Out of the Blue
Thomas J. Watson grew the world's most successful company by teaching a corps of businesspeople how to 'think.' Now, as Big Blue shrinks, a cadre of entrepreneurs with IBM experience are learning to think again
When Bill Holt finally got to tackle the project he had always dreamed of, he knew exactly how to go about it. Twenty-seven years at IBM -- 17 of them as a line manager -- had taught him a thing or two about how to plan, how to budget, and how to anticipate problems. He gathered reams of market data from industry experts and potential customers. He designed a prototype of the product. He created a detailed business plan and, using the large-format presentation graph paper familiar to anyone who has worked at IBM, drew up a step-by-step storyboard. But Holt wasn't launching some new peripheral or software application or mainframe server. In fact, he was no longer at IBM. The venture he was embarking on, with his brother (and former IBM employee), James, was Holt Brothers Barbecue.
"One of the things you learn at IBM is how to run a business. The rules and principles apply to any business you go into," Holt says. Since opening his restaurant, in 1992, he has grown it into an $800,000 joint. It recently garnered a local award for best barbecue in Atlanta. Holt's success makes him a member of an elite club of IBM expatriates turned entrepreneurs who attribute their accomplishments to the set of skills they learned at the computer company.
Once upon a time IBM was famous for its promise of lifetime employment. But times have changed. Initially through attrition and then through plain old layoffs, IBM has shed 180,000 employees since reaching its 406,000-person peak, in 1986. According to group vice-president William C. Hollett of Drake Beam Morin (DBM), the New York City-based outplacement firm handling IBM's refugees, that crowd is more entrepreneurial than any other cross section of downsized corporate lifers. "Historically, the culture of IBM has encouraged employees to try new things and suggest alternative means to solving problems," says Hollett. Drawing from numbers compiled from the DBM entrepreneurial workshops offered to people who have left IBM, he has discovered that roughly 15% to 18% of former IBM employees tackle entrepreneurial enterprises -- twice the percentage of all corporate refugees starting businesses.
Many Big Blue alumni traffic in the same high-tech knowledge they traded on at IBM. Yet businesses launched by former IBM employees are all over the map. They include TopsyTail Co., a Texas company that peddles hair gadgets; Finally Finished, a furniture-restoring company in upstate New York; Everyday Learning, a $7-million educational-publishing company in Evanston, Ill.; Preferred Staffing, a $14-million temporary-staffing agency based in Chicago; and Bob Soto's Diving Ltd., in Grand Cayman Island.
And they include legions of solo practitioners in either technical consulting or other -- sometimes far-flung -- pursuits. Private detective Bob Tomlin and comedian A.J. Jamal have more in common than an IBM pedigree and a successful solo career. Both praise their IBM experience as the secret to their success. "IBM taught us the logical way to think about a problem, how to break down a big problem into smaller components and solve each one," says Tomlin, who worked for IBM from 1968 until he took a generous retirement package, in 1992. Jamal, who hosts the Comedy Channel show Comic Justice, attributes his successful career to the basic skills he learned in his six and a half years with Big Blue in downtown Cleveland. "Everybody wonders why I am so businesslike with comedy -- and it dawned on me that doing comedy is like troubleshooting a technical problem. No matter what is happening with the machine, you can fix it. Is the green light on? The green light is on. Check the left panel. Is the red light on? The red light is on. Check the back panel. And so on. It's the logic IBM taught us."
IBM's entrepreneurial ex-employees are a large and vibrant enough group to support such endeavors as the Big Blue Alumni International, a nascent board on Prodigy where they can network. According to the board's cofounder Linda Anderson, more than 1,300 members have signed on since its launch, last year, making it the second-fastest-growing board on Prodigy. She and cofounder David Camm (another "Blue-blood") have also set up a "virtual corporation" of members who offer their home-based services to companies throughout the world -- a high-tech temp agency of former IBM employees. And Out of the Blue, a snappy monthly newsletter for IBM alumni, has, in only a year, attracted several thousand subscribers, according to publisher Alex Auerbach. "The newsletter," he says, "celebrates the real value to being an ex-IBMer -- that the training you received can be of value in your next job."
