IBM vs. Gartner During the 1980s

Part 1.

IBM vs. Gartner in the 1980sAfter leaving Oppenheimer to create, launch and manage Gartner Group in 1979,  I continued to  personally write and publish  about the IBM Corporation just as I had done previously for my financial buy-side clients (banks, insurance cos., et al). Forbes quoted me in 1972:  “there is nothing IBM does that fails to impact every aspect of the industry…I prefer to know the most about a little rather than a little about most”. Other analysts at Gartner also commented  on IBM because it influenced the entire IT space, and more than a few of our clients  came to believe that we knew  more about this firm than all the other Wall Street analysts put together. Those of us who were ex-IBMers respected it , while understanding  that our obligation was to observe and document a neutral view, while inserting subjective comments and suggestions;  this actually contributed to our rapidly growing marketplace impact.

This era’s  large IBM computer systems dominated, and by socializing with couple of Leasing Company firms, I outlined the parameters of  a possibly useful forecasting mode; Dave Stein and Michael McFarlane developed it and ran the business  in the early 1980s  we called  RAVIS (RAV=Residual Asset Values), which  turned out to be of  incremental value to our firm’s early growth. The model developed probabilities  of how IBM’s planned program might evolve, including product cycles, possible price cuts, and more. We guessed well, strengthened our credibility, butsoon learned that IBM was concerned and was ‘watching’ us. But the  model  provided value for our clients, but as we  later learned, it also increased IBM’s neuroses.

My former Oppenheimer (Opco) assistant who I’ll call O.A. had left Opco soon before I did to form his own intelligence operation at Wall Street brokerage firm Dean Witter, and because he was somehow suspected to be directly  privy to confidential information from European sources, IBM’s focus on  leaks shifted to him. On August 28, 1980, Watts Humphrey from IBM called me to say that Dean Witter (that is, O.A.) had likely broken the law re privileged information, that IBM was not ready to sue, that it would take its lumps, but it would like our support to  convince Dean Witter to cease and desist running its “intelligence” (G2) business given the SEC implications.

I did not know anyone at Dean Witter except for O.A., and did not call the firm,  never finding out why IBM had not complained directly to that Wall Street brokerage. But within a few days Hank Herrmann, IT analyst at the giant investment firm Waddell & Reed and one of my  brightest Wall Street clients when I was at Opco, (and now  CEO of that huge firm)  called to tell me O.A.. was already talking to other Wall Street firms about employment! I wondered why.

On September 20 another IBM executive, Don Otis,  called me. He said IBM was watching O.A..“like a hawk”, and we had to watch our step as well! Don also criticized one of our recent client communications  ‘suggesting’ certain specifics of IBM’s build plan and its backlog. I didn’t know what Don was talking about, and  responded that he must know that  leaks from IBM salespeople  were rampant,  often ‘shooting their mouths off to IBM’s  large accounts’. I added that we wished to be kept out of all IBM/O.A. matters, we did not want to be sucked into a general Wall Street purge. But I did agree to avoid the Leasing crowd which was disseminating hearsay, to maintain an ethical stance towards all interested parties, and to definitely not compete with O.A.’s “proprietary methods” (like his reputed hosting of alcohol-rich parties in Europe, to which knowledgeable  IBMers were invited)!

Within a week or so spoke with a contact at National Semiconductor (NSC), Alan Baumgartner , who had a good mix of skills (mostly telecom market research, but was strong on inside dope, as he was a true networker and knew lots of people). Alan had actually once hoped to hire O.A.. but  he had reversed fields and was now dumping on O.A. despite his having just recently closed an  arms length deal with Alan’s firm: “ O.A. responds to all our requests, is often right-on with his G2, was right on about IBM’s Newport at 3.6 MIPs, new cache memory at 16K, 4X interleaving [note: such IBM leaks rarely found us!),….. and you (e.g. me and my staff) should develop an equivalent source!” Alan had also found out that Duane, O.A.’s new boss at Dean Witter ‘was nervous about him’. He concluded the conversation by indicating that National Semiconductor would likely approve becoming a Gartner client by year-end!  Luckily, my  O.A. issue dissipated when he left Oppenheimer, was soon to be pushed out of Dean Witter together with the new CIO clients he had accumulated, but we rarely heard  about him, let alone from him, again.

Part 2

Several months passed  after  having spoken to IBM’s Don Otis  I received another critical phone call, this time an indirect call from Ron Rolfe of Cravath Swaine and Moore, IBM’s counsel, and the acknowledged heavy hitter of the entire U.S.’s legal profession!  So once again  the lawyers were getting into the act, always persistent, always a serious development. Ron and I had crossed paths before, but positively; now he confided that the O.A. issue with Dean Witter was about to blow, but that we might end up finding ourselves in the middle of  IBM’s overall investigation despite our past and still constructive relationship; IBM was clearly narrowing the focus of its search for “deep throats” and perhaps we were doing it a disservice by not cooperating more aggressively. He concluded  by casually reminding me that after all, as O.A.’s past boss I could be implicated by former association!

