Gerstner's Second Act: Can IBM Stave Off Mircosoft

Stave Off Microsoft?Capitalism is the economic arm of American democracy, the system we live under that makes certain the obviously organic hunger in some individuals for riches and power gets counterbalanced by an equally obvious organic obsession in others to tear the idol down.

In the computer universe, there's no denying that Bill Gates is an idol: Microsoft has positioned itself as the powerful gatekeeper to the wired world. It's an elevation that's been achieved as much by tactics as by weaponry. The speech to his troops: the easier the interface for customers, the better. "In the software industry," notes one participant in the tech wars, "the company is legendary for the way it targets a rival, dissects its strengths and weaknesses, then finds a way to devour its market. Think about Borland, Lotus, WordPerfect, and Novell. Each was mighty in its day, but they were hobbled after Microsoft set its sights on them."

In retrospect, this is the curse that often comes with success.

Lurking in the shadows, however, is an older autocrat who's already been a victim of that curse; who now may have learned how to dissect a rival's weaknesses; and who may be in the process of figuring out how to undermine its strengths.

IBM-stodgy and immobilized, by some accounts-has, for the past four years, been led by CEO Louis V. Gerstner, whose "genius" is credited with turning the company around: making it more aggressive, forward-thinking and better able to compete, says technology consultant Michael French, vp of Insight Research Corp., based in Parsippany, NJ. "Gerstner doesn't have the Gates high profile or his visibility," comments French, but he's making IBM an effective competitor by moving forward on several fronts at once.

Not everyone agrees. Though French sees the battle for the banking and financial services industry as one in which the best weapon very well might be marketing-a human-oriented expertise-others feel it's technology, specifically that Microsoft is taking on mighty IBM by hitting at that company's prodigious back-office Unix and mainframe businesses with Windows NT. "The momentum (for NT) is just too strong," says John W. Geyer of the Gartner Group. If NT pushes ahead and IBM can't find a weakness by which it could successfully overcome the NT strategy, it could join the Microsoft victim-list of companies that, though still operational, have lost their way.

But in the financial services world, Microsoft-NT or not-is still a novice stacked up against the likes of IBM. "Microsoft is really a fledgling organization in the banking industry, even though several years ago they stepped up a lot of their vertical relationships," says IDC's Evan Quinn, director of Java and Internet software research. "If you take a look, especially in the back office and even in a lot of the front-office work, Microsoft's penetration in banking, though important, still trails a behemoth like IBM in terms of revenue."

IBM's management is where its greatest vulnerabilities lie: A monolith with an intractable system entrenched over many years, its inability to react quickly to challenge is notorious. Some sources argue that it's not the technology that's at fault, but the men and women who are creating and marketing it. Gerstner's challenge, then, is to revamp how his organization-his people-approaches the market.

Look at the people at IBM and the people at Microsoft, instructs Brigham Young University associate professor Michael D. Bush. Microsoft has been recruiting for years. They have the brainpower-the best and the brightest. Gates hires not only the brilliant and the agile, but also the possessed. They have "a fire in the belly," Bush says.

And as history shows, impassioned leadership at the top, used effectively, pulled this country out of more than one apparent death-dive. Think of FDR and December 7, 1941. Leadership found the message, figured out how to sell it, and sold it to a public which caught fire and came from off-the-edge-and-behind to win in the end.

Gerstner, infinitely quieter than Gates, gives no public signs of this messianic quality, yet-closely viewed-his strategic maneuvering indicates a sort of second coming of IBM. Comments Piper Jaffray's Bill Burnham, senior research analyst, electronic commerce, "He was the first guy at IBM not to wear a suit." What this may signal, implies Burnham, is an attempt by Gerstner to effect a massive management change creating a culture that could engage in the kind of guerrilla warfare style that would be effective against any competitor, including Microsoft.

Historical insight-and its pertinence to the survival question-is worth noting. Clifford Stoll, an astronomer whose book, Silicon Snake Oil: Second Thoughts on the Information Highway, has drawn attention for its contrarian opinions, argues that banking's frenzy for ever-more technology will go the way of the frenzy for nuclear power as a cheaper, cleaner, better source of energy or educational TV as a better way than books, schools, or parental attention for developing young minds.

It's time to look around at what's happened, Stoll insists. Nuclear power ended up costing us more money; educational TV produced a generation of kids who just watched more and more television. Were those who were called Luddites about nuclear power or educational TV really Luddites? "Maybe they were the visionaries," Stoll says. The real visionaries will be those who recognize the human values in the business world.

