Up Close and Personal: IBM's Bob Moffat

One of those with the toughest assignments within the company is Bob Moffat, senior vice president and group executive in charge of IBM's personal systems and integrated supply-chain initiatives.

Appointed to the role in February, the long-time IBM veteran is responsible for IBM's Personal and Printing Systems Group, which includes the PC Division, the Retail Store Solutions Division and IBM's Printing Systems Division. In addition, Moffat leads IBM's Integrated Supply Chain (ISC) organization, which is responsible for the supply chain, procurement, manufacturing, distribution and logistics for all IBM systems worldwide. In a down economy, it's not exactly a dream job. In no other area of IBM's businesses are margins so tight, competition so keen.

Since he arrived, Moffat's decision-making skills have been put to the test. He has already had to reduce head count, slash manufacturing and recalibrate alliances with top companies, including Intel. He has also streamlined processes. No longer do price cuts, for example, need days of planning like they did when Moffat was a junior manager trying for days to get on the schedule of a boss who could authorize a price drop of a few dollars.

The son of a small print-shop owner, Moffat is not wired to follow bureaucracy or adhere to a dogma that won't serve his needs. Consider where he draws his inspiration, which can come from the most unusual places. Although a staunch IBM supporter, he considers Dell Computer CEO Michael Dell a remarkable person because he knows what it is like to build a business with little money.

For much of his early life, Moffat made do with little. That discipline has given him the strength to do things others can't,or won't. Take the time, for example, that he directed a plane through a snowstorm that grounded others just to meet with a New York City customer to set the record straight about comments a rival made about IBM's future in PCs. (The customer was told that IBM was exiting the PC business; Moffat walked five blocks through driving snow to set him straight and won the customer's business.)

Then there was the time he trimmed head count in his division by 20 percent. That same week, he was singled out by a real-estate agent trying to sell him a house as the man responsible for ruining the hopes of many in the community. (Moffat turned it around and reminded the man of how many jobs were saved by those cuts.) Then there was the time he decided that the PC company needed to try a different approach to competing. (It came to him one Saturday afternoon after 14 straight hours of work when he realized that his team couldn't work any harder and, even if it did, it wouldn't matter because the team had already reached the point of diminishing returns.)

Today, Moffat looks ahead to bringing new technologies to life, providing partners with new opportunities to add value and better leverage the strength of the IBM company. On the pages that follow, Moffat shares his thoughts and experiences on a variety of topics with editorial director Robert DeMarzo and industry editor Rich Cirillo.

VB: In terms of partners, when you look at who did well in the market in early 2002, what companies do you see?

Moffat: The guys who did well are the guys that provided an ROI to somebody, especially in today's environment, which is all about taking cost out. No large corporation, after going through what we've seen during the past year from an economic standpoint, is going to be adding a lot more structure. You don't see people out hiring people very quickly, either. After the painful events in the past 12 to 18 months, they are sitting there and being very careful about what they add. Therefore, the projects that they're investing in are things that bring a quick return on investment. The guys who have this mix between services and hardware, who can carry their hardware as part of a solution that reduces cost and shows an immediate payback, are doing better. Contrast that to the Web integrators. Putting something up on the Web is not exactly a priority of a CFO today, who is in a much more powerful position in most companies than he was 24 to 36 months ago when we were all going through the dot-com bubble. Interestingly, SMBs have bought faster than large companies. They didn't have to go through the same significant change, of course, and they do things a lot quicker than large enterprises.

VB: So how did you do in the first half?

Moffat: I'll let you go to public data to see who suffered the most, because I'll stay away from talking about what my competitors did or didn't do. The key for us is that we saw our desktop business get healthier, and I attribute it to the fact that we found ways to improve the profitability of distribution through collaborative programs. Not soft-dollar programs. Collaborative programs,stuff like reducing partner inventory, making them turn inventory faster, keeping stocking levels up, keeping their warehouses covered, etc.,helped us gain leverage. We've always had a very healthy ThinkPad business. It continued to be actually healthier through the chain. And so I know we took it away from top-tier guys, because I see that data.

VB: Talk about the collaborative programs, the progress you've made in that regard, and where you think you go from here in terms of how that's going to help you in taking share out of the top guns, including Dell and those going through a major merger.

