27 Sep 2004  Research & Ideas

IBM Finds Profit in Diversity

Former CEO Lou Gerstner established a diversity initiative that embraced differences instead of ignoring them. In this Harvard Business Review excerpt, professor David A. Thomas describes why IBM made diversity a cornerstone strategy.

 

Editor's Note— Like many companies, IBM took big strides to eliminate discrimination by attempting to ignore cultural, racial, and other differences among its vast worldwide workforce. That ended when Lou Gerstner became CEO. Gerstner initiated a diversity task-force initiative that would "uncover and understand differences among the groups and find ways to appeal to a broader set of employees and customers," according to HBS professor David A. Thomas.

Since then, the number of female executives in the company has grown by 370 percent, ethnic minority executives have jumped 233 percent and the number of self-identified gay, lesbian, bisexual, and transgender executives gained 733 percent. Another benefit: "By deliberately seeing ways to more effectively reach a broader range of customers, IBM has seen significant bottom-line results," says Thomas.

In this Harvard Business Review excerpt, Thomas describes the key factors that made the initiative a success.

Any major corporate change will succeed only if a few key factors are in place: strong support from company leaders, an employee base that is fully engaged with the initiative, management practices that are integrated and aligned with the effort, and a strong and well-articulated business case for action. IBM's diversity task forces benefited from all four.

Demonstrate leadership support

It's become a cliché to say that leadership matters, but the issue merits discussion here because diversity is one of the areas in which executive leadership is often ineffectual. Executives' espoused beliefs are frequently inconsistent with their behavior, and they typically underestimate how much the corporation really needs to change to achieve its diversity goals. That's because diversity strategies tend to lay out lofty goals without providing the structures to educate senior executives in the specific challenges faced by various constituencies. In addition, these strategies often don't provide models that teach or encourage new behaviors.

IBM has taken several approaches to helping executives deepen their awareness and understanding. To begin with, the structure of the task forces—how they operate and who is on them—immerses executive sponsors in the specific challenges faced by the employee constituency groups. The groups are a formal mechanism for learning, endorsed at the highest levels of the company.

Second, the chief diversity officer, Ted Childs, acts as a partner with the CEO as well as coach and adviser to other executives. In addition to educating them on specific issues, as he did when the company decided to offer domestic partner benefits, Childs also works to ensure that they behave in ways that are consistent with the company's diversity strategy...

We did not set quotas, but we did set goals.
— Lou Gerstner

And third, Gerstner and later (current CEO Sam) Palmisano not only sanctioned the task force process but actively sought to be role models themselves. A number of the executives I interviewed were struck by Gerstner's interest and active involvement in the development of high-potential minority and female senior managers and junior executives; he took a personal interest in how they were being mentored and what their next jobs would be. He also challenged assumptions about when people could be ready for general management assignments. In one case, Gerstner and his team were discussing the next job for a high-potential female executive. Most felt that she needed a bigger job in her functional area, but Gerstner felt that the proposed job, while involving more responsibility, would add little to the candidate's development. Instead she was given a general management assignment—and the team got a signal from the CEO about his commitment to diversity. His behavior communicated a sense of appreciation and accountability for people development. Indeed, accountability for results became as critical in this domain as it was for all business goals.

Gerstner also modeled desired behaviors in his interactions with his direct reports. One of them told me this story:

    During a board of directors dinner, I had to go to [my daughter's] "back-to-school night," the one night a year when you meet the teachers. I had been at the board meeting that day. I was going to be at the board meeting the next day. But it was the dinner that posed a problem, and I said, "Lou, I'll do whatever you want, but this is the position I am in," and…he didn't even blink. He said, "Go to back-to-school night. That is more important." And then…he told the board at dinner why I wasn't there and why it was so important…to make it possible for working parents to have very big jobs but still be involved parents....

Engage employees as partners

While the six-month task force effort was consistent with IBM's history of promoting equal opportunity, the use of the task force structure to address issues of diversity represented a significant culture shift. IBM was an organization that had discouraged employees from organizing around any interest not specifically defined by the requirements of their jobs. The idea of employees organizing to advocate was anathema. One white male executive said, "Does this mean that we can have a communist cell here? Are we going to have hundreds and hundreds of these?" The skepticism reached up to the highest levels: When Childs first proposed the task force strategy, Gerstner asked him one question: "Why?"

