From last week's article (IBM's Culture Is Its Best Long-Term Investment Metric), here are the yearly revenue growth numbers over the last century achieved by each of International Business Machine's (NYSE:IBM) Chief Executive Officers -- from Watson Sr., IBM's founder, through the current Chief Executive Officer, Ginni Rometty.
The Watsons' 20th century sales culture produced amazing revenue growth for IBM's first eight decades, but the results of the last two have been inconsistent. To evaluate if there is revenue growth in IBM's future, a look at the past provides some interesting insights. Revenue per employee is an effective method to visualize sales productivity changes over time. Though it is only one of many measures for considering the overall health of a corporation, this particular one -- especially when evaluated over extended periods of time -- reflects sales effectiveness.
IBM's Sales Culture -- The Early Years
Sales morale in any organization is dependent primarily upon the men at the top and is based on their knowledge of the business, their personality, their integrity and their moral character.
Thomas J. Watson Sr., Human Relations
In 1930, the Great Depression was only a few months old when this statement, appearing in a feature article written by Watson Sr., placed the responsibility for the morale of a sales organization on the shoulders of the top corporate executives. It is one thing, though, to write an essay on a topic, and quite another to put your beliefs on display for every one of your employee-owners to witness.
By 1932, the economy had continued its downward spiral and would not reach bottom for another eighteen months. During that time, many CEOs failed to find a direction for their companies and lost them. Watson's decisions impacted not only the direction but the tenor of his corporation. At the IBM One Hundred Percent Club -- an annual recognition event for IBM's salesmen -- Watson brought his top executives on stage to face an audience filled with his best-of-the-best salesman. He told everyone there:
"We did not ask these [IBM executives] to come up here so that you might see how handsome they are, or just to hear them talk. That includes me. The reason they are here is that we want to give the men at headquarters an opportunity to look into the faces of the men who are most directly responsible for our company's progress."
That day, every IBM salesman knew they had an advocate in the corner office. More importantly, Watson's executives knew that they knew.
The chart below shows IBM's revenue and revenue per employee starting in 1934 -- the earliest time from which we have consistent sales numbers. It would appear he had the right processes, priorities and culture in place to support a productive, revenue-generating sales culture.
IBM's 20th Century Sales Culture -- A Time of Transition
IBM's greatest strength had always been its highly trained sales force. It still was.
William W. Simmons, Inside IBM: The Watson Years
By the mid-fifties, customers were growing dissatisfied and it had become clear that something had to change. As Bill Simmons (IBM Product and Market Planning Manager) points out in his book, Inside IBM, sales representatives were becoming jacks of all trades and masters of none, with a single salesman unable to master the breadth of solutions provided by IBM. But at the same time, customers wanted to deal with one IBM representative and not a plethora of product specialists. IBM needed a new sales model to grow its business -- the forecast was for slower growth.
In his research, Simmons discovered that a salesman with an industry specialty (as distinct from a product specialty) produces 50% more than a generalist. A pilot project in IBM's Data Processing Division (DPD) confirmed that advantage with a 20% rise in business within just three months. So in 1960, IBM DPD branch offices started the transition from a sales force of geographic product generalists to industry specialists. Branch offices changed names, from, for example, Chicago "South Shore" to Chicago "Banking and Insurance." It aligned its sales force within fifteen industries by customer. Sales representatives received industry education, and DPD incented its sales reps to cover less desirable industries (e.g., education, which has long sell cycles) with lucrative commission plan changes. By the end of 1963 -- just in time for the announcement of the System/360 -- two out of every three IBM DPD sales representatives were selling into specific industries.
By 1968, IBM's share of the insurance industry market was 88.5%; and while the competition remained focused on just two industries (banking and aerospace), IBM DPD stole market share in all fifteen. IBM swept the board.
Many academic authors have written about IBM. Especially of the Watsons, they always seem to comment on their "good luck." Unfortunately, most of these authors fail to understand a business philosophy where luck is defined as preparation meeting opportunity. IBM's focus on rewarding the individual for individual performance gave it an advantage. Every individual was always thinking about his or her next opportunity. It wasn't luck that the System/360 shipped with a sales force well positioned to sell it within all industries; it was a culture that encouraged wild ducks -- men and women who won't be tamed or shamed into being company men. Of course, no human institution is perfect, but it worked.
It was the powerful combination of technology and sales culture that made the System/360 so successful.
