“The Routes-to-Market methodology came as a breakthrough for IBM at a very challenging time in our industry. It had a big impact on our bottom line by enabling us to grow sales with a much more cost-effective mix of marketing and selling resources. Many companies need to solve that challenge today, before their competitors do.”
- Ned Lautenbach, formerly Senior Vice President, Worldwide Sales & Services, IBM
The Problem
IBM lost a total of $16 billion as the company’s sales fell 3 years in a row in the 1990s. The board brought in Lou Gerstner as CEO, the first outsider to be CEO in the company’s history. Gerstner hired Jerome York as CFO. After months of work, York and his team determined that IBM's expense-to-revenue ratio—how much expense was required to produce $1 of revenue—was wildly out of range with IBM’s competitors. On average, the competitors spent 31 cents to produce $1 of revenue, while IBM spent 42 cents for the same end. When this 11-cent difference was multiplied by IBM’s total revenue, it became clear that IBM had a $7 billion expense problem!
Gerstner had to get sales growing again while cutting $7 billion (26%) of operating expenses. Many CEOs face this same problem in today’s economy.
The Challenge
Several factors made solving this problem very challenging at IBM. The company was hemorrhaging cash when Gerstner joined it. Wall Street analysts demanded that IBM be broken up into a dozen independent companies. Gerstner detailed in his 2002 book, Who Says Elephants Can’t Dance?, how he restored profitability and growth by reorganizing the company, reengineering almost every management process, and changing the company’s culture.
For one of the key transformations, Gerstner asked Ned Lautenbach, SVP, Worldwide Sales & Services, to reorganize IBM’s sales operations into a worldwide customer-centric organization focused on vertical industries (such as banking, government, insurance, and manufacturing) and a group dedicated to the fastest-growing market segment, small- and mid-sized businesses (SMBs).
As the new organization was being implemented, Lautenbach’s team realized that IBM’s go-to-market process was broken, but they couldn’t agree on how to fix it. So many different solutions had been proposed internally to fix this problem that Lautenbach requested an outside review of them before deciding how to proceed.
The Solution
Peter Raulerson of Paramarketing was asked to review the proposed fixes to IBM's broken go-to-market process and recommend what to implement. He had previously consulted with IBM brand managers and sales executives on go-to-market strategies, and had consulted extensively with Lotus management on marketing, sales and channel programs prior to IBM’s acquisition of Lotus. He had also consulted with IBM’s top competitors in hardware, software, networking and professional services, and had 20 years of management experience running a software company and business units of computer and networking vendors.
When Raulerson reviewed the alternative proposals for solving IBM’s go-to-market problem, he realized that they did not go far enough in making IBM competitive. He recommended basing the solution on the Routes-to-Market (RTM) methodology that had been developed and piloted by IBM executives Jean-Claude Malraison and Antoine Leboyer in Europe, and adding several changes to the methodology to make it easier for cross-functional teams of marketing, sales, customer service and brand management (product management) people to optimize spending, so that IBM could produce more revenue at lower cost.
Lautenbach took Raulerson's recommendation. Raulerson joined the RTM team at IBM and led the effort to finalize the methodology and roll it out across all of IBM’s operating divisions and the new sales organization worldwide.
The Results
Lautenbach’s new sales organization and RTM were put in place in 1995, after Gerstner and York had completed the restructuring, layoffs and cost reductions that cut $7 billion out of annual operating expenses. By the end of 1995, revenue rose dramatically, exceeding the previous high which had been set in 1990, and the company returned to profitability, as dozens of IBM cross-functional teams used RTM to grow revenue and profits with less costly marketing and sales resources. In the five years from 1995 through 1999, RTM enabled IBM to increase revenue by 37%, net profit by 155%, and stock price (market capitalization) by 511%, with no increase in marketing and sales expenses.
Consultant Michael Hammer, author of Re-engineering the Corporation, said in 2005 that IBM’s turnaround was “the single greatest turnaround in modern business history.” IBM has used RTM continuously since 1995 and has published a summary of the company’s “Internal Routes-to-Market” and “Business Partners Routes-to-Market” in IBM’s annual report each year.