Liberal Talk Radio

At the gym tonight I picked up a copy of Fast Company magazine from March. I hadn’t read the rag since pre-bubble, but it looked compelling (as opposed to the usual gym fare of US Weekly and People). What I found inside was this article on how IBM was learning how to turn it’s massive R&D efforts into an in-house start-up operation. In a typical year, IBM is awarded more patents than any other company. But the corporate culture is such that the A-list managment talent goes towards the marquee divisions and existing businesses that involve less risk:

he program began in September 1999, when Lou Gerstner Jr., who was then IBM’s chairman and CEO, was working at home on a Sunday. Reading a monthly report, Gerstner found a line, buried deep, saying that pressures in the current quarter had forced a business unit to cut costs by discontinuing its efforts in a promising new area. Gerstner, a temperamental type, was incensed. How often did this happen?

As the head of strategy, Harreld looked into the issue and “found a similar pattern across the board,” he says, which he documented with 22 case studies. IBM had plenty of new ideas — its famous research labs won thousands of patents a year — but it had a remarkably hard time turning those ideas into businesses. The company had produced many crucial inventions, such as the relational database and the router, then watched while others, such as Oracle and Cisco, built huge companies around them.

What were the root causes? Harreld asked. In a classic defensive posture, IBM rewarded short-term results and served current markets, and was constitutionally reluctant to devote management attention, resources, time, or talent to rolling the dice. “Everything was based on the current period, not on the future,” says David C. Dobson, an IBM strategic planner who’s currently Harreld’s deputy. Neither Gerstner nor Harreld spent much time on new businesses, and they didn’t tap their “A-team” of executives to run them. “We were relegating this to the most inexperienced people,” Harreld says. “We were not putting the best and brightest talent on this.”

IBM is a smart company because they think long-term. Once Gerstner took the focus off quarterly profits, the solution was obvious. The result was a plan to create “emerging-business opportunities,” or EBOs. These internal startups would be given access to IBM’s vast research division and tasked with building a business in five years or less. So how are they doing?

Harreld, who runs the program, promised the board that EBOs alone would produce two percentage points of growth for IBM. Given Big Blue’s awesome size, that ain’t hay: It means about $2 billion of new revenue every year. The actual results have wildly surpassed all expectations. Since the program’s inception in 2000, IBM has launched 25 EBOs. Three failed and were closed down, but the remaining 22 now produce annual revenue of $15 billion, a figure that’s growing at more than 40% a year.

I bring all this up because I want to re-emphasize how smart businesses think beyond the quarterly report. Gerstner’s wider field of vision could eventually result in any number of progressive-friendly positions. Take IBM microprocessors: every gram of processor produced requires 630 grams of fossil fuels. Certainly there’s an opportunity for innovation there, with the price of crude at $66/barrel. Or what if you want to ensure a steady stream of good college graduates to produce more patents in 20 years? Better start investing in early education. If you don’t want your business to be around in 5 years, you can go ahead and trash the place. Otherwise you should do like we Italians say, and “don’t shit where you eat.”