Big Blue After Lou

Lou Gerstner is not one to mince words. Two years ago, while high-tech stars such as Sun Microsystems were putting the "dot in dot-com," IBM's characteristically blunt CEO was referring to dot-coms as "fireflies before the storm." A year later, he pronounced them, "dot toast."

Never mind that the new-economy vanguard was then thumbing its nose at IBM, the icon of the buttoned-down high-tech business establishment. Gerstner pushed Big Blue's "e-business" offerings to large corporations. He took his struggling blue chip to the woodshed and got it focused on fundamentals like execution and management accountability.

Now the dot-coms are gone, and Sun, as well as other former highfliers such as Cisco Systems and EMC, are reeling from the worst downturn in the industry's history. In contrast, IBM is looking strong. Its customers have a renewed attraction to its solid, high-tech basics: long-term service contracts, computer outsourcing deals, mainframe installations and sales of foundation software such as databases. Dry, boring stuff, but it puts food on the table - last year's profits reached $8.1 billion on revenues of $88.4 billion. As Gerstner told analysts last month, "The real e-business leaders know there's no magic dust. Technology is hard work."

But now, with IBM at a peak, Gerstner is thinking about turning in his business cards. He recently confirmed months-long speculation that he's transitioning toward retirement and publicly recognized his heir apparent, company COO and President Sam Palmisano. While the change in leadership comes at a time when IBM has rediscovered prosperity, keeping it in this shape will require constant tending. Services, along with sales of chips and server software, have driven growth. But IBM's Unix servers, though much improved, haven't earned the cachet that competitor Sun enjoys. The market for IBM's mainframe computers is anemic. And the company's PC business may be fighting a losing battle to maintain profitability.

These are significant issues, ones Palmisano will have to address when he replaces one of the industry's most commanding figures, a business leader whose much-chronicled successes have earned the respect of managers around the world. Industry observers are settling in for the show: The next few years are likely to be pivotal in the history of IBM.

Already almost a century old, IBM is the company that helped pioneer the technology industry, first through business machines and then through computers. When Gerstner arrived on April 1, 1993, however, "IBM was really floundering," says Jerome York, who was brought in a month later as chief financial officer. "There was this crying out: 'What is our vision, what is our strategy?'" Profits of $6 billion in 1990 fell to losses of $8.1 billion by 1992, and competitors such as EMC and Hewlett-Packard were chipping away at IBM's aging mainframe and storage lines. Gerstner had to stop the bleeding.

"I'm not a believer in Gerstner as miracle worker," says Paul Carroll, author of the 1993 book Big Blues: The Unmaking of IBM. But "he's one of these guys that gets stuff done."