

IBM founder's Depression gamble pays off In the 1930s, companies faced an extreme version of many of the challenges facing CEOs today. Sales fell, stock prices slumped, employees' retirement accounts went through the floor, and the public lost faith in business. CEOs today face many of the same challenges that IBM's Thomas Watson Sr. did in the Depression. What did he do? He expanded. Thomas Watson Sr., then IBM's chief executive, reacted differently from most CEOs, according to a new biography of Watson by USA TODAY's Kevin Maney. He took the huge risk of keeping IBM's factories open and workforce intact despite crashing sales, and he increased spending on research and development. Watson nearly ruined the company, but in the end, it shot IBM past competitors and looked like a brilliant strategy. "Watson borrowed a common recipe for stunning success: one part madness; one part luck; and one part hard work to be ready when luck kicked in," Maney writes in the book, "The Maverick and His Machine: Thomas Watson Sr. and the Making of IBM, out this week. Fast-forward to today, and IBM's new CEO, Sam Palmisano, is trying to recapture the Watson-era daring. Last fall, as he launched IBM's "on-demand computing" effort, Palmisano compared it to the big bets Watson once made. Palmisano wrote about the 1930s gamble in IBM's latest annual report. And he has talked about Watson in speeches and to the media, often saying he wants to marry the best of the Watson-era DNA to the best of the new DNA. (Related story: Expert offers IBM advice on regaining its leadership role) In these edited excerpts, Maney tells how Watson beat the Depression Monday, Nov. 18, 1929, Thomas Watson called his top executives into the boardroom at headquarters. They came gladly, anxious to hear anything from Watson. He had disappeared (from meetings) after the stock market crash 20 days earlier. "Gentlemen, I thought we would get together this morning as there have been a great many things happen in the last few weeks," Watson began, as captured in a transcript. "Some of our people have had to give a lot of thought to their finances, which has distracted their attention from the main issue. That main issue, of course, you all know with us, is building the IBM and making it a bigger and better business." The crash rattled the nation and left businessmen with a hollow ache in their guts. Stocks kept falling. Companies cut workforces. Financial institutions struggled to stay afloat. The economy seemed instantly, shockingly crippled. And for those 20 days, when this group needed Watson to stand tall and assure them, he disappeared. Had he given up? Was IBM sunk? Was he busy planning a way out of the mess? "I have been thinking this over very carefully over the weekend, and that is why I have called you all together this morning, so we can get to thinking along sane and sound lines," Watson told them. "I have not done anything in the interests of this business for the last three weeks." The executives must have gasped. That didn't sound like good news. "You know I have not talked with any of you about sales, money collections, et cetera," he continued. "I have run a stock broker's office for three weeks." It dawned on them: Probably every one of those men individually had gone to see Watson since the crash. They had built their lives and finances on IBM stock, which so far had almost exclusively gone up. As it hit new highs in the summer of 1929, some executives used their holdings as collateral for margin loans to buy other stocks. But now, the value of their IBM holdings had been cut in half, and the share price kept falling. They paraded into Watson's office seeking help or comfort or both. He took the time to give it to them, in a gesture that said that his men were the business. He had to steady his executives before he could steady his company. But he'd had enough of that. The Watson stock brokerage office was closed, he told the group. "I have now opened up on the IBM company with a vengeance, and I want all of you to get your heads up and tails over the dashboard," he said. "We have a big job to do, a hard job to do, and the only way is thinking and working constructively, and we must start it immediately." He put the situation on the table. IBM's business was going to dip, Watson admitted. Every U.S. business was about to experience, as he put it, "a temporary slowing up." But IBM would not sit still and await its fate. "We are not going to wait for something to happen — we are going to make something happen," Watson said. He went around the room, handing out assignments. Purchasing, sales, service — boom, boom, boom — he hit every department. It was time to get serious, and they were going to have to do it together. "I hope that every man in this room feels that he can start doing a bigger job than he has done before," he said as he was winding down. "And if there is any man in this meeting who doesn't feel that way and will come to me alone, I will be glad to talk with him and help him, because now is the time to make the most of everything." It wasn't a threat. It was a call to rely on each other, not tear the organization apart. Spreading optimism despite pessimism Watson knew the facts about the broken economy. But the situation didn't fit his plan, so