Moffat: Unlike some people out there, having large share is unimportant to me if it's unprofitable share. The numbers from either IDC or Dataquest in the first quarter would argue we lost a little bit of share on a worldwide basis. It's primarily due to our moves in Asia and the retail market. It was a conscious decision. We weren't making money in the desktop retail business in Japan, so we chose to exit it. You lose share in that marketplace when you exit something and don't hit a customer set. [But it doesn't matter to me. Unimportant. It was hollow share. Therefore, what we've been trying to do is focus with the channel partners to ensure that as we do anything collaboratively, we are enhancing their profitability. I'll use [Tech Data CEO Steve Raymund as the example. Steve and I had the team sit down and actually look at where our weaknesses were, where our strengths were and where the areas of most leverage were, so we could improve their bottom line. Knowing Steve pretty well, he will get his company to do things that improve his bottom line. He will not do things because I'm a good guy. So we looked at this and looked at the activity-based accounting inside his company that looks at profitability by brand, by customer set, etc. We have a similar thing, as you know. So we looked at [procedures. In one area, we looked at our bill rates across all his different distribution warehouses and saw we could gain share by just taking up our full rates, not taking up inventory, but in sharing that distribution across the different places that he distributes from. So we put in place a collaborative planning process. We reduced the number of focused SKUs that he was going to go carry, as opposed to trying to cover everything. He saw the benefit. He saw speed improvements and greater productivity from his reps. We saw it, too, because we gained share. We're able to focus our own manufacturing on that sort of thing so we could ensure that we didn't have stock-outs, etc. So we gained, he gained.

VB: You have talked about the shifting power of the decision makers and how that has changed in the enterprise. Can you expand on that a little bit?

Moffat: It's nothing other than base economics. This happens every time the economy goes up and down. And the key thing for people to understand is who has power at what times and at what part of the economic cycle. When you're in an economic downturn, CFOs have a lot more power in the company than they do when it's a robust time. Just think about simple things, such as a discretionary expense like travel. When things are robust, nobody is checking who's traveling where.

VB: Nobody cares if you take a $1,500 unrestricted flight to California and back, you mean.

Moffat: Exactly. Nobody is checking it. But now, when times are bad, I'll bet you every company has controls in place on who travels, how they travel and where they travel. Those are controlled costs. It's a prime example. It's exactly what happens in IT. We saw it last year, time after time after time. You'd sit with CIOs, and you'd talk about where they wanted to go and how they wanted to take their businesses. When I was with a large investment banking firm on Wall Street, I'll say at 2 o'clock, I struck a deal. I thought that we were completely close, assuming I could do something. Then they were called upstairs. At dinner that night the deal was undone because their budget got cut. It didn't [fail because they didn't buy into the value proposition,they loved the value proposition. But that time they got another budget cut on top of the multiple [cuts they had gotten prior to that. The CIO still had control over what's the standard and whether the technology works. But the guy doesn't have control over money. And when you're fighting for your budget every day, you're having to decide where you invest and how you invest that money. That's why if you look at what happened in the industry and if you go back and look at prior economic cycles, PCs go into the economic downturn first. Think about it. [Managers think like this: I can not have storage space to put the information on that I need to store, not have enough MIPs in the glass house to run all my back-end processing, or not upgrade a PC for a little bit. I think I'll do the latter. And that's exactly the thought process.

VB: Our surveys show that the desktop PC is getting older.

Moffat: Right. Unfortunately, the question is what comes out first. The PC? Infrastructure? I don't know the answer to that. I really don't know the answer to that. History does not show that it's consistent. Either way, the days of sustained 10 percent growth are probably over.

VB: At least that's what a lot of CEOs tell us. Ten percent average growth in IT is over, they report. Let's get ready for high single digits.

Moffat: Well, CEOs are only quoting what analysts are telling them. My poor boss, that's what he did. He quoted what external data said. If you look at the industry, the industry had robust growth, but some of it was artificial. The dot-com bubble was not real. It wasn't based on real economic premises. And more and more of those are coming out over time with how some of the growth that some of the IT providers had wasn't real growth. When you sell it to them,but it's [really a loan on your balance sheet,that's not a real sale.

VB: So what will drive PC sales?

Moffat: Our work shows that GDP is the determining variable. It is very obvious to us. Although you might get some pops due to technological things or replacement things or stuff like that, sustained growth is probably around that mid-single-digit-type of number. That's a very different market than most of us are used to. Honestly, that will change the landscape of PC providers.

VB: How is it changing you?

Moffat: Well, on Jan. 8, I made a pretty definitive statement. When you outsource your manufacturing and you tell people that, it can be read two ways. You can read it as the glass-is-half-empty, which is, this is the first spinning off of a piece of our assets and that we're getting out of this business, or you can read it as half-full.

VB: Some people did the former.

Moffat: Yes, and you can't blame them. Those people don't understand my heritage. I built those damn factories, so you don't spin off your kid. But I liken it to this: When my kid got to his senior year of high school, I had to let him go to college because that was the only way that he was going to continue to grow. And that was true of our manufacturing. The only way that we were going to continue to grow was to [outsource the manufacturing, spin it off and allow SCI to leverage all their capabilities and allow us to go invest our money and our resources on things that we felt would differentiate us more.

VB: Because it was tying up just too much capital?

Moffat: Forget about capital. Yes, it tied up cash. But it's also intellectual capital. Where do you spend your time? This allowed us to go take some of the savings and invest those back into the business. That's the glass-is-half-full scenario, which is "wait a minute, this guy isn't crazy." I told everybody that this is our reaffirmation of our commitment to the business, because I firmly felt it was. You do not go through the pain that I went through to right-size this business if you're just going to get out. You just don't. There are a lot easier ways to deal with that.

