“To understand the IBM turnaround story, you have to appreciate how far we fell, and to appreciate how far we fell you have to appreciate just how high on the pedestal we were,” says Jon Iwata, the company’s vice president of corporate communications. “In the mid 80s we were named America’s Most Admired Corporation four years in a row. We were one of the companies featured in In Search of Excellence. Every aspect of our operations was benchmarked by competitors: our human resources policies, our leadership training, even the architecture of our buildings.”

But IBM missed was blindsided by back-to-back revolutions in the technology business. First, the personal computer revolution placed computers directly in the hands of millions of people. Then, the client-server revolution began to link all of those PCs. The focus shifted from business applications across the enterprise to personal productivity, and IBM—insular and complacent—did not understand the significance of the change until it was too late.

Says Iwata, “I remember seeing film of trees in Yellowstone Park after a forest fire, and on the outside the trees looked fine. They looked great. They had their branches intact. But inside the trees were burned out. They were already dead; they just didn’t know it yet. That’s how IBM was in the mid 80s.”

For the first time since the company’s founding in 1911, its profits disappeared, and big losses took their place. Its stock price was cut in half. Its paternalistic practice of lifetime employment came to a shocking end: IBM’s workforce was trimmed from 430,000 people to 200,000 over a four-year period. In 1993, the annual net losses reached $8 billion. Fortune, which had ranked IBM as the nation’s most admired corporation, called it a dinosaur. The New York Times printed an obituary on the front page, under a headline announcing “The IBM Era Is Over.”

Four months after that story appeared, IBM appointed a new CEO, Lou Gerstner, an outsider from RJR Nabisco. His first new hire was David Kalis, his chief communications officer at RJR. Clearly, Gerstner understood from the outset that communication—particularly with the company’s demoralized workforce—would be a key to any turnaround.

That turnaround started slowly, however.

“For the first 18 months, Lou Gerstner concentrated on stabilizing the company,” says Iwata. “He made a lot of difficult decisions, job cuts and infrastructure cuts, that were necessary to keep the company together. But no real culture change occurred, except at corporate headquarters. We were trying to do culture change communications—we had posters everywhere, and town hall meetings, and retreats, and corporate videos—and we knew what kind of culture we wanted to create: entrepreneurial, innovative, risk-taking. No one could argue with those aspirations, but as far as employees were concerned, the culture really wasn’t changing.

“It became apparent to us that you couldn’t change behavior by describing the attributes you wanted the new company to have. Real change didn’t begin until we stopped focusing on what we wanted to be and started focusing on what we wanted to do.”

Gerstner was clear on what he wanted to do: he wanted to lead again. It wasn’t enough for him to stabilize IBM, restore it to profitability, deliver the kind of growth shareholders had been used to (although he would ultimately do all those things). He wanted IBM to be a leader again—an almost unthinkable aspiration at a time when one Merrill Lynch analyst wrote that the company had “traded its arrogance for insecurity” and when Oracle chief executive Larry Ellison had proclaimed that IBM wasn’t dead, it was merely irrelevant.

Instead of focusing its communications efforts internally, talking about risk-taking and creating the boundary-less organization, the company began to focus externally, on what it would take to beat companies such as Netscape and Oracle at their own game. Says Iwata, “Instead of discussing how we were going to change, which can sound like rhetoric, we talked about what we were going to do. And once we knew what we were going to do it became apparent how we would need to change.”

One key to the turnaround was Gerstner’s decision to embrace a new concept IBM called e-business. In 1996, the communications department created a little black book, called One Voice, that was designed to explain the company’s new business strategy to employees. In a conversational tone, it explained what businesses IBM was in and why. It made it clear that the company, beaten down over the past decade, would not apologize for its business model. If the world questioned IBM’s business model, Gerstner seemed to be saying, then the world simply didn’t get it.

The company printed 300,000 copies, enough for all its employees worldwide. A few weeks later, it was forced to print another half-million.

“Our sales people were taking it to their customers and telling them to read it if they wanted to understand how technology was changing,” says Iwata. “Our human resources people were using it as a recruiting tool. I was at our management development center, in a dormitory, and I found it in the bedside cabinet like the bible. I was on a corporate jet coming back from a meeting and I took out Sports Illustrated to read and the guy traveling with me, a very senior executive, took out a dog-eared copy of the One Voice booklet, with passages marked up and underlined, and started reading it.”

Because of One Voice, people inside IBM began to understand the company’s business model, but they didn’t have the tools they needed to understand the market, and how it impacted the success or failure of their individual business units. Gerstner realized he needed a way to “bring the marketplace inside the company,” says Iwata. The human resources department restructured the company’s compensation policies so that people were rewarded based on their individual performance, their business unit performance, and the company’s overall performance. But they needed new tools to help them understand how what they did had an impact on the bigger picture.

“We didn’t want management to have to tell people when their businesses were in trouble,” says Iwata. “We wanted the marketplace to tell them. So we came up with metrics for every business unit, and we provided them with all the information they needed to show them how their business was performing based on those metrics, without the accompanying executive commentary that is often nothing more than spin. Some of the numbers were painful, if customer satisfaction was down or margins were down, but we wanted people to have the numbers.”