The Post-Watson Era
The Watsons embedded in IBM a culture of sales. Anyone wanting to reach the highest echelons of the corporate ranks knew they had to successfully carry a sales bag for IBM. Although many thought it unfair, Watson Sr. believed there was no substitute for the experience of carrying an individual sales quota, managing customer accounts and hearing "no" 9 out of 10 times a day, yet still persevering to be a consistent One Hundred Percent Club attendee.
But it was never a secret. I heard it many times in my career as I would ask about promotional opportunities. As with everything in life, there were rules to the game, and this one was well publicized. It was one of IBM's most sacred: the closer an individual was to the customer, the more they earned and promotions came easier. We knew, well into the nineties, that IBM's success rested on the shoulders of a select few: those that sold.
It is important to point out-especially in this time frame-to always evaluate more than just revenue per employee. IBM would lose money for three straight years at the end of the timeline covered by this chart. Yet, it was the remnants of the Watson sales culture that carried IBM -- even with the loss of one out of every two IBMers -- through the nineties. Watson Sr.'s 1932 legacy -- standing on stage in front of his sales force -- still lived, but time was having its deleterious effect on our top executives' cultural memories.
IBM's 21st Century Sales Culture -- A Time of Stagnation
Louis V. Gerstner took a culture defined by the three simple words -- Respect, Service and Excellence -- and replaced them with eight principles covering two pages in Who Says Elephants Can't Dance? Although revenue per employee rose sharply from 1993 to 1995, this was the result of massive headcount reductions, not sales process improvements. Sales productivity dropped by more than 5% over the next six years.
Samuel J. Palmisano replaced Gerstner's eight principles with five traits and nine competencies, which spanned several web pages. Always positioned in the press as the salesman's salesman, Palmisano did little to assist his former peers in sales over his nine years in the corner office. Revenue per employee stood at $228,000 in 2002, when he took the helm, and nine years later remained the same.
Under Sam's watch, an IBM culture that was always full of heroic sales stories (stories of salesmen closing deals on the last day of the year, of lab support blackening the skies to solve a customer problem, and of executive teams that understood the value of human relationships) was replaced by a deafening silence.
And as covered in my last article, linked above, Ginni Rometty is not off to a good start. To be fair, she is still working with the hand she has been dealt. She must focus now on transitioning her human resources organization from just an extension of finance to being a human relations organization. She must expect, enable, and set the example for her executives to be assistants to their teams.
The Last Eight Years -- Making Unsupported Claims
IBM's CEO and Board of Directors have claimed the following in their annual reports over the last eight years:
- 2006 IBM Annual Report-Simplifying and streamlining internal processes has improved operations, sales force productivity and processes, and these actions have improved client satisfaction when working with the company.
- 2007 IBM Annual Report-Simplifying and streamlining internal processes has improved operations, sales force productivity and processes, and these actions have improved client satisfaction.
- 2008 IBM Annual Report-Simplifying and streamlining internal processes has improved operations, sales force productivity and processes, and these actions have improved client satisfaction.
- 2009 IBM Annual Report-Simplifying and streamlining internal processes has improved operations, sales force productivity and processes.
- 2010 IBM Annual Report-Simplifying and streamlining internal processes has improved operations, sales force productivity and processes.
- 2011 IBM Annual Report-Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency.
- 2012 IBM Annual Report-Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency.
- 2013 IBM Annual Report-Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency.
It is hard to tell what these annual reports are using to substantiate such claims: it is definitely not revenue per employee or sales morale. The revenue per employee data covering the last two decades and the last ten years speak for themselves.
And a sales force that isn't selling? Well, it is not a happy place.
Is There Revenue Growth in the Future?
IBM's 21st Century sales processes are not contributing to revenue growth. Streamlining has gone as far as it can. IBM's consistent simplifications are nothing but constant complications for its sales reps-destroying sales productivity.
Ms. Rometty has set a new direction for IBM in the latest annual shareholders' meeting to capture what she sees as "the phenomenon of our age-big data." When IBM transformed its sales culture in the fifties, it wasn't just technology that initiated change, but a sharp observation by one employee who was motivated to make a difference. He found a supportive executive team rooted in a four-decade cultural heritage extending back to IBM's founder. Big data will mean nothing without an employee-owner to make something of it, and a culture supportive of change.
Ultimately, this is still her greatest hurdle: IBM produces technology, but its history proves it was not just a technology company--it was also a culture that encouraged individual thought and emboldened individual action. Without a supportive sales culture, her data initiative is just so much data, no matter how big.
She must change IBM's 21st Century culture to achieve sustained revenue growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.