June 16 was the 100th anniversary of the founding of the Computing-Tabulating-Recording Company, known today as IBM.
It’s worth a moment’s reflection on what traits distinguish a company that can survive for a century in an industry, technology, with whiplash-inducing rates of change. What follows is about building a firm for the ages and while some of it borrows from IBM’s own fairly earned mini-celebration of its milestone, I choose to believe the historic facts speak for themselves.
A good starting point is just how much change there has been in the Fortune 500 and, by extension, at the top of American business.
Only 2 of the top 25 industrial corporations in the US in 1900 still remained on that list at the start of the 1960s; and of the top 25 Fortune 500 companies in 1961, only six are left today.
IBM credits its endurance to Thomas Watson, Sr.’s
“intentional
creation of something that would outlast him–a shared corporate culture.
He showed how the basic beliefs and values of an organization could be
perpetuated–to become its guiding constant through time. This is why we
have never defined IBM by what we make, no matter how successful the
product or service.”
Did you catch that?
IBM is not about what they sell. It’s about their corporate values. Indeed, they write that during downturns, when the temptation is greatest to cut investments in training and R&D, is precisely the moment you need to protect and build on your strategic plans.
It’s also about making hard choices:
Consider the IBM Personal Computer. This wasn’t just a breakthrough
invention and successful IBM business. It was a product that spawned a whole new sector of our industry. But several years ago, it became clear that the PC
was not central to our future–or the future of computing. So we got out–
a move that scratched almost $11 billion in annual revenues from our books.
This was just one of several similar moves over the past 10 years. All part of the
perpetual motion of building higher-value businesses.
The technology industry is notoriously brutal with firms that fail to innovate, so you may think this emphasis is unique to IBM. (And after all, they’ve had more than their share of near-death experiences.) But it’s not just IBM and it’s not just tech companies that need to be ceaselessly scanning the horizon:
“It is the policy of this company never to be satisfied with what we have and always to anticipate the demands of the future.”–Thomas Watson Sr., IBM’s first CEO (undated)
Living that creed takes guts.
As The Economist put it in an article partly published on the occasion of the founding’s anniversary:
To grasp why it is so difficult for IT firms to stay on top, picture the computer industry as a never-ending enterprise to create digital “platforms”, both large and small. These are the foundations on which others build software applications or services. Every ten years or so, a new dominant platform emerges to elevate computing to another level. First came mainframes. This was followed by “distributed” systems: mini-computers, personal computers (PCs) and servers. And now there are computing “clouds” and mobile devices.
Migrating from one platform to the next, explains Michael Cusumano, a business professor at the Massachusetts Institute of Technology, means questioning everything a firm stands for: the technical skills, the brand, how money is made. So big companies mostly try to defend their existing domains rather than to explore and conquer new ones. Microsoft, for instance, remains firmly attached to its Windows operating system . Only a few have managed even one platform shift, let alone, like IBM, pulled off three. And either of its first two could have easily done Big Blue in.
The philosophy behind this nimbleness is actually to conceive of the company not as an organization creating products but as an organization loyal to an idea. Again:
So how has IBM done it? People who have been watching the company for a long time give similar answers. “From the beginning, IBM had a concept of itself as an institution, not just a technology company,” says Rosabeth Moss Kanter, a professor at Harvard Business School and author of “SuperCorp”, a book partially about IBM’s prowess. “IBM is not a technology company, but a company solving business problems using technology,” says George Colony, chief executive of Forrester Research, a consultancy.
The chart vividly demonstrates how IBM has changed what it provides to customers over the past 20 years. But I’m confident IBM would tell you what it has not changed is its nature.
The Economist contrasts companies built on ideas (IBM, Apple, Amazon, Facebook) with companies built on products (Dell, Cisco, Microsoft). And posits that only the firms premised on ideas will endure.
Here’s the itemization, if you will:
- IBM: Package technology for use by business
- Apple: Package the latest technoology in simple, elegant form and sell it at a premium
- Amazon: Make it easy for people to buy stuff
- Facebook: Help people share things with friends easily
- Dell: Building PCs very very efficieintly
- Cisco: Routers
- Microsoft: Windows
Yes, I hope you’re saying, “I get it.”
Now here’s the question: Is this taxonomy a useful way to categorize law firms? Are there firms premised on fealty to ideas and firms premised on selling products (practice areas)?
If you think about what type of people these two different firms put in leadership positions, it’s also clear: Idea firms put thinkers, strategists, inventors in charge. Product firms put marketers, salesmen and (yes) rainmakers in charge. Or if not “in charge,” then certainly they make them the most highly compensated people and encourage one and all to emulate them.
At the risk of being simplistic, rainmakers come and go: Ideas endure.
More subtly, products and services come and go: But powerful ideas can morph and evolve as markets change. “Packaging technology for use by business” changed from calculating machines to punch cards to mainframes to workstations and PCs to, today, software-as-a-service, high-end consulting engagements, and the cloud.
Building PCs extremely efficiently is a great skill, but there are relatively low barriers to entry and margins are under brutal and ceaseless pressure. Designing PCs (that is to say, Mac’s, not to mention iPads, iPods, iPhones, and iTeletransporters for all we know some day) has enormous barriers to entry and rich margins. And it can evolve in an open-ended way, essentially into the indefinite future.
Wachtell, for example, has become far more than Marty Lipton (who just turned 80, by the way, and reputedly still lunches at the “21” Club almost every day). Wachtell is the M&A firm par excellence. Would its future at the top of our profession be remotely so assured if it were the Marty Show?
A firm that can credibly claim it is (say) the go-to firm for high-tech startups (Wilson Sonsini?) has an innately open-ended path of evolution in front of it. A firm that relies on a particular product (securitization, anyone?–and the late great Thacher Proffitt) can see its revenue collapse far faster than it can adjust. (Just yesterday, a friend reminded me that thousands of lawyers used to make a living sparring with the Civil Aeronautics Board.)
Alas, I suspect that law firms premised on a widely recognized idea are rare. Many would insist they are idea-based, but dig under the surface and I bet you’ll find a mutating assemblage of practice areas and geographies without–in most cases–an overarching idea that all the partners could tell you in their sleep motivates the firm.
If the half-life of “product-based” firms is substantially shorter than that for idea-based firms, why don’t we see more idea-based law firms?
What other firms would you nominate as “idea-based”? I’m genuinely curious. Let me know.