The entrepreneurs who have left IBM found much good to take with them. They were horrified not at big business, as you might imagine, but at bad business. So they set about building thriving companies by taking the best of what IBM taught its employees and shedding what no longer worked. Their new companies may be seen as attempts to re-create what IBM once stood for -- to re-create the company they joined rather than the one they left.* * *
The most visible sign of an IBM heritage is a company's well-trained sales force. "The ability to sell is key to growing a company," says Mike Coles, chief executive of Timecorp Systems Inc. He's convinced the rigorous training and motivation of his salespeople was the reason his $5-million company achieved the #410 spot on the 1994 Inc. 500 list of America's fastest-growing private companies.
At Big Blue, Coles learned IBM founder Thomas Watson Sr.'s first business principle: respect for the individual. Coles saw how that philosophy translated into myriad company-building strategies and everyday tactics. Perhaps the most visible was a sales philosophy propelled by people rather than product.
Historically, according to Tom Watson Jr., "IBM used sales commissions, advances, quotas, and guaranteed territories, at a time when most of those practices were still looked upon as innovations." The company groomed its elite force by sending every new sales hire to one year of intensive training followed by an apprentice period spent observing veterans, and then graduating them into a culture that encouraged excellence with lavish recognition and rewards.
Coles joined the company straight out of Florida State in 1966 with a dream of one day becoming IBM's controller, and like everyone else who aspired to the top management at IBM, went into sales. After the yearlong training program in Tallahassee (yes, he even sang songs from the IBM songbook), Coles won "rookie of the year" honors in his first year as a salesman, qualified for the Hundred Percent Club (which recognized salespeople who sold at least 100% of their annual quota) five times, and earned one coveted Golden Circle recognition, which sent him and his wife on a paid trip to Bermuda.
IBM's values took root for Coles, who left in 1980 out of disillusionment over the company's flagging performance. He went on to form and sell two companies before launching Timecorp, in 1988. Timecorp sells software systems that enable large retailers like Wal-Mart and Chi-Chi's to standardize rules and regulations or scheduling practices. Coles made sure building a sales-driven culture was his company's first priority. "You are not going to build a company without crack salespeople," he says.
Timecorp's training resembles IBM's down to everything but songs from the company songbook. Rather than hiring one employee at a time, Coles signs on at least three or four sales staffers at once, so he can train them in Timecorp University's four-week symposium. At that intense cultural and product indoctrination, Timecorp veterans teach newcomers about the company's products and how to sell them. After that the rookies do an obligatory apprenticeship with the pros. Once they complete training and become salespeople, they fight for corporate prizes.
Timecorp has also cloned IBM's practice of giving trips and recognition to excellent performers. Last year 16 of the company's 45 employees were rewarded for their efforts: each of the 16 winners was invited to bring a guest along on a cruise to the French West Indies aboard a windjammer. Drawing from the time when "you could not go into an IBM branch office without seeing a new-account bell or horn," Coles has mounted a huge brass bell in the Timecorp lobby for employees to ring to celebrate when they land a new account or debug a key product.
Coles also writes annual "quota letters" to his salespeople, detailing such goals as how much business he expects them to do in the coming year. He took that tradition directly -- and unconsciously -- from IBM. "I do that without even thinking about it," he says.
Well-motivated teams with a cultlike commitment to the company aren't limited to businesses like Timecorp. In fact, many companies founded by former IBMers extend the rewards and company-culture building beyond sales. At Bottomline Technologies, whose 150 employees include 30 IBM alums, all are treated to rewards, recognition, and corporate-culture building as extensive as the computer giant's. Bottomline started this year with a company "Kickoff Meeting," in which about 100 employees gathered at a local movie theater for a daylong event. At the meeting promotions were publicly recognized, divisions summed up their goals, and a dozen top performers were honored with $400 leadership awards. In March the high-performing salespeople attended a "winterfest" in Las Vegas. "It's important," says president Dan McGurl, "to have a regular system for rewarding excellence."