Ron then offered the following syllogism :

1. IBM  assumes that we somehow have some squirreled some IBM documents into our files (where was that assumption born, and was IBM assuming we had them, or guessing?)

2. IBM is concerned about the employee privacy issue and does not wish to go on a witch-hunt, but..

3. document evidence would be of great assistance, thus…

4.The only way for us to put distance between us and O.A. was to coöperate; turn over all IBM documents, and if not, we would be under suspicion!

Nice of him to alert us, he sounded pretty sure of himself, and of course this made me much more nervous. Our lawyer  Marty Mushkin, was concerned that some of the material we were disseminating might in fact be be considered ‘trade secrets’  “because there would be an economic advantage to competitors if they had it”. I almost simultaneously learned that Tom Crotty who ran our Wall Street investment business inserted himself in the growing crisis by speaking with an IBM senior executive Watts Humphrey! What was that about?  Had the witch hunt begun? Where was this all heading?

In those days I naïvely felt that truth was an absolute defense, and while our models were  partly fed by the rumor-mill, nothing specific was transmitted to clients.; rather,  just speculation. And despite Rolfe’s visit, the tension soon  softened even as our analyst team (including ex-IBMers like me)  watched as our respect and admiration towards the IBM company erode . I  accelerated our need for  analysts to document their ‘honestly obtained’ evidence  about IBM , certainly when there was even a hint of their  ‘bashing’ the firm,  but we nevertheless  continued to call  ‘a spade a spade’ whenever right. My internal Gartner Inc.problem was that the aftermath of IBM’s threats had resulted in too many of our analysts developing a negative bias towards it; and as  Gartner was becoming an even  stronger name and force in the industry, if out analysis looked biased, that would  likely be noticed by our  public!

Part 3

Here’s how the drama continued to unfold:

In early March 1993 I was shocked to  receive a call followed by a personal visit in my office by two people associated with IBM: Tom Barr was Cravath Swaine & Moore’s  most famous lawyer  and was handling the entire IBM account. And  Nicholas Katzenbach (Rhodes Scholar,  former professor at Yale and  the U. of  Chicago, then was the U.S. Attorney General, and was now General Counsel for IBM)! Imagine how nervous I felt as Mr. Barr  calmly and respectfully told me that copies of Gartner presentation charts were found stapled to IBM “Confidential-Do Not Copy” documents,  during discovery proceedings in the IBM vs. National Semiconductor Corp. lawsuit! (This was one of two major lawsuits which IBM initiated in its efforts to control its Japanese  competitors and their U.S. Partners; IBM apparently wished them to ‘cease and desist’ from the design and production of “IBM Compatible” mainframes; those lower-cost copies which were penetrating IBM’s huge installed-base of large systems, IBM’s major revenue source!)

After some idle chatter, Tom  said  that we were not the subject of an investigation or the target of litigation, and ‘of course’ IBM was  skeptical that we were necessarily the source of this material. BUT,  he asked me respectfully to look into this matter, and within 20 minutes, the two left to return to Armonk, IBM’s corporate HQ.. .I recall wondering why Mr. Katzenbach had come along, he had hardly said a word.

Wow! As soon as they left I huddled with David Stein my partner, and we instantly and simultaneously concluded what had transpired: The Gartner analyst who led our ILCM service (IBM Large Computer Machines) would more than sometimes entertain our Japanese clients from Fujitsu and Hitachi, the  primary manufacturers of these huge IBM clones, and National Semi was their major semiconductor supplier. One of our conference rooms was near my office and David’s, I recalled I had been casually surprised by the size of each Japanese group,  but most important,  I  knew that our analyst had a girlfriend who worked at in one of IBM’s major laboratories, in its education department!  Q.E.D.?

We immediately walked into our analyst’s office and confronted him with the situation. He did not even attempt to refute our suspicions, and agreed to pack up  at once and leave our offices, permanently!  I should note  that somewhat later we determined  that “IBM Confidential”  and “Do Not Copy” were the lowest forms of security control  within the firm, compared with “IBM Secret”, “IBM Top Secret” (I don’t recall the  other security terms), and that the source of the document was an IBM classroom where dozens of these documents were exchanged with few further security controls.

