the time was, it was more important to get the machine out because that’s what our customers wanted.

I mean, that’s almost a quote from the gentlemen himself. And so it was a trade-off because these components were inexpensive and were dropping in costs, the Dells, the Commodores, all these companies could come into a business very, very quickly. They didn’t have the overhead of IBM. And so they’re able to sell these products for 10, 15, 20% less. And in a retail market, price was more important because everybody had good function. The technology was simple to put together. It worked. So nobody had a concern about that. So it was just a question in the marketplace of the gizmos, the whiz-bangs, the software that went into it. And then of course the costs. Just to give your audience a perspective, the killer app when the PC first came out, was the spreadsheet. You want to guess how many companies were offering spreadsheet software within five years? 3,000.

Yeah. And of course it was, to that time, what was going on with apps on Apple phones when every college kid was trying to write an application that would allow him to find out his friends and all the bars. Everybody had a product out. It’s probably the same number, maybe 6,000. But, you see what the idea is. I think that’s what happened.

Rob Atkinson: That was my sense as well—also from reading the book—that if they had just been a little bit more patient, I don’t know what, another six months maybe, a year, and they would have, there wouldn’t have been any wind tellers of what people call wind tellers. The windows...

Jim Cortada: Maybe a year; my guess is a year. But put yourself in that time, ‘81, it gets announced in August of ‘81. They started shipping product in October. They can’t make it fast enough. In fact, they underestimated demand by a couple hundred percent.

Rob Atkinson: Yeah.

Jim Cortada: They were rocking and rolling. This was 360 all over again. And people weren’t sleeping at night. I mean, they were working 24 hour a day. That smoke coming out of the factories.

Jackie Whisman: Then you go into the late eighties, early nineties, and you talk about how IBM almost died, but then resurrected itself by switching gears and going into services. And while this may be good for IBM, arguably it was bad for the nation because IBM ceded important hardware production to foreign competitors like the personal computer to Lenovo. And given IBM has seen sales reductions for many years running recently, maybe this wasn’t a great long-term strategy for them either. What do you think?

Jim Cortada: Two different issues. Let’s go back to the late eighties, early nineties. With regard to ceding production to other countries. Every manufacturing industry in the United States, or let me put it this way, in the Northern Hemisphere of the world was moving production to the Southern Hemisphere of the world and to Asia where labor was less expensive and where automation could leverage that as well. So this is not an IBM thing, per se. All of IBM’s competitors were also doing the same thing. With the results that, by the end of the 1980s, you had a footrace to see who could produce products for less cost, IBM, like most large corporations, and you add in here General Motors, Ford, all the usual suspects, had enormous cost structures, expense structures. That data from an earlier period before this was done, before your outsource manufacturing. And they had to bring that down or they’re all going to go out of business.

So there was a footrace in the 1980s to get that driven down, to answer your specific question. While at the same time at IBM, IBM had bet that mainframes would continue to be a big business, which it was and still is for the company today. But relative to the size of the market and relative to the demand of the market, it was not going to be as dominant as it was before.

So the challenge was to move to either get more diverse with more products or more services at the same time that it had to drive down its general operating costs and that of its products. So this was going on at the same time. Then what happened was the company couldn’t get this done fast enough. Call it bureaucracy, inertia, some denial on the part of some of the executives, old habits, all of the above fits in there.

And so it took a very long time for the company to change. But, it built into the culture of the company to change once it decides to do it very quickly. And the way it did it was that brought in an outside CEO who was not, if you will, infected with the old ways of doing things that IBM, Louis Gerstner. So he comes in in 1993, he’s a strategist by nature. He had done a couple of turnarounds before IBM. He said, “I got one more left in me” is his quote. So he came to IBM, found the place was crawling with lots of technology, smart people. Everybody was looking for somebody to tell him which hill to climb. And so when about 90 days, he had figured out which hill to climb. And as I say, the rest is history. He was able to do a very rapid turnaround. Probably the most rapid turnaround, successful turnaround, in the 1990s in corporate America. He kept mainframes.