Motivational perks aren't the only cultural common bond among "Baby Blue" companies. The most re-created aspect of IBM is another outgrowth of Tom Watson Sr.'s primary dictum: generous human-resources practices. Those include, for instance, "open door" policies (a direct homage to Watson's practice of making it known that any employee with an unresolved problem with his or her supervisor could bring it directly to the company chief) and the development, even at small companies, of clear review processes and career paths.
When Mike James, an eight-year IBM veteran, took over his father's law-publishing start-up, Barclay's Law Publishers, in 1989, his first step was to establish performance objectives, coupled with regular performance reviews, for almost every employee in the organization. "I think the most important component of the IBM training was management of personnel," he explains, adding, "the biggest issue in a small business is the fair treatment of employees and the hiring of the right people." Since then the company's revenues have nearly doubled, to $11 million, and it now employs 100.* * *
In his new book, The Discipline of Market Leaders, Michael Treacy posits that leading companies excel by choosing to offer their customers the lowest-priced product, the superior product, or the product that best solves their problem. Until recent years IBM's success had always been undeniably based on products in the last category. "At IBM it wasn't necessary to have the best product line, but you had to solve the customer's needs," says 14-year IBM veteran Art Durham, current CEO of Opto Generic Devices, a manufacturer of motion-sensing products in Van Hornsville, N.Y.
The religion of providing solutions first and foremost is founded in another of Watson's basic beliefs: that you must listen to the customer. That notion is the gospel of scores of entrepreneurs who used to be with IBM. "One of the things we take from IBM is that we are a solution-oriented company, which is what IBM was in the old days, when it sold punch cards for companies to tabulate records or do payrolls," says McGurl of Bottomline. "It was a solution-oriented sell rather than a product, a box."
McGurl's Exeter, N.H., company sells automated check-printing systems to companies that write more than 50 checks a week. It has grown into a $15-million company since its founding, in 1989. Building a company from scratch has enabled McGurl to instill in it the notion of total customer service, which he saw drift away at his alma mater. He says that in his last years at IBM he "essentially became an order taker for each product and lost focus on how to add value for the customer."
That way of doing business contradicted the approach to selling he'd learned 32 years ago at Big Blue. "My training as a young IBM salesman was very much application oriented: we learned about inventory control; we learned about accounts receivable and the aging of accounts receivable and how even the early punch-card equipment prior to the introduction of early computers was all sold just on an application justification," says McGurl, who left IBM in 1984, when he was offered a generous severance package.
McGurl remembers his very first sale, to a garment manufacturer called Rosecrest Manufacturing, in Boston, in 1963. "The whole sale was understanding the cut-and-sold report and understanding the value of that information to management and then being able to show them how the computer could provide that information so they could make better use of their materials to produce better sportswear," he says.
That's precisely how he wants his salespeople to think today. "We are a solutions sell. Our application is check-disbursement technology. We are selling a better way to make payments and prevent check fraud," McGurl says. "Bottomline is successful because the application-selling idea is part of our sales team. That is how we train people to sell."
Bottomline drills into its sales force the story that the company's solution is "disbursement technology" -- hardware and software that make it easier and safer for companies to pay for people and things. The salespeople are given extensive product training so they can determine just what configuration would be appropriate to each customer -- as opposed to pushing the same product to everyone. "For each client we go out and figure out the requirements and then design a solution," McGurl says.
"I think IBM forgot that the users were most important. They thought they could dictate to people what they would use," says Dave Wenz, cofounder of Showcase Corp., in Rochester, Minn. Wenz is a former true Blue fellow who has thrived by building a company in a niche IBM defiantly neglected.
