How They Started (36 page)

Herman’s first version of the tabulator in 1890.

Things were going well, but the machine itself was not perfect, not by any means. For one thing, the paper Herman was using would tear easily, and it was difficult to read the information recorded. To solve this, Herman switched to using punch cards the size of $1 bills. The advantages over paper were clear: the size of the cards meant they were easier to sort and collate, and they did not tear so easily. The process of trial and error to iron out problems took years of dedicated work, and during this time, investors were not easy to find or keep. Government departments were intrigued by the potential of Herman’s machine, however, and they continued to test his machines. Meanwhile, Herman kept himself going financially by consulting on patents and working on other inventions.

In 1888, the War Department decided to rent one of Herman’s tabulating machines for $1,000 for the year. Herman was told that if it was successful, there was the chance the Navy would also be interested, as the Office of Records and Pensions wanted to compile data on the health of its servicemen. The machine performed well, Herman signed a contract with the Navy that same year, and he began to rent out his machines to other clients. Then, in 1889, Herman’s patent application was finally approved and he took his machine global, exhibiting it at the Paris Universal Exhibition of that year.

Herman developed his invention to include a motorized card feeder.

By this time, the 1890 census was fast approaching, and as the US population had grown considerably in the 1880s, it was estimated that it would take 13 years to complete. The Census Bureau trialed Herman’s machine against two competitors’—and Herman’s won. The Bureau placed an order for six machines at a yearly rate of $1,000 each. A year later, in 1890, an order for 50 more machines was placed by the Bureau.

The data collection for the 1890 census was completed in a staggeringly short six weeks, and the whole census itself was finished in just two and a half years. Herman’s invention saved taxpayers $5 million and earned him a PhD from Columbia University.

By 1891