He said, “Customers still want them. In fact, customers want one stop shopping. They want IBM to be Home Depot where you can get all the building materials you need for your house.” Whereas his processors said, “No, let’s have boutique shops for this, that, and the other thing.” And he said, “No, customers really want one stop shopping.” And he brought that back, which was an old tradition at IBM: providing one stop shopping. So that’s how we got through the critical period and why IBM bounced back so quickly in the nineties. That was essentially what was going on at the time.

Rob Atkinson: Yeah, I think that your report is a good one. There were two components. There was a sort of, almost like this kind of Japanese, Europe, IBM as too big, too slow, not really responding. And so there was that change. But then there was the later change, which was more after the financialization of the market overall. And you talk about this in IBM shifted what they called the “roadmaps.” It really put earnings per share as the major corporate target. If we can jack up earnings per share, we’re doing well. I’ll tell you our bias or my bias is that’s the wrong target for a company. You can’t ignore that, but there are ways to jack up your earnings.

Jim Cortada: Let’s discuss that because I agree with you. In fact, in the book, I called it a cancer.

Rob Atkinson: Yeah.

Jim Cortada: Here’s the deal to quote President Biden. He’s got a great phrase. I love it. The deal here was that IBM wanted to encourage the entire business to grow and innovate. And the CEO of the company said, “We will know that we are doing that properly if our earnings per share grows at a certain rate each year.” And they call that the roadmap. And in order to make that, people had to innovate, they had to sell more stuff and they had to take out expense out of the business. And they made that. And everybody said, “We’re geniuses.” The stock market loved it because they hit the targets and the price of the stock went up and high fives all over the place.

The problem with that is that when they did the second one, they said, well that felt so good, let’s do it again. Let’s order a second dessert. So they came out with another roadmap. But this one, they had taken so much creativity and converted into products and revenue and cost reduction so on the first one, that’s the second one was going to be harder to make. Everybody knew that. But it is what it is. Now, in IBM’s culture, if you put a number in front of an IBM employee, they will chase that like a dog who hasn’t eaten a piece of meat in a month. And that’s what happened. Everybody started focusing on the number, earnings for share, for example, and not on, let’s spend money here to grow this piece of the business which has gone contrary to that.

And let’s take out expenses in another part of the business which has been contrary to that. And the only way you can make the second set of numbers was to control expenses because you can control that. You couldn’t control whether a customer was going to buy more stuff. You couldn’t control when the next innovation was going to come out in technology. But by God, you could control expenses.

So that’s when you got all the layoffs, selling off of divisions, and everything else that everybody can make their little target that contributed to their earnings per share on a quarterly basis. And then went on, and that’s when everybody got into trouble, because as you said, they were focusing on the wrong target. The mistake was to have that target. And the second mistake was to hold onto that target too long. So, for example, when Ginni Rometty became the CEO of the company in 2012, she had been the architect of that second strategy because she owned strategy at IBM for a while.

Right before that. So it had her name on it, not just Mr. Palmisano’s name, it had her name on it. And she came in and the first several years, she remained true-blue, wedded to it. When everybody around her was saying, really? We’ve got a problem here. And they were reducing expenses more enthusiastically than we’re investing in our future. And it was that kind of a conversation. And then the stock market began to realize that that was a problem. And the value stock went down. Revenues went down for all the reasons that revenues always go down when you’re not paying attention to the market sufficiently. I mean, IBM was still churning out billions and billions of dollars in revenue and high profits on that. But it was cancerous.

Rob Atkinson: Yeah. It’s really striking how many companies have fallen into that trap. I wrote a piece called Who Lost Lucent? That really was the defining factor for Lucent in the dotcom bubble. They were competing against Ericsson. Ericsson, partly because they’re owned by a big wealthy family, the Wallenbergs, they were willing to take a shorter-term hit to earnings per share and figured, well, we’ll come back. We’re not going to cut all our R&D.