The delivery system was the company’s Intranet, which was redesigned to deliver very specific information that people needed to do their jobs more efficiently.

“People are inundated with information, but they often can’t find the exact piece of information they need to do their jobs properly,” says Iwata. “What we did was filter news and information so people were receiving what was important to them. We created personalized web pages that provided external news that helped people understand what was going on in their markets.”

The communications department soon realized that the Intranet was a powerful news medium, but it could also be much more than that. It could cut through the structure of the company, which like many corporate structures erected artificial barriers between employees in different locations and different profit centers, and bring people closer together.

“Long before the movie came out, we had our own ‘matrix’ at IBM,” says Iwata. “In the movie, The Matrix is this illusion that helps control people’s behavior. At IBM, the matrix was an invisible force that prevented people from working together. In the movie, when Keanu Reeves realizes the matrix doesn’t really exist he’s able to fight it. We used the Intranet to make the matrix disappear for our people.”

It wasn’t easy, because almost every group at IBM had its own Intranet—more than 4,000 sites in all, with more than 4 million pages. The company brought all the Intranet “owners” together and began a process of standardization. “We agreed on little things like color. We thought blue would be nice. We put all the buttons in the same place. Then we began to consolidate. We decided that what mattered was not which division you were in, but what you did. If you were a sales person, we wanted to create single site where sales people could find the information they needed.

“Instead of people chasing information from website to website, we decided it would be much more efficient if we could make the information come to them, depending on their role in the company. We started to create communities.”

Slowly but surely, IBM’s people were aligned behind the vision. They were committed to being faster, to embracing risks, to working with colleagues in a boundary-less organization. It became apparent to Gerstner, and to the communications staff, that employees didn’t need more information, more speeches, more newsletters; they needed the equipment to do their jobs better.

Says Iwata, “We had to stop focusing on the message and start providing people with tools they could actually use.  It was a new mission for us. We had to teach ourselves how to do this.” Once again, the Intranet provided the answer.

Some of the help people needed was on incredibly simple subjects: how to hold a meeting for example. “At our company, people didn’t know how to have meetings. We called a meeting, everyone showed up, everyone had his or her say, we agreed on what the next steps should be. It burned up a lot of time and it wasn’t productive.”

The communications department posted information on how to hold meetings, on the proper uses of e-mail, on brainstorming techniques. It also created what Iwata calls a “video jukebox” of about 5,000 training videos, ranging from Gerstner’s speeches to distance learning models, which people can access at any time and from any location.

“Now, when people join IBM, all this is part of the induction process,” says Iwata. “They learn the IBM way of doing things.”

But the “killer app” of IBM’s Intranet was a deceptively simple tool, a telephone directory, called (appropriately) the Blue Pages. The Blue Pages have evolved from a simple name-and-telephone-number directory to a way in which people anywhere in the company can find colleagues with very specific expertise. Every employee is asked to enter biographical information, including projects they have worked on and clients they have served.

Says Iwata, “If I want to find someone who has experience working with Linux on a 390, which is our mainframe computer, I can enter the search criteria and come up with a list of about 50 people. If I then narrow the search to the banking industry, I can find a colleague in our French operation who has used Linux on a mainframe for a banking client.”

Getting people to use the Intranet has been incredibly easy, Iwata says. The company simply closed down all other media. It eliminated its internal television network, and Gerstner made it clear he would communicate with employees online. In the past, he would send out an e-mail containing details of the company’s quarterly earnings. Now he sends an e-mail alert with a link to the story on the Intranet.

It’s working. In 1997, employees responding to a survey ranked co-workers as the most trusted, most credible source of information about the company, followed by managers, with the Intranet a distant sixth. In 1999, co-workers topped the list again (as they almost always do) but the Intranet had overtaken first-line managers.

“The human resources people didn’t believe it,” says Iwata. “We had to reverify the results.” In the latest survey, the Intranet is in a virtual tie with co-workers as the most trusted source of information.”

The next step in the development of the company’s Intranet is planned for next month, when the communications department will unveil WorldJam.

“In the past, the model of communication at IBM was vertical,” says Iwata. “Management communicated what it wanted people to hear down the organization, and our employees communicated up. But in today’s fast-changing world, we need horizontal communication. People need to be able to talk with one another.”

WorldJam is designed to encourage the sharing of great ideas—of best practices—throughout the IBM network. WorldJam will focus on 10 topics of interest to IBMers—from how to build relationships with new customers to how to handle work-life balance issues. It will then invite employees from around the company to post their ideas. “We don’t want them to tell us what we’re doing wrong, or what we could do better,” says Iwata. “We want them to tell us what they’ve done to solve these problems, what’s worked for them.”

In the eight years since Gerstner arrived at IBM, profitability has been restored, the workforce has been rebuilt (up to about 330,000 worldwide from a low of 200,000), and the company’s market value has increased almost 800 percent. Clearly, there have been many different factors at work in the company’s recovery, but communication—the smart use of communication technology, but more importantly understanding what kind of communication really drives behavior change—has played a major role.