Recent history teaches us the truth of such assertions. Thus, instead of debating which new technology to buy-replacing low-wage, back-office personnel with high-wage network jocks and people who write Web pages-banks should be asking themselves, "Who are my customers?"

Gartner Group's Geyer agrees. Though more techno-friendly than Stoll, he says the question is, "Who owns the customer relationship? That's the real key."

Thus, if it's not technology itself that's of first importance, but, rather, human values, Microsoft could be following a strategy that could prove vulnerable to attack-subtle and otherwise-by an even more acute competitor.

Implemented skillfully and managed well, the market message of "customer relationship"-banks with the public, IBM with banks-could be a powerful tactic, especially if it's integrated with efforts on other fronts: the forging of alliances in a common enemies strategy and an increase in technological innovation.

Battle for control of the back office

Conversations with senior IBM executives, an examination of apparent strategies and observations from outsiders reveal that, within Big Blue, some attention is being paid to such arguments. Gerstner was unavailable for comment.

The battle, it seems, is just beginning, and while the outcome may be in doubt for some years, IBM-its anti-Microsoft strategy still evolving-is not content to be an also-ran in financial services and electronic commerce. "IBM has put tons of investment into its e-commerce business; they've changed the way they participate in partnerships with companies," says Quinn. "Fifteen years ago, if it wasn't invented by IBM, IBM didn't sell it. Now they are open to suggestions from everybody."

In financial services, the major theater of operations is the back office where mainframes once dominated. To Microsoft, the complexity of the machine is the obvious weakness the software giant can attack. And attack it does.

While Microsoft officials concede that an institution can't run a monolithic accounting system on 100 PCs, but must do so on a mainframe, they argue that if the system were written using component technology instead of COBOL mainframe language, the accounting system could be run on 100 PCs. And the price of 100 PCs is a lot less than the price of a mainframe. Using four specialized servers linked together, the scalability of such technology can arguably run every part of a $20 billion dollar bank, from core processing and the teller line to ATM support and PC banking.

Salvation in the form of e-commerce

Perhaps, but there are arguments against this. The use of Microsoft's Windows NT for core processing is an "unrealistic option right now," says Piper Jaffray's Burnham. Besides capacity, there is the vital reliability argument which the mainframe still wins. But it is NT, Burnham says, that "Microsoft is using to take on IBM."

Microsoft has a reputation as a relentless competitor, and sources say the big technological trends are in its favor. The release of NT 5.0 in the first half of 1998 could eventually claim the market, but first it needs to be tested and, perhaps, changed, Burnham says. Other analysts agree: "Windows NT will ultimately prevail," Geyer claims.

For its part, IBM's counter-arguments are well-known: mainframe indestructibility, the prodigious cost of migrating data from mainframes to other systems, the merits of its own solutions. According to Insight's French, Gerstner is shoring up IBM's networking hardware and software businesses as well as pushing its e-commerce solutions.

IBM customers confirm that the company is making inroads in its battle to reposition itself as a "partner" with its customers. Merrill Lynch, which uses Microsoft software but IBM hardware, uses the word "partner" in describing its joint effort with Big Blue to mount its Trusted Global Advisor program. And more powerful machines from IBM has enabled Merrill Lynch to reduce its total number of mainframes from 14 to two.

Gerstner is also fighting back-and repositioning Big Blue-on a number of other fronts, particularly in the emerging world of Internet commerce. It is here that Gerstner is fostering alliances that rely on the strengths and shared vision of other technology companies notably agitated by mounting competition from Microsoft (see sidebar).

Within IBM itself, however, there appears to be some planning which only peripherally has to do with technology. "Gerstner may be attempting to move the battle onto his own turf," suggests Paul Carroll, author of Big Blues: the Unmaking of IBM. The CEO has acknowledged, says Carroll, that in the area of desktop operating systems, IBM and OS/2 have lost to Windows. But IBM has a lock on conservative corporate clients, and the strategy here appears to be to build up the company's service business with tens of thousands of service people who can tell customers how to stay current, cut costs, have flexible architecture and add new businesses to existing ones.

Selling service to grow market share

The subtext of this "relationship" strategy: IBM will take care of you. Service is a powerful selling tool, and it's a theme that IBM expresses directly over and over again as an elucidated marketing message. There is, however, a subtext to the subtext: it's what the IBM "will take care of you" message implies about competitors.