Lucent was advised by the stock market, and their CEO went along with it. “We’re going to cut, cut, cut to get our profitability up.” But then when the market came back, they were so damaged, they were so shrunken, that they couldn’t come back. Whereas Ericsson could come back. Another one, a good example of that, I remember this when Mark Hurd was leading HP, he was the golden boy. Oh my gosh. Look at the earnings from HP. This was the greatest company ever. And what they didn’t know was on the inside, he was stripping the company out. Stripping out core assets, uninvesting in the future. And then HP was I to say a shell of itself, but a much, much weaker company.

Jim Cortada: Absolutely right. One of the things I say in the book, and maybe I’ll get in trouble for this at some point, is that toward the end of the 1980s and early 1990s, and then again in the early 2000s, senior executives were paying way too much attention to what Wall Street analysts were saying. And yet, all those analysts, none of them had ever run a company before. Right? And so you had that problem. On the other hand, they probably should’ve spent more time paying attention to what economists are saying and what public officials in Washington were telling them about, let’s invest in the future and grow. I mean, think about DARPA. DARPA was willing to spend billions and billions of dollars scattered across the entire IT industry to invest in future technologies. And thank goodness they did. Otherwise we wouldn’t have a vaccine today. So, we probably should have spent more time listening to those folks because you can only get funding for risky projects. That’s never been a problem in the American economy since the 1890s. If you wanted to invent something new, a new rocket, whatever it is, yeah, you could go home and invent it yourself, or you go to DARPA and they’ll fund it. There’s enough fat in the American economy to do this. And it may take you 25 years before you get a cash cow out of it, but it can be done. So part of it is listening to the wrong people.

Rob Atkinson: Yeah. No what’s striking is—it’s funny or not funny, it’s tragic—we are working on a paper on what’s called the DMA, the Digital Market Act in Europe. And one of the criticisms that the European regulators are making of some of the big companies like Apple or Google, Amazon, is that they’re not paying enough attention to earnings per share. They’re focusing on long-term growth and they’re willing to sacrifice a little bit of profitability now to reinvest in the future. Now, the Europeans are saying, this is a problem. Just amazing.

Jim Cortada: Yeah. You need a balance. You need a balance. The big problem that I noticed at IBM, and with other larger American corporations, is this quarter fixation. And that comes really out of Wall Street. Whereas European firms were willing to stretch it out a little bit further, and you can even see it in little ways. I mean, Viking Cruises, it’s privately owned company. They understand, none of us are going to get on a cruise ship for a couple of years. So they found other ways to make sure that you didn’t forget who they are. Because they’re playing the long game while they’re still trying to figure out how to pay for all their boats every month and at least a skeleton crew. So they don’t start out just having a bunch of rusty old boats two years from now.

So you have to balance that. The balance is different in Europe than it is the United States. And now we have this very interesting business model coming out of China, where China and corporations are collaborating. So the profits and the cash flows are shifted back and forth. So you can maintain competition within say the Chinese economy, but at the same time, you’re making sure you’ve got 12 companies that are robust in a particular space at the same time. It’s a different model than what we have in the Western world. And one to watch.

Rob Atkinson: Absolutely. Well, Jim, we could go on for, at least I could go on for a long time because there’s so much valuable insights into this book. It’s oftentimes historians, they can get a lot of insights, but your advantage is you were on the inside. Sometimes that can distort your views. In this book, I really was impressed by what I thought was your very good objectivity. You were able to step away.

Jim Cortada: Thank you.

Rob Atkinson: Thank you so much for being here.

Jim Cortada: It’s my pleasure.

Jackie Whisman: We should have known that we couldn’t cover 110 years in less than 30 minutes, but we gave it our best shot. But that is it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website, itif.org. Follow us on Twitter, Facebook, and LinkedIn, @ITIFdc.

Rob Atkinson: And we have more episodes and great guests lined up. New episodes will drop every other Monday so we hope you will continue to tune in.

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Podcast: The Rise, Fall, and Reinvention of IBM, With Jim Cortada