Wenz joined IBM in 1967, right out of college, and spent the next 21 and a half years with the company. Along the way he gained more patents and inventions than any previous programmer in company history. In his last IBM position, he worked on a new user interface for the AS/400 line. The interface would make the terminals more interactive, enabling the system to accommodate PCs and generally be more user-friendly. He thought it was a great idea, with one flaw. "IBM was determined to build the new user interface based on OS/2 [IBM's operating system]," says Wenz. But he took what amounted to a heretical position: "I said Microsoft Windows is going to win this war, and not OS/2."
Wenz encountered such opposition from company loyalists that he quit in January 1989 to build a company dedicated to opening up the AS/400 interface to other products. In 1991 Showcase released its first product, Showcase Vista, which permits the AS/400 line to accommodate computers using other operating systems. Its success was instantaneous. The company employs 95 now, did $10 million worth of business last year, and is growing by about 50% annually, says Wenz.
For Wenz and others, listening to customers means more than listening to the market; it means meeting with and responding to key customers -- another habit successful company builders have taken from IBM. Wenz, for instance, pays attention to a client advisory board comprising key customers who meet with the company every six months. And Coles of Timecorp and Bottomline's McGurl swear by similar processes.
Perhaps the most extreme example of customer-focused behavior is Steve Petracca, a 12-year IBM veteran who started Reply Corp. in 1989 to build clones of PS/2 (a popular IBM PC). Though in 1992 the company sold $37 million worth of computers, it lost $5 million. And when Compaq set off a vicious industry price war, Petracca realized he wouldn't be able to match the competition's price cuts. "We concluded we had to get out of the PC business," he says. In October 1992 the company laid off 40 of its 100 employees and set in place an entirely new strategy. Petracca went to his customers to ask how Reply should reinvent itself. After conducting an elaborate survey of the company's customer base, in January 1993 Reply successfully introduced motherboards and upgrades for the PS/2 installed base, and the company again closed the year with revenues of $37 million. But this time it earned a $3-million profit. Petracca projects that sales will reach $42 million this year and grow another 50% the next, and he plans to take his company public.* * *
Petracca believes that utterly abandoning a product in favor of something customers were asking for was a tactic he took away from his years at IBM, and something, ironically, that IBM was unable to accomplish when it most needed to. "At IBM we were so intent that we knew the right architecture that we didn't listen to the customers," he says. The lessons about what to adopt and what to avoid in building a successful company were not lost on him.
Petracca sums up what his IBM experience taught him to eschew with one simple symbolic rule: "We don't do color charts at Reply." At IBM he came to oversee 10 employees, each earning $75,000 a year for creating rip-roaring full-color charts for executives to wield at their meetings. "We would get into meetings and spend more time arguing over whether to use pie charts or bar charts than over the content of the data," he says, still horrified. It's not merely the charts but the accompanying mentality that he has rejected. "IBM guys like to build big organizations," Petracca says. He designed Reply to be lean and flexible.
Tomima Edmark, CEO of TopsyTail Co., has taken that attitude to the limit. Since founding her company with her $25,000 severance package from IBM, in 1992, she has sold more than 5 million TopsyTails, the $20 plastic hair tools made famous through national infomercials. She credits eight and a half years of company politics at IBM with teaching her that "organizations need to be very lean -- very clean -- very easy to communicate with." Her company has but four employees, who work in a bull pen. All other work is outsourced. Employees' business cards list only name and company -- no title. "The environment should be designed to maximize the company's output and not to maximize everybody's egos," Edmark says.
Yet Edmark feels she learned more at IBM about how to run a company than how not to. And, like most entrepreneurial IBM refugees, she still harbors a secret wish that IBM would simply go back to its roots. As Dave Wenz says, "Nobody that's worked for IBM for 20 years bears a grudge. I really believe that for many years they were the best company in the world. Who knows? They could be again. Frankly, I hope so."