What Lou Gerstner Could Teach Bill Clinton.

• Author: WORTH, ROBERT

Lessons for government from IBM's dramatic turnaround

IF STEPHEN KING WERE TO WRITE A NOVEL about the federal government, he could scarcely do any better than the tome that landed on President Clinton's desk on June 15. The Report of the President's Foreign Intelligence Advisory Board was destined to be grim reading: Its authors were asked to look into security lapses at the Energy Department following last winter's revelation that China had stolen high-level nuclear secrets. But what former Senator Warren Rudman and his fellow panelists saw was clearly beyond their worst fears. "Never have the members of the Special Investigative Panel witnessed a bureaucratic culture so thoroughly saturated with cynicism and disregard for authority," they write. The DOE hadn't simply let a few clever Chinese spies make off with classified papers. It was virtually inviting people to pilfer the material and know-how to make nuclear weapons. Although its scientists are among the best in the world, the Department's bureaucrats deliberately "defeat security reform initiatives by waiting them out." A honeycomb of bureaucracy has "diffused responsibility to the point where scores claim it, no one has enough to make a difference, and all fight for more." Furthermore, these problems "have been cited for immediate attention and resolution ... over and over ... ad nauseam." The authors conclude that the Department is simply incapable of maintaining nuclear security, and they propose that its weapons research and stockpile management functions be turned over to a new semi-autonomous sub-agency within the Department, or to a new independent agency.

You might suppose that any self-respecting corporate executive, viewing this catastrophe from the comfort of the breakfast table, would declare that only government could screw up so badly. Yet at least one former high-level IBM official saw a certain parallel between his former employer and the DOE. After all, it was only six years ago that IBM, once the world's premier computer company, was teetering on the brink of collapse. Between 1991 and 1993 the company had lost $15.4 billion, and sales of mainframes, its old standby, had dropped by half. These failures were not simply the reflection of a changing marketplace. Like the Energy Department, Big Blue was burdened with a vast, redundant bureaucracy that was virtually guaranteed lifetime employment and resisted change with all its might. It too had a culture of arrogance rooted in its record of scientific superiority. And like Energy, IBM had virtually given away some of its best technical assets to its competition--in this case Microsoft.

Finally, IBM too had been diagnosed ad nauseam, and many demands for reform had come and gone. Many computer industry observers figured it was curtains for Big Blue, and arrangements were being made to subdivide it (again, like the Energy Department). Even Lou Gerstner, the CEO who later came on board and ultimately turned the company around, was close to despair. "It just looked like it was going into a death spiral," he said later. "I wasn't convinced it was solvable."

Six years later, IBM is utterly transformed. The civil wars that crippled the company are over, and the arrogance that blinded it is gone. The covers of IBM's annual reports accurately reflect its internal change: Blue-suited men walking through a maze of computers have been replaced by smart-looking young women in bluejeans. Most importantly, the changes have paid off. In 1998 IBM had record revenues of $81.7 billion, and a profit of $6.3 billion. Its market capitalization has grown roughly tenfold since Gerstner took over, and Wall Street analysts expect the company's stock (and profits) to grow by at least 20 percent over the next year.

Time to start running the government like a business? Well, no. We've all grown tired of CEOs who think they can hop over for a stint in government and "kill that snake," as Ross Perot used to say. But the IBM story isn't your typical corporate fable. Lou Gerstner didn't just cut costs to make shareholders smile, or mouth the latest corporate slogans. His successful turnaround has already become the stuff of legend. Yet no one has bothered to point out that the parallels between Big Blue's problems and those of the federal government are uncanny. The excitement IBM's revival has stirred says a lot about the passion we all seem to feel for business stories at the end of the millennium. It also says a lot about what government might achieve if we could bring the same passion to its renewal.

Big Brothers

It's no accident that IBM and the federal government have had similar illnesses, because they grew up together. Thomas J. Watson, a former traveling salesman of organs and sewing machines, started his computing career with a punchcard accounting system that had been developed for the 1890 census. He changed his company's name to International Business Machines in 1924, and as the federal bureaucracy grew during the Depression, IBM grew with it. The Social Security Act of 1935 and the Wages-Hours Act of 1937 required companies to log the hours worked, wages paid, and overtime earned for America's 26 million workers. This was big business for a maker of tabulating machines and time clocks. IBM also mimicked the government's paternalistic solicitude: The company was among the first to provide group life insurance (1934), survivor benefits (1935), and paid vacations (1936), writes Robert Slater in Saving Big Blue. After the war, IBM's virtual lock on the nascent technology of computing made the company fantastically profitable.

At the same time, IBM began to develop the distinctive culture that would lead to its rise and ultimate fall. Tom Watson and his son, Tom Jr., were perfectionists who saw the family business as a sacred trust and ran it like benevolent dictators. Employees were expected to devote themselves utterly to the company--and to its founder. There were company songs, with lyrics like this: Our voices swell in admiration, of T.J. Watson proudly sing; He'll ever be our inspiration, to him our voices loudly ring.

In return for such devotion, employees were given all kinds of perks. "It was the kind of place where they might call you in on...