Last spring, in a speech Gerstner made to analysts, while noting that IBM's business consulting services had helped 10,000 customers with their electronic commerce installations within the last year, he claimed that these were relationships that were wholly non-competitive, unlike some technology companies that have made the decision to enter the travel business, the newspaper business and the banking business. The warning about Microsoft is expressed by IBM execs repeatedly, both implicitly and explicitly.

IBM has "very well-developed relationships with all financial institutions," says Annette Kolenda, North American manager for banking, finance, and securities. "Increasingly, clients are making technology decisions based on business decisions," Kolenda explains. How do you use technology to enable these business decisions? The answer, she says, is through service: IBM's own core of client-directed experts will work with an institution's own staff to custom-craft what works best for the IBM customer.

Government intervention-again

Why should a bank rely on IBM, which obviously has its own products to sell? It comes down to "brand," says Robert Howe, IBM's head of financial services worldwide. "Banks are our clients," he stresses. IBM is partnering with the client to deliver what banks want: their own label, as opposed to the "disintermediation" threatened by some other brand on the screen.

Brand management is a theme echoed in IBM's marketing materials: "As new customer access channels are established, so there will be a contest for brands. Strong brands in financial services serve as a proxy for trust, quality, convenience and performance."

Who's going to control that brand? To many industry players, the "M" word creates a sense of dread. "People are getting worried about their core business being controlled by someone else," says one IBM source. The firm will "never, ever" use technology against its own customers, he stresses. Case in point: Integrion and its ownership by IBM and 18 banks. IBM will never look at customer data-another bank bugaboo-and they will not disintermediate. This, says one IBM insider, is "Lou Gerstner's number one message."

The message is getting out.

The way Gartner Group's Geyer sees it, with Windows NT, Microsoft is not just trying to take on IBM's banking business, it's trying to take business from the bank itself.

Banks are seeking ways to own the customer, says Craig Elderkin, partner of Diamond Technology Partners, adding that they are pre-eminent in payments, and they want to keep it that way. Says Burnham, banks don't want Microsoft to own their customers. "They are selling against Bill Gates."

Gates has clearly heard the rumbling of the guns. His December 1997 keynote-via satellite-at the Bank Administration Institute's Retail Delivery show dealt with the brand question repeatedly. "Time and again, people raise the question, 'Are we going to take on some very broad role; are we going to have customer data or be doing financial transactions?' The answer to that is no. We're a software company."

The perception of Gates as an interloper may be only a temporary problem which his company's invention and acuity will overcome. Or, it could be a critical turning point. Microsoft, like IBM before it, can be said to have prepared the ground for the message now being used against it. Back in 1956, Big Blue was supreme, a position it achieved not only through technical capacity, but also through methods which included an insistence that purchasers of one IBM product also purchase a second IBM product to make the first one run. The government stepped in, and the marketing tactic was prohibited, a legal setback which some say first triggered IBM's slide.

The Netscape versus Internet Explorer battle may be Microsoft's repeat of IBM's mistake, though, with characteristic agility, Microsoft's release of Windows 98 will likely make the recent Court decision moot-for now. There is growing speculation, however, that the Department of Justice is gunning to break Microsoft into three separate divisions: operating systems, applications and content. This looming battle, sources say, accounts for Microsoft's current "integration" strategy.

In the interim, there is a more fundamental problem here for Gates, and Gerstner may have grasped it. There are two basic ways to win the game, explains Martha A.E. Gifford, head of the anti-trust practice at Proskauer Rose Goetz & Mendelsohn. One of them is through business acumen: competing with other firms by hiring the best, acquiring patents and trademarks, and spending the millions necessary so customers flock to the product line.

Gifford says that the other route is through predatory business practices: telling customers, "'I'm loading all basic operating software you're getting into your machine,'" while at the same time making it difficult to use secondary software.

Predatory behavior is an important theme. What was IBM in 1956? Forty- two years later, what is Microsoft?

Getting perception to match reality

The late President Harry Truman always groused that nobody read or studied history and that's why they made mistakes. Well, the young can't remember, and sometimes they're too busy inventing technology-or watching television-to learn.

Unfortunately for Gates, the FUD strategy-fear, uncertainty and doubt- is working hand-in-hand with world events no one can control. Banks have a lot of problems right now, Geyer explains. There's the advent of the Euro currency, Year 2000 and Internet knocking at banks' doors. As a result, these institutions want to partner with a vendor who presents the least amount of risk. Why add worry about a Microsoft invasion-or, even incursion-when there's so much else to worry about, and so many other fires to put out?

The FUD factor is important. One uncertainty is about Microsoft's functionality. Jokes about Microsoft applications that never were, but will be some day, make the rounds constantly. The jokes are so notorious that Gates himself joins in: "Every function in my new house," he told one audience, "is managed by the PC, and sometimes it works."

