IBM ROI Case


   What did IBM do?

And 50+ Years of IBM at a Glance

Walt Niehoff had a long and productive career at IBM, a good chunk of which was spent as part of a software group called GraphPak. He had a colleague in the company who shared something with him one that senior IBM’ers had been using as part of their toolset for maintaining high performance as executives and managers.

I met Walt because of Tom Hood, the week before I called him for the first time in 2001. Tom had been searching the net for the Mobley Matrix for the dozen-th time over the past five years, because he wanted it to help his staff at the Maryland Association of CPAs understand their business model so they could become profitable again. His search turned up the graph you see below. After our first call, he sent the chart showing 50 years of IBM to me, and I called Walt.

It was such a thrill for me to meet an IBM’er who had a connection with Lou Mobley, however distant. When I asked him how he came to develop the graph, he told me he had learned it from a guy who had learned it from a guy who had learned it from Lou.  This was the first time I had direct confirmation, in this case a 2nd or 3rd party, of some of the stories of generative leadership that I had learned sitting at Lou’s feet for the many hours and days he regaled me with how he had helped build IBM, while being one of the select group of right hand men with whom Tom Watson Jr. was so effective at surrounding himself.

It is an absolute privilege for Walt to be willing to share his perspective and open source gift on the form of his ROx plot tool and rigorous presentation of the Du Pont Formula, Lou and Chuck’s 3rd Bottom Line. I am using the same charts Walt has explained in detail in on page ___, to tell highlights of the story as I heard it from Lou so many times over the years we knew each other.  With any questions regarding IBM in this book, Walt’s contributions should be considered the definitive source.

IBM’s executives used Lou’s financial matrix, which they called the ‘Mobley Matrix’, and the chart on the next page to guide IBM’s Operating Cash Flow and Asset growth between the years of 1957 and 1978.

His Return on Assets Chart demonstrates the effectiveness of Lou’s training in financial performance and leadership culture alignment. During the time when he was training IBM’s upper management, using what is now the Financial Scoreboard and Financial Dashboard, the company experienced unparalleled returns that propelled the company to become one of the most successful businesses of all time. Some of the records they set, and then blew away again and again, may never have been equaled before or since.

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In the upper left corner you can see the starting place where Lou first began serving as the coordinator of hiring thousands of engineers. Lou helped set up the Sand’s Point Executive School curriculum for Watson in 1955, led the marketing team that coined the term ‘data processing’ in 1952, and managing the committee that built IBM’s internal training curricula and cultural norms transmission in 1953 and 54. 

Lou had invented the chart to argue with DuPont’s Treasurer (why the name Du Pont is in the DuPont Formula), that showing only single percentage numbers for ROI (seen here on the right hand side) was almost meaningless in and of itself. He gave up trying in 1956, deciding to simply implement it as a executive leadership and performance improvement training tool. 

The chart shows clearly that the single ROA percentage could be an infinite number of points along those curved, dotted lines. Where a point falls, and therefore its meaning, depends on whether the business unit is stronger at controlling costs (Efficiency), which high Return on Sales shows in the upper left, or at converting capital and assets into improved market share (Effectiveness) by moving Capital (Investment) Turnover to the right.

Using this chart to guide budget development over the next 20 years helped to more than doubl IBM’s Return on Asset stewardship from near 18% in 1957 to over 42% in 1978. That means that, while being one of the largest and fastest growing companies in history, in 1978 IBM returned a profit of nearly half (42+%) its total asset value in that one year!

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The chart above is a copy of the handout the Walt’s colleague received from an internal IBM Management program he attended. Here you can see the DuPont Equations of IBM’s ROA trajectory during the 20 years that Lou Mobley served the company, training the CEO’s, Senior Executive and many managers in personal and organizational leadership development. Under the title Divisional Profit Planning, IBM’s leadership used this chart to help guide the development of what was called a ‘balanced plan’.

  Every year IBM’s next year’s budget had an embedded critical success factor: creating financial results where the increase of efficiency (short term/profit margin focus) by raising Return on Sales, would be balanced by a similar increase in Capital (Investment) Turnover, thereby balancing cost control with increased sales effectiveness (long term/market share focus). This means that the ideal period-to-period progression of results should move on a trajectory of increasing ROI perpendicular to the dotted curves through out the trajectory.


Notice that it took them until 1962 to figure out how to tune the entire company to achieve that trajectory -and then recover some more balance to the past margin improvements the next year by having higher effectiveness improvement than efficiency. Control Data Corp. entered the service bureau business in 1964, so they re-tooled the whole company with a perfectly balanced two-year internal investment strategy, which they market-tested with great effectiveness in 1967. That perfectly teed up a huge leap to almost 37% ROA in 1968.

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As mentioned previously, Tom Hood had been searching the net for information on the Mobley Matrix to help his staff at the Maryland Association of CPAs (MACPA) understand their business model so they could become profitable again. In the Continuing Professional Education class that I have taught to nearly 1,000 CFOs, Controllers and CPAs, including for MACPA since 2001, Tom and I have used the association’s numbers to illustrate Lou’s approach to what has been been termed ‘balanced planning’ or profit planning.                                                                                                                                 

Lou suggested that when doing pro forma projections, that the intent should be an ideal of increasing all three bottom lines, Profit, Operating Cash Flow, and Return. He suggested that the ideal way to increase Return on Assets was to make incremental and ideally somewhat similar scale changes (small and steady improvements) in both Return on Sales (which he called Efficiency) and Asset Turnover (which he called Effectiveness). So when testing projections for their bottom line impacts, it is ideal, to have relatively equal improvements in both efficiency and effectiveness that are steady over time, rather than heruculean pushes to improve only one or the other. 

Another thing to bear in mind is that improving effectiveness is generally the far harder of the two. His encouragement was that if losses in either dimension are unavoidable then plan for that explicitly, as IBM did from 64 to 66, and then plan your turnaround as they did in 67 and 68, and attempted to do, but lost ground on effectiveness in 69

 

Walt has made all of us a gift. If you would like to create a chart like this to track your own return numbers history, and drive its future, go to ww.bizlearning.net/freeroachart to download the Excel® plotting program and documentation, and have at it.

Alfred Sloan, working with Donaldson Brown, originally implemented the DuPont Equations’ math for tracking internal efficiency and effectiveness improvement in the late 1920’s, because he realized that was the only way he would be able to beat Henry Ford to make General Motors the largest automobile manufacturer in history, for a time. 

Any leadership and stakeholder team that can connect what they do every day with vision and intention focused on sustained and balanced, simultaneous improvement of effectiveness and efficiency, will inevitably be a dominant player in any market it chooses to serve. Simply by aligning its objective facts with its highest service aspirations.

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