Brr. I remember it vividly.
IBM went from being the world's most profitable company in 1990 to
losing something like $8 billion in 1992--which was real money back
then. It was really hard for an executive to be the one to say that
the emperor had no clothes, because you could easily lose your place on
the golden escalator. Nobody did, until too late.
1992 was a very strange time. (It's important to remember that IBM had
never had a layoff in the 78 years of its existence.) After the
departure of John Akers and Jack Kuehler, on whose watch Humpty fell off
the wall, the new bean-counter-in-chief announced the following program:
(1) Your budgets are being cut by some unspecified (but large) amount in
each of the next N years;
(2) Depreciation (formerly paid from a corporate bucket) now comes out
of your department budget--the same one your salaries come out of;
(3) We have this $8 billion pot of money to use to write stuff off against.
That put all the line managers in a cleft stick--basically, they could
either keep their stuff or their people, but not both. It resulted in
an absolute orgy of crushing new equipment--the good stuff that
(unfortunately) had book value. The amount of waste and destruction
that occurred was really monumental, and it was all for purely
accounting reasons. In principle it could have been sold off, but in
reality there was far too much stuff, and it was far too specialized, so
it almost all got sent to the crusher. As one example that I know
about, crushing a brand new $2M custom copper deposition tool delayed
the introduction of copper metallization in CMOS by at least a year, and
perhaps more. The line managers weren't at fault--what's the use of a
building full of shiny equipment with nobody to run it?--but it was an
obscene waste, which offended me very deeply.
Being young and foolish (and the son of an obsessively honest CEO type)
I stood up on my hind legs in front of several hundred people and asked
the new CFO to explain why it was a good idea to crush all this new
equipment. He answered, 'I hope we aren't doing that.' (Whoops.) You
could have heard a pin drop in that auditorium. He subsequently
unleashed a few dozen auditors on IBM Microelectronics and IBM Research.
I had asked because I genuinely wanted to know, but I sure kept my head
down for a couple of years after that! (To the great credit of my
immediate management, I got in zero trouble for that piece of naivete.)
It's certainly true that they had to stop the bleeding, and in general I
think Gerstner did a very good job--much better than his predecessor or
his successor--but those perverse incentives did a lot of short-term
damage, and also set in motion the destruction of the company's culture,
which unfortunately is now nearly complete. It was a great place once,
and I was very lucky to be there.
Cheers
Phil Hobbs