InformationWeek

InformationWeek: Lou, you're always talking with your customers about what their technology needs are. What are you hearing from them about what they want, what they fear, what concerns them about the concept of E-business? What keeps them up at night?

Gerstner: I think you have to step back first and ask what customer you're talking about. We have customers who send us RFPs [requests for proposals] and say they're going to replace a front-end controller or a System/390, or they want to do a bid on a group of PCs. That's a technical buyer, a customer with a different set of interests. I'd like to step back and say the senior management of companies and the top IT professionals who are a part of that senior management team have a very different focus today, and it doesn't start with the IT industry, and it does n't start with E-business, and by God, for sure it doesn't start with browsers or spreadsheets. The business community in general spent about 15 years in this country very preoccupied with restructuring. Globalization and competitiveness coincided with a period where the technology industry was basically preoccupied with the desktop. So there was no connection of the IT industry with the CEO. CEOs don't do spreadsheets; they do not wake up at night thinking about [Microsoft's erstwhile user interface] Bob. Will Bob talk to them from the PC, and [technologies like that were] kind of the focus of attention for some time in this industry. What E-business does is it moves the agenda of the IT industry back into the CEO's office. What CEOs are thinking about today -- having completed for the most part the restructuring -- is growth. The new mantra is growth. Globalization, cycle time, speed, competitiveness. And what we keep saying to our customers is that E-business is not a technological change. It's a fundamen tal change in the way business will be done in their industries, aided, abetted, supported, and enabled by the technologies. So that's what we talk about, and it's an end-to-end reshaping of their companies to take advantage of an electronic marketplace.

Now what do they worry about? Well, the highest degree of concern is security. I mean, is this some Wild West, uncontrolled environment where customer data and transaction are subject to a lack of privacy? For the most part, they're beginning to understand that the issues of privacy and security are no worse -- and in some cases better -- than some of the so-called physical models in use today. Particularly using a credit card over the telephone. But they're still concerned about that. And if they're satisfied that security concerns are resolved, they know their customers will be, too.

The really insightful top managers are worried about some things beyond that. They're deeply concerned about branding. They wonder, "What does my brand mean in an ele ctronic world?" They're deeply concerned about distribution challenges. [They wonder] "How do they think about distribution channels I'm using today and electronic distribution channels?" So you look at the brokerage firms. They're deep into it. Very sophisticated and well into this issue of electronic distribution vs. their traditional methods of distribution.

The third thing they're concerned about is the threat this new world brings to their franchise from new competitors.

InformationWeek: In a way it almost helps their competition as it helps them.

Gerstner: It does that, but all great turns of technology tend to bring about an opportunity for new competitors to enter a market. They don't carry the baggage of existing competitors, so they can move faster -- they do not have the kind of conflict issues in terms of branding or distribution. So they're worried about new competitors. The example that's always brought up is bookstores and Amazon.com. But it goes way beyond that. Becaus e what's happening here is that a number of these companies in lots of industries are worried that the technology companies helping them take advantage of this change may turn out to be among their biggest competitors.

InformationWeek: How much do customers tell you that they're excited about the opportunities of E-business?

Gerstner: There's no universal customer point of view. I'd say the area that's probably the highest priority for all our customers, if you want to look at a big area, is what I'd call supply-chain management. How can we link with our extended enterprise: suppliers, distributors, vendors, in some cases customers, and improve customer service, drive costs out, and in some cases create substantial competitive advantage? That's a natural evolution of what companies have been doing. So, here you get an electronic "booster shot" to the process of shrinking supply chains that comes along, and companies have been focusing on that for the long term. So I'd say that's probabl y No. 1. Secondly, there's a whole group of companies that look at the intranet, inside enterprise opportunities, to substantially exploit what we call knowledge management at IBM. How do you get companies to exploit knowledge more rapidly for competitive advantages? Those advantages include cycle time, better customer information, better customer response rates, and a lot of people are focusing on that.

The area of commerce I would say is coming along more slowly. I mean, you're literally selling things over electronic networks, and that's slow for obvious reasons because that's where the security issues are, that's where the branding issues are, that's where the distribution overlaps are.