Stoll maintains this sort of thing doesn't sit well with the banking community. "Banks are famous for being buggy, slow, coming in way over budget," he observes, adding that they are "getting burned right and left" on high-tech investments. Projects that should have taken three months take 12. Microsoft's offerings, he claims, are "one more chance for banks to spend lots of money for high-tech gizmos to keep up with the Joneses (in the bank) across the street," he says.

In life, perception is key. Will technology take banking away from banks? The perception of Microsoft, not as a tools supplier, but as a dangerous competitor can be critical to the success or failure of the company: Cheaper and faster won't count, especially if the technology doesn't live up to the task at hand. Playing on this, Gerstner told analysts that the big reliable mainframe is now cheaper, that orders are coming in, and "there are no errors in the chips."

Gerstner, it seems, is putting FUD to work in the service of IBM. He broadcast this tactic when he told analysts the company was developing "mean-speaking guys and girls" who "talk about competitors the way we should, about taking business away from them the way they did from us for 10 years."

This is white-shoe IBM?

Playing the game while changing the rules

If this sounds like the classic stuff from which drama is made, it is. And, like classic drama, there's a third act. For both IBM and Microsoft, the finale is management.

Though Gates initially failed to recognize the significance of the Internet, once understood, Microsoft's flexible management structure was able to quickly leap over multiple barriers to flood the marketplace with Internet product and functionality, not the least of which is Internet Explorer.

To strike back at Microsoft and shore up its own electronic commerce position, IBM is invoking a common enemies strategy that allies it with other technology companies. One such alliance pairs IBM with Sun Microsystems, JavaSoft and the fierce, around-the-clock, around-the-world efforts of Java developers who continue to report as much as five-fold increases in Java's productivity, writes financial expert George Gilder. This could give Java "the power to break the Microsoft lock-in of applications profits and lock-out of rival operating systems. As a cross- platform solution, Java flattens the playing field for Microsoft's competitors," he notes.

If Gates was initially off the mark with the Internet, as usual, he caught up fast, changing the rules of the game as he went along. This is evidenced by Microsoft's alleged breach of its Java licensing agreement with Sun Microsystems, an alteration that prompted Scott McNealy to file a lawsuit against the Redmond, WA-based software giant.

Still, there are some in the industry who see Microsoft's response here-as with its initial battles with IBM-simply as the response of a brilliant perfectionist to the mistakes of slower, more rigid minds. Brigham Young University's Bush, notes that, while claiming Java is an open standard, Sun "still wants to control it," prohibiting Microsoft from making the changes it thinks are necessary.

"It's the Gaza Strip all over again"

Microsoft is not trying to kill Java, says Bush; it's just doing what makes business sense. That's the premise that separated Microsoft from IBM more than 10 years ago.

Does this mean that someday-perhaps not soon, but in the future-IBM will win the battle? At best, even IBM envisions a compromise. What if customers want NT? "If they want NT, we'll give them NT," says an IBM spokesman, who stressed that, of course, they'll also be selling IBM hardware and software solutions. The company's total revenue was $77 billion in 1996, of which financial services accounted for a healthy share.

For some observers like Geyer, this is simply bowing to the obvious. And what if IBM gives customers NT-eroding the market share of Unix and mainframes? "It's the Gaza Strip all over again," Geyer cracks. IBM would be allowing "an occupying power into its own fiefdom. But what are its options?" It can try to build solutions based on Windows NT, or it can force its own solutions down customers' throats and lose everything to Microsoft.

Forcing solutions down customers' throats is just what IBM does not want to do in positioning itself as bank-friendly. "Someone asked the other day who I thought the next IBM might be. My answer was IBM. It's because they finally get it," says IDC's Quinn. "They realize the ubiquitous network does provide a change agent for all kinds of businesses."

But if IBM is straining for flexibility, twisting itself out of familiar shapes in the struggle to survive, what of Microsoft? For those who won't accept the past as predictor of the future, there is a recent cautionary event: the end of Microsoft's concurrent application licensing program, which has corporate users of its Office productivity suite muttering. "This is not a way for Microsoft to win market share," one licensee has said. "Maybe it's their delusions of godhood."

Maybe charging customers more money when you've achieved near monopoly is just the same old historic mistake made by other companies, one of which is named IBM. For his part, Gerstner is hoping this potential misstep by Microsoft will buy him time enough to prove IBM a worthy competitor.

-trotsky tfn.com

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