But in the end, IBM's task force structure paved the way for employee buy-in because executives then had to invite constituent groups to partner with them in addressing the diversity challenge. The partnerships worked because three essential components were in place: mutual expectations, mutual influence, and trust.

When the task forces were commissioned, Childs and Gerstner set expectations and made sure that roles and responsibilities were unambiguous. Initially, the task forces' charters were short, only six months (the groups are still active today), and their mission was clear: to explore the issues, opportunities, and strategies affecting their constituencies and customers. Once this work was done, it fell to the corporation's senior executives to respond and to report on the task forces' progress at various junctures to IBM's Worldwide Management Council. Gerstner and Childs followed up with the task force sponsors to ensure that the groups were gathering meaningful information and connecting it to the business.

The task forces' work has evolved to focus on more tactical issues, and the organization has demonstrated its willingness to be influenced, committing significant resources to efforts suggested by the groups. Trust was also built as the task force structure allowed employees more face time with executives—executives they would likely not have had a chance to meet—and provided new opportunities for mentoring…

The task force structure has been copied on a smaller scale within specific business units. Even without a mandate from corporate brass, most units have created their own diversity councils, offering local support for achieving each unit's specific diversity goals. Here, too, the employee partnership model prevails.

Integrate diversity with management practices

Sustaining change requires that diversity become an integrated part of the company's management practices. This was a priority for Gerstner, who told me:

If you were to go back and look at ten years' worth of executive committee discussions, you would find two subjects, and only two, that appeared on every one of the agendas. One was the financial performance, led by our CFO. The second was a discussion of management changes, promotions, moves, and so on, led by our HR person.

In my interviews, among the most frequently mentioned diversity-related HR practice was the five-minute drill, which began with Gerstner's top team and has cascaded down from the chairman to two levels down from CEO.

The five-minute drill takes place during the discussion of management talent at the corporate and business unit levels. During meetings of the senior team, executives are expected at any moment to be able to discuss any high-potential manager. According to interviewees, an explicit effort is made to ensure that minorities and females are discussed along with white males. The result has been to make the executives more accountable for spotting and grooming high-potential minority managers both in their own areas and across the business. Now that it's been made explicit that IBM executives need to watch for female and minority talent, they are more open to considering and promoting these individuals when looking to fill executive jobs.

Managing diversity is also one of the core competencies used to assess managers' performance, and it's included in the mandatory training and orientation of new managers…

Both Gerstner and Palmisano have been clear that holding managers accountable for diversity-related results is key. Gerstner noted, "We did not set quotas, but we did set goals and made people aware of the people in their units who they needed to be accountable for developing."

Link diversity goals to business goals

From the beginning, Gerstner and Childs insisted that the task force effort create a link between IBM's diversity goals and its business goals—that this would be good business, not good philanthropy. The task force efforts have led to a series of significant accomplishments.

Even without a mandate from corporate brass, most units have created their own diversity councils.

For instance, IBM's efforts to develop the client base among women-owned businesses have quickly expanded to include a focus on Asian, black, Hispanic, mature (senior citizens), and Native American markets. The Market Development organization has grown revenue in the company's Small and Medium-Sized Business Sales and Marketing organization from $10 million in 1998 to hundreds of millions of dollars in 2003.

Another result of the task forces' work has been to create executive partner programs targeting demographic customer segments. In 2001, IBM began assigning executives to develop relationships with the largest women- and minority-owned businesses in the United States. This was important not only because these business sectors are growing fast but because their leaders are often highly visible role models, and their IT needs will grow and become increasingly more sophisticated. Already, these assignments have yielded impressive revenue streams with several of these companies.

The task force effort has also affected IBM's approach to supplier diversity. While the company has for decades fostered relationships with minority-owned businesses as well as businesses owned by the disabled, the work of the task forces has expanded the focus of IBM's supplier diversity program to a broader set of constituencies and provided new insights on the particular challenges each faced. The purpose of the supplier diversity program is to create a level playing field.

Excerpted with permission from "Diversity as Strategy," Harvard Business Review, Vol. 82, No. 9, September 2004.