InformationWeek: On the security front, people are realizing that the security issues may not be as great a hurdle to consumers as once thought. People are realizing that using your credit card over the Internet is no more dangerous than giving it up to a taxi driver.

Gerstner: That's true. Wha t I always say to the CEOs or the line operating guys is, "Think about what you did this weekend. You probably got out a catalog, got on the phone, and bought a fishing rod or some electronic equipment. You gave your credit card to someone you don't know." The facts are that electronic networks provide more secure transactions than a lot of the current systems. We know that companies are beginning to understand that. What's not happened yet is that consumers don't accept that. But they will. It was the same thing with direct marketing. I was involved with building one of the largest direct-marketing companies in the world back at American Express. Initially customers didn't want to give their credit card [number] over the telephone. Now, no one ever thinks about it anymore. I think that's what's going to happen here.

InformationWeek: YYou spoke about some of the changes that the CEOs you speak to want to see happen with supply chain, or knowledge management. What are you doing at IBM to take advan tage of some of these changes? What's your view as CEO?

Gerstner: We are building the entire IBM company around the concept of knowledge management. The heart of that is our Lotus Notes system. We now have 220,000 Lotus Notes users in the company, and if you take our business partners, our extended team, it's over 300,000. Every day people are building applications because Notes is not just a messaging system. It's an application platform that allows this collaboration and content sharing. Every day we're amazed about how it changes the way we operate. A small example from the point of view of a CEO: Every now and then at this company I say I want a small group of people to focus on a major enterprisewide issue. This Lotus workgroup software, the WorkPlace, is fantastic: a group of people from all over the world that work on a problem through the Lotus Notes system. They never have to travel. When they've got something they like, they then authorize the next group to come in, and they start to par ticipate in the process of solving this problem. And then all of a sudden they send a note to the senior management team and say, "OK, guys, here you go. What do you think?" Now you think about the cultural differences in doing that: the speed, the ability to incorporate a lot of people without slowing down the process. That's one example.

InformationWeek: IBM is an enormous company. You've been through a lot of changes. Are you able to quickly enough meet market demand? You mention how Notes has helped you. What else?

Gerstner: Are we as fast as I want us to be? No. Will we ever be done? No. But you're right. Does Lotus provide us with a way to beat the hierarchical system that's required in all large enterprises? -- and I say yes. What Lotus Notes in all of its manifestations does is flatten an organization. It's a knowledge-management tool. It moves knowledge without having to worry about a hierarchical structure. Large organizations are set up for accounting and control, for statu tory purposes, and in some cases to cluster certain functions together. But that's not the way the decision-making process or the knowledge process flows in most companies. So I think you need another mechanism within the company to achieve those objectives. And I think the heart of the technology behind that is our Lotus platform.

InformationWeek: Do you think IBM as a company of this size can survive without that kind of collaborative technology?

Gerstner: No, I do not. You're absolutely right. I think that all large companies know today that speed and being early to market are often more important than being right. It's a hard thing for the management consultants to realize, but being first is often better than being right. Being first requires speed, and so I think being able to move quickly is a sine qua non of a large company today.

InformationWeek: Have you been able to implement that decision making and speed within IBM so that some projects that don't seem to have a future can be disbanded quickly? Was that the decision behind the killing off of the NetPC?

Gerstner: Let me tell you that having a knowledge-management system at a company like this is not the answer to all the things we have to do at the company. So the process by which we manage R&D and make allocation decisions, or product decisions, can help with a system of this kind. It needs other changes; it needs a cultural change in people's minds to say it's OK to stand up in this company and say a project ought to be cut.

InformationWeek: Do CEOs understand that E-business is facilitating a cultural change in the way companies do business?

Gerstner: What we talk about when we get the CEOs together is E-business is not just sticking a Web site out there. It's not about Web browsers. It's not even about Web servers. It's about changing the whole way you do business inside the company and outside the company. So there's a whole technical change, because when people start comin g to your Web site, you have to link all of that front-end activity to your engineering systems, your manufacturing systems, billing systems, accounting systems, customer-satisfaction systems, credit systems. I mean the front end without a major relinking to the back end is probably not only useless, it's probably harmful, because you get a lot of dissatisfied companies. And that's what provides the real opportunity for IBM, because now you're talking about integrated systems [that are] going against large transaction processing, database systems, security and communication and networking systems. This is about a whole end-to-end change in your technology infrastructure. But also, it's a whole change in the way people think. How do they think about their suppliers? We know of some very large manufacturers who have brought their vendors right into Lotus Notes, into the basic engineering, production, and inventory data of their company. They have access just like insiders do, which is very critical toward just- in-time inventory, cycle times, etc. There are other manufacturers who say they don't want anyone to see that data. It's a cultural issue: Are you willing to open the boundaries of your enterprise and bring your extended team in in a truly collaborative way?

