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To Hell and Back

IBM opened its first full-blown research lab in 1945 as an act of vengeance. The company had teamed with Harvard graduate student Howard Aiken to fashion the pioneering Mark I computer, then the world’s largest electromechanical brain. But Aiken’s press release ignored IBM’s contributions, infuriating company patriarch Thomas Watson. Out to construct a superior machine, the “Old Man” renovated a frat house near Columbia University, and launched the lab.

From that seed sprang today’s international research organization-the world’s largest. Over the next half-century, a flood of technological and scientific triumphs-including back-to-back Nobel Prizes in the 1980s for the scanning tunneling microscope and high-temperature superconductivity-placed IBM at the forefront of industrial research. But while some advances poured billions into corporate coffers, the company failed to turn other Research creations into big profits. Achievements in relational databases and Reduced Instruction Set Computing (RISC), for example, languished for years in IBM’s pipeline-only to be snapped up and commercialized by competitors such as Oracle, Hewlett-Packard and Sun. Such failures earned Research the reputation of a “country club,” whose members cared little about bringing their ideas to market.

It’s hardly fair to place the blame solely on Research. For one thing, IBM’s historic success with entrenched technologies sometimes made it difficult for the business groups to accept radical approaches such as RISC. And many of Research’s inventions-the first magnetic hard disk drive, for one-did get commercialized by Big Blue. Still, the division’s longtime motto was: “famous for its science and technology and vital to IBM.” In reality, notes Wolf-Ekkehard Blanz, once a physicist at IBM’s Almaden Research Center in San Jose, Calif., and now a manager in Siemens’ medical division, “it was perfectly OK to excel in one” of those two goals.

Things reached a head in the early 1990s, when IBM started hemorrhaging money. In spring 1992, research director James McGroddy focused the division more on the bottom line, establishing a new strategy area-Services, Applications and Solutions-whose members worked directly with customers on specific needs. Foreseeing a management change and worried Research might be considered an ivory tower, he also prepared a report detailing its contributions. McGroddy was ready on April 1, 1993, when new boss Gerstner asked senior executives for a description of their operations. Research was first to complete the assignment-and the Thomas J. Watson Research Center in Westchester County, N.Y., was Gerstner’s initial company stop outside headquarters. After a five-hour tour, the new boss told McGroddy he had served on the AT&T board and watched Bell Labs struggle to help its parent: “I want to thank you for not putting that problem on my plate here.”

Over the next two years, to whip his division into fighting shape, McGroddy reduced his budget 22 percent by cutting overhead and axing redundant or dead-end programs-simultaneously helping Gerstner slash nearly $2 billion from IBM’s $5.1 billion annual R&D budget. It was a painful period. Morale plummeted, many good people left. But the real battle had been won that first day. At McGroddy’s retirement dinner in late 1996, Gerstner confessed he’d considered breaking up the division-farming its pieces out to business groups-until McGroddy’s great first impression convinced him to stay the course.

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