he decided to bulldoze through the facts. His words always reflected optimism — in public, in executive meetings, and to IBM's employees. Watson welcomed invitations to speak at almost any event, just so he'd have a platform for spreading his viewpoint. Photo from IBM archives IBM's Thomas Watson Sr. addresses a sales meeting of the 1937 100% Club at the Waldorf-Astoria in New York in January 1938. "When is industrial progress going to start again?" he said in a typical speech, this time before the Rochester, N.Y., Chamber of Commerce (in the early 1930s). "I say it never stopped. Some people may not believe that, but it is a fact. You are going to find as we get further out of the Depression — and we are on our way out — that inventive genius, progressive ideas, progressive people, have been more active than ever. Industrial progress has never stopped." Watson's actions backed up his words. He made two dangerous decisions. One, he would keep the factories running and lay off no one. Two, he would increase spending on research and development, even as companies around the world slashed their R&D budgets. The decisions came within a sliver of ruining the company. Big gambles almost turn to disaster First, the factories. In The Magazine of Wall Street, John C. Cresswill wrote a column about an interview with Watson. "Mr. Watson has the idea that the troubles of the times are not so much due to overproduction as to underproduction," he wrote. Businesses didn't need to cut back because they were making more goods than it was possible to sell. Businesses needed to work harder to make more goods and sell more goods, which would in turn re-start the economy and move things in the right direction." (Watson) would keep the factories building machines and parts, stockpiling the products in warehouses. In fact, between 1929 and 1932, he increased IBM's production capacity by one-third. Watson's greatest risk was running out of time. If IBM's revenue dropped off or flattened because of the Depression, the company would still have enough money to keep operating for two years, maybe three. Watson's logic led him to make what looked to outsiders like another insane wager. On Jan. 12, 1932, during the worst of the Depression, Watson announced that IBM would spend $1 million — nearly 6% of IBM's total annual revenue — to build one of the first corporate research labs. The colonial-style brick structure in Endicott, N.Y., would house all of IBM's inventors and engineers. Watson played up the symbolism. He would create instead of destroy, despite the economic plague. Within a few years, Watson's gamble on manufacturing and research looked disastrous. Revenue from 1929 to 1934 stalled. IBM edged toward insolvency. In 1932, IBM's stock price fell to 1921 levels and stayed there — eleven years of gains wiped out. The board of directors discussed ousting Watson, but put it off. As (management writer Peter) Drucker observed about Watson: "He didn't know how close he'd come to collapse." Luck and readiness conspire By 1934, Watson needed a miracle. He had been counting on a prompt end to the Depression — an end that was nowhere in sight. His back against the wall, Watson's greatest stroke of luck dropped in to save IBM. On Aug. 14, 1935, (President Franklin) Roosevelt signed the Social Security Act. No single flourish of a pen had ever created such a gigantic information processing problem. To make the system work, every business had to track every employee's hours, wages, and the amount that must be paid to Social Security. Overnight, demand for accounting machines soared. Every business that had them needed more. An officer of the store chain Woolworth's told IBM that keeping records for Social Security was going to cost the company $250,000 a year. Businesses that didn't have machines wanted them. The government needed them by the boatload. Only one company could meet the demand: IBM. It had warehouses full of machines and parts and accessories, and it could immediately make more because its factories were up and running, fine tuned and fully staffed. Moreover, IBM had been funding research and introducing new products, so it had better, faster, more reliable machines than Remington Rand or any other company. IBM won the contract to do all of the New Deal's accounting — the biggest project to date to automate the government. Maybe Watson's relationship with FDR helped, but what other company could the government have turned to? IBM was the only real choice. This period of time became IBM's slingshot. Revenue jumped from $19 million in 1934 to $31 million in 1937. It would climb unabated for the next 45 years. From that moment until the 1980s, IBM would utterly dominate the data processing industry — a record of leadership unmatched by any industrial company in history. Drucker asked Watson years later if he had anticipated the Social Security Act. Watson said he hadn't. Of course, the act was debated and written about well before it was passed. But Watson said he had no idea it would impose such a record-keeping burden on business and the government. No one did — otherwise, Congress would never have passed the act. Watson did not foresee that the act, combined with IBM's readiness, would not only save IBM, but propel it toward tremendous growth.