InformationWeek: What do you think going forward are going to be your critical success factors?

Gerstner: First of all, our success factors are heavily weighted by our ability to focus. We are focusing on enterprise solutions that involve real commercial activity. We were the first company, I believe, to stand up and say the Internet is not about content, it's about commerce. For two years, everybody was running around saying it's putting all this stuff on your Web site, getting all these people to come and visit you, and it's all about consumer choice, and we said, no, it's about commercial, and it's about transactions. It's about commerce. It's about real business. So, we're focused on helping our enterprise customers build real transaction-based, commerce-based systems. We're not trying to get into content business or host Web sites to tell you where you can go to restaurants.

Secondly, our focus is on the serious technology that has to evolve here. We're dealing with issues related to scalability and reliability. We're deep into full-motion video applications on the Internet. We're trying to create end-to-end solutions. We're not trying to tell our customers, "Here's a piece of technology. Now go try to fit it in." So we've identified a number of very specific solutions that we think are network-enabled that, in some cases, will fit in with specific industries, like Integrion with banks, or that cut across industries where we're doing supply-chain management.

InformationWeek: Customers don't seem to have one point to focus on, though, to say this is what E-business is, because it's going to be different for every customer. What are the risks in that strategy? You don't have the screen presence. How are people going to see IBM's version of E-business out there?

Gerstner: We don't want the consumer to see IBM's brand, and that's what our customers love. They see other technology companies trying to stick their brand between the customer and their clients. Nobody's worried about our brand. The customers we talk to don't see this as a popularity contest on who stands for something. They don't see this as a thing. They see this as a new way to do business. We believe the E-business market is going to be more than 50% of the services business. Not a product business. It's helping people think through how to take advantage of this major change.

We've embarked on a strategy that is not product-focused in a singular way. We have products like Notes and Domino that are highly related to the networked world. But IBM's positioning is that we are the solutions company to go to when you want to try to pull all of this together. First to integrate the technology, but then to integrate the technology into your business processes.

InformationWeek: Do you think your ability to provide those solutions will put you in a position to lead the E-business market?

Gerstner: First of all, I think this is a market that has emerged very quickly in the last year, so anybody who sort of sticks a stake in the ground and says, "I am the indisputable leader," is following the normal FUD [fear, uncertainty, doubt] that goes on in this industry. I'd tell you that our internal research as well as some external research I've seen indicates that we are one of the leaders in this field. But I'm not going to sit here and tell you that we're way ahead of anyone else, nor am I going to say that anybody else is way ahead. This is a rapidly changing environment, and when the move comes that we're in the middle of right now, from viewing this opportunity as a browsing opportunity to a commerce opportunity, it's coming our way. We're building to be at that point when people realize this is more than a Web experience.

Infor mationWeek: Is there anyone who has a piece of the puzzle that you'd like to have that would establish you as a clear leader?

Gerstner: There are no pieces that I would like to have that would establish us as a clear leader. There are two things I think we need very much for us to emerge as a leader, but more importantly for this whole tremendous technology to benefit our customers: First is, we've got to have an environment with the governments around the world that are supportive of the evolution of this technology and not overly restrictive. There's a whole issue of how the government approaches E-commerce in all of its dimensions. It involves encryption, taxation, electronic property. The second issue is, will the industry have the maturity to deliver truly open systems, driven by the customer? Because I don't believe some companies in this industry are prepared to be mature about this and do the right thing for the customer. Will we have truly open, interoperable industry standards for a n etworked world? If we don't, you in a sense destroy the whole premise of the networked world. That means a different approach than this industry has tended to follow in the past.

InformationWeek: What things do you want IBM to bring out soon to help celebrate this strategy as a truly IBM initiative?