VB: So what about all this talk of spinning this business off?

Moffat: I wouldn't have integrated parts of this back into IBM if I was going to spin off the business! If you're spinning off the business, the last thing you want to do is be integrated. You actually want a separate thing. So if people looked at the Jan. 8 announcement as a single event, then they could say whatever they want about it. If they looked at the past 18 months, which is how long I've been back, they actually saw there's a strategy here. We're building a solid foundation for profitable growth. I sat across from a customer in New York City on a snowy, winter day that I made it into the city, and one of my major competitors did not. I told them to land the damn plane in the runway. I walked five blocks to be able to get to the customer. I didn't have to have a limo driver. My competitor's people%85had told them that I was getting out of desktops within the next three to four years. And the customer said, "Can you respond to that?" And, I said, "They're absolutely correct. I will not be building desktops like they are today in four years." And, I said, "Do you want me to show you prototypes of what a desktop [will look like in four years?%85If they're telling you you're still going to buy the same thing that you are [buying today four years from now, then I don't think they understand where the industry is going."

VB: Did it work?

Moffat: They didn't ask me ever again whether I was getting out of the business. They saw that we viewed the business a little differently from someone who was going to continue to produce the beige things that you and I know from the '80s%85And [I showed these people that there actually could be a different vision of the desktop and how you could take the four pillars and play it out to solve their problems. We designed a desktop almost on a sheet of paper. Honestly, I don't know what a desktop is going to look like four years from now. Some of my engineers have some pretty nifty ideas. I don't know whether they'll work yet. But there are some pretty nifty ways that the stuff can look in the future. And you'll continue to see us try, assuming that we test them and believe they can play out in the marketplace.

VB: But that doesn't always work, does it?

Moffat: We always learn, though. I'll use an example. Do you remember one of the first major portables we came out with, the P70 luggable with the orange screen?

VB: I remember it well. I had one up in my attic, which I just cleaned out.

Moffat: Then you know it. It's huge, right? And then you remember the Butterfly?

VB: Yes, it won awards. I also remember something called the Peanut.

Moffat: Did you know that the Butterfly was not a big success? What was wrong with it? I certainly loved it. Why did it sell like hell, however? It had nothing to do with the keyboard design. The answer is that at the time, it didn't have a fast enough processor. It didn't have enough memory.

VB: Sure was a great innovative product, though.

Moffat: Right. But it didn't play in the market. But look what we did. We said, "How can we use some of the technology that we learned and the things we learned from the experience to move forward?" We learned to take innovation from one line and move it into another to serve customers. Maybe it's getting something out of the I series and going into the R. What's an R? Well, it's a baby T. That's what it is. But it solves a set of problems for a different set of customers,one that we play very well to.

VB: How are you getting buy in from others internally for all the things you are doing?

Moffat: One way is through variable pay. The way you pay people in IBM is their base salary, which is fine, but also through variable pay, which is how you make them share in the performance of the business. Our variable pay is based on profit, cash flow and customer satisfaction, which, I think, is a subjective variable because, honestly, it's a little tougher to measure on a period-by-period basis. We do measure it, but because it's a sample, you watch for swings.

VB: At this point, sort out some milestones and reflect on some of the pain and achievements. Touch on some of the hardest decisions you have had to make,decisions or issues or things that you wish you hadn't done or looked back at and said, "I could have gone a different path."

Moffat: Let me deal with what I wish I had done differently%85It's easy to Monday-morning quarterback from here, but as I look back, I could have seen the downturn in the industry faster. We all didn't want to believe it. But I kick myself to this day because I am an analytical being, and all the data pointed to that there was going to be a downturn. If I recognized it, I could have avoided some pain. Look at it this way: I think it was the Titans that ended up on the one-yard line in the Super Bowl. They could have thrown the ball two yards deeper. But they didn't. And they suffered as a result. Likewise, the signs were there, which would have meant that I would have taken more of the pain from last year. The problem was that none of us recognized how bad things would get. We all said, "OK, I got it, but it's not really going to be that bad, it's not going to be that long, etc." So we all took paper cuts. Here. There. But you wound up bleeding to death from the paper cuts. I would have preferred to deal with things up front, get on with it and then move forward.

VB: What caused the most pain?

Moffat: The changes with employees. That's because, to me, it is easy to make a decision about whether or not you continue with a product, or whether you continue to invest in a marketing program, etc. But people, that's different. Let me tell you an anecdote. When I moved to Raleigh about eight years ago, I was sitting there getting ready to close on my house, and the real-estate agent for the other guy was sitting there saying that he had heard about me. He said, "You're the guy who's firing 20 percent of the people in the PC company." We had just consolidated everything up to Raleigh. Well, there were my kids. One was, I guess, 4 years old, and the other was 7. And I'm like, gee, these guys are going to think their dad is a monster. So I said, "No, I'm actually the guy that's keeping 80 percent of the others [employed."