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Q&A with Lou Gerstner December 2, 1999 "The Internet Is All about Business, Not Browsing" IBM's chairman and CEO, Lou Gerstner, talks about how Big Blue came to be a champion of e-business IBM Chairman Louis V. Gerstner Jr. may not be thought of as a tech visionary, but he was remarkably prescient about the Internet. Back in 1995, Gerstner took what was then a contrarian position: The Internet isn't about browsing or content, he maintained, but business-to-business e-commerce. In an expanded Q&A with Business Week's Ira Sager, Gerstner -- sometimes pounding his fist on the table for emphasis -- shared his thoughts about IBM and the future of e-business. BW: What shaped your early thinking about the Internet? Gerstner: If you look at the history of how IBM got to e-business, you have to go back to March of 1994. It was the first time I went before the analysts. And they asked me, "What is your strategy?" One [part of it] was called network-centric computing. That was 11 months after I joined the company. We understood it in a rudimentary way at that time. Soon after, I commissioned a task force [that] worked for a year on what it really meant to exploit network-centric computing. Their work came together in September of 1995. And we made a very important decision in October. It was the second bet-the-company [decision] that I made. The first was to keep the company together. We said, "If we really believe this, we're going to reprioritize all the budgets in the company." And in a period of four weeks, we reallocated $300 million. We created the Internet division. It became the catalyst for change in the company. BW: You also made an unconventional decision that the Internet was about business transactions. How did that come about? Gerstner: Our work concluded that the Internet is all about business, not browsing: doing transactions, not looking up information. That came about because every time I'd meet with the task force they would present all this wonderful technology to me, and I would say, "Well, what's a customer going to do with it?" That's where we really began to believe that every physical transaction in the world was going to be augmented or replaced by a digital transaction. BW: Why then was IBM late to focus on dot.com companies as potential customers? Gerstner: There's no question we were late. We know that, but we're fixing that in a hurry. The dot.coms have a different model that they've pursued -- in how they've thought about and purchase technology. And we've had to adapt our model to them. BW: When you met with Wall Street in May, you compared IBM's e-business to the top 25 Internet companies. Were you trying to get analysts to view IBM as an Internet company? Gerstner: If you define an Internet company as [one] that is totally committed to transform its internal business, and in our case, to also have it [the Net] be the basis of our entire product offering, then I think there is no company that's as much an Internet company as we are. Now, if you say an Internet company is [one] that has rapidly growing revenue and no profits, then I don't want to be classified as an Internet company. BW: In one of the periods of greatest growth in Internet computing overall, your server business is still struggling. Why is it not benefiting from the success you've had in e-business? Gerstner: We've had a very focused strategy on the server business since I've been here. The first thing is that when I got here, IBM was going to die if we didn't fix the mainframe business. I mean, it wasn't going to make it. We have totally repositioned that business. We have had record MIPS [a measure of mainframe computer power] shipments each of the last six years -- and by the way, probably including this year, even with this Y2K discontinuity. BW: But in each of those six years, the revenue from mainframe sales has declined? Gerstner: Right, because the issue was the relevancy of the product. We've invested a lot in technology, and we've cut the prices enormously. Our customers are saying, "Hey, this product is now relevant to me." We consciously took the pricing down. And the profit impact? We ate that to reposition the business. And as the networked world emerges, guess what? The 390 [IBM's mainframe line] is becoming increasingly a critical resource for many of our customers in their e-business applications. Next, we totally missed PC servers. Two years ago we got very serious about them. We were nothing in PC servers. We have been growing the Intel-based server business to the point now that we and Dell are neck and neck for No. 2 and putting real pressure on Compaq. In Unix, we have been an uninspiring competitor against Sun and HP. We are just putting our act together here. I don't want to describe our strategy in any detail. You will see a Unix program roll out here that will be very different over the next year or two. Since a great part of the Internet server [market] is Unix-based, we're behind in that arena, and we have to take that share back. BW: How can companies get the biggest payoff from using the Net? Gerstner: The Internet is ultimately about innovation and integration. Innovation is what your objective is -- in cost structures, selling, marketing, sales, supply chain. But you don't get the innovation unless you integrate Web technology into the processes by which you run your business. And that's been the rude awakening for a lot of companies -- the theory that you could set up an e-commerce site, host it on a little PC server, and do e-commerce. Suddenly, people began to realize that you cannot do an e-commerce transaction unless it's integrated into your systems for logistics, fulfillment, credit, manufacturing, and accounts receivable/accounts payable. And so the true revolution coming from the Web is when the Web can get integrated with the information technology infrastructure in a company and the business processes that it runs. BW: People talk about the Internet being a landscape-altering technology. Describe how the Internet has changed the landscape within IBM. Gerstner: When we decided that we had to be an e-business ourselves, we discovered what every large company has: When you bring your company to the Web, when you truly integrate business processes to the Web, you expose -- to yourself and ultimately your customers -- all of the inefficiency that comes from silos or decentralized organizations. Many large companies are very decentralized. They're all over Corporate America. Banks are a great example: mortgage departments, credit-card departments, home-loan departments. Now, when a customer comes to you on the Web, they're expecting to be able to move across those departments. They're expecting to see a common look and feel. They don't want to see pricing presented in different ways. They don't want to be bounced from department to department. BW: A lot of attention is paid to how the Internet can change business models. But what will the Net do for traditional markets? Gerstner: All you have to do is watch television and see these guys raising their hands in the financial markets, and you say, "This is going to end. There has to be a more efficient way." And so we will see the emergence of electronic marketplaces that will have powerful effects, real discontinuities, in the existing structure of markets. Now the interesting thing you could ask is: What about electronic marketplaces in our own business -- the computer business? I don't think we've seen a lot of that emerge yet. Instead, what we believe is going to be very important is the delivery of traditional software and services and hardware over the Net. That's a form of electronic marketplace. What we're seeing as we host people's Web sites, commerce sites for the most part, is that people are going to have somebody host that whole thing for them. It will start with commerce and then start moving into business processes. When we can actually run significant applications for the customer over the Net, we'll see a lot more outsourcing. We think that that's a big service opportunity for us. BW: Is the growth of your business hurt by a shortage of skilled workers? Gerstner: Absolutely. Our services business has been growing like crazy. In the explosive e-business area, we cannot handle the demand we have for services. We are looking at some acquisitions -- they'll be small organizations. We're [also] linking up with other companies. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS BW e.biz Cover Story, Dec. 13, 1999: "Inside IBM" [an error occurred while processing this directive]