We watched our analyst leave, and of course notified IBM of our finding and the his firing.  But still, IBM continued to harass us. We believed we were at the boundary of being sued despite IBM’s initial representations, as we suffered through  constant negotiations and cost, with our new major attorneys who had been recommended by our board.(Weil Gotshal’s Dick Gruenberger with the active assistance of his firm’s famous chairman Ira Milstein, who will have to deal with  the extremely tough Tom Barr. I believed we had a strong case that these were not trade secrets  but with no trial we were nevertheless soon forced to a ‘consent settlement’ with IBM, a better result than being sued which would likely have bankrupted us. Yet, we did suffer what I considered a forced punishment, as follows:

We were given a detailed document as to IBM’s  version of  what it believed should be our rules of behavior which we had to  distribute  annually to all staff  receiving and having to sign it ! Also, our lawyers Weil Gotshal  had to commit to visiting us at the same time annually  in order to review,  face to face with all analysts, our various obligations with regard to IBM’s rights (!)

Third, the major item for me, was IBM’s applying what has been called in the trade a “snitch clause” whereby  any offer by any outsider to provide information which might possibly be considered confidential, would have to be reported immediately to IBM counsel. This seemed ridiculous, if not onerous, but that was that; I assumed it was primarily to keep us on our toes.

In retrospect, this legal nightmare had caused us  much  agony, wasted time which hurt our productivity,  and incurred huge legal expenses, in my view an unnecessary and vindictive action on IBM’s part, and which it should have known, in the long-term might ironically hurt it more than helped!  After all, we were a form of ‘the press’, which digs for protected content all the time, and who ever sues the press?

Part 4

As we moved forward, our responsibility was to continue analyzing the IT industry objectively for all our clients, and not about IBM in particular or for its benefit. Throughout the decade our company’s  mission continued the education  of all players in the IT marketplace, including  those vendors who were meaningful, the large users and investors, and even the press itself.  And despite our unfortunate experience with Big Blue, we did recognize its strong points; but we also felt our continuing responsibility to  impart confidence to our clients with regard to asserting their independence from IBM “Big Blue”, compared with  how they previously  followed Blue’s every whim and message! We stopped ‘loving’ the firm, to say the least, and some of our analysts developed an extreme dislike, while we retained our influence. How could IBM alienate the firm which already had achieved the strongest influence with the largest IBM clients and their Data-Centers across the country? Regardless,  this was the beginning of an IBM  downtrend which lasted for many years!

Our multiple relationships with large user organizations such as the Society for Information Management (made up largely of CIOs) helped to tell  our customer base of special IBM deals which others were obtaining, which often resulted in such deals becoming general practice (previously in the 1970s, IBM had been a fixed-price no-deal vendor). We  were present to give IBM’s customers confidence and security when they considered switching to other vendors such as the midrange Digital Equipment Corporation, the plug- compatible manufacturers (PCMs) Amdahl, Hitachi, Fujitsu, Memorex, Telex, Calcomp, and  many others (and the Japanese copy-cats especially thrived at IBM’s expense). Our Wall Street operation ‘Gartner Securities’ covered these PCM’s,  recognized their functions and viability, and documented and/or recommended them as stock market ‘buys’.   Justified by the normal journalist’s (and analyst’s) responsibility to combine our knowledge and analysis, we developed a  broad relationship with each of IBM’s competitors in every sector, all of whom extended themselves to try to educate and impress us perhaps improving our forecasting abilities.   We were also able to pretty  accurately forecast (on our own and with  no inside information) IBM’s impending product announcements which often but  temporarily led to cool its market for soon-to-be-obsolete platforms.  One day IBM’s Corporate CFO in Armonk searched and found me in Paris; the phone rang and he  complained, “Gideon, do you realize what you’ve done to the IBM company’s quarter?”  our IBM-related  conclusions continuing to be in great demand  resulted from  our  formalized (and unique in our industry) “research process”, to be discussed elsewhere.  And as  IBM continued to be concerned and vigilant itself, it retained a sense of humor; I’m told that at IBM’s Armonk NY corporate HQ, a repeated joke at lunch was, “have you spoken to Gideon lately?”

But IBM itself had  also blundered in the face of both market and internal complexities;  its marketing ploys, overselling by its Data Processing Division sales force,  development delays in its plants, and over-reliance on financial officers, together with its high prices and huge market share, encouraged the Japanese and other copycats; finally came its financial decision to sell off a large part of its huge rental base to boost earnings,  which led to longer term cyclicality  compared with its prior financial predictabiity .

Despite IBM’s clear ‘invincibility’ during the early 1980s Gartner Group (now called Gartner Inc.) was the first and most explicit documentor of many of its  down trends….But after years of  downward spiral, our readers know that IBM has rebounded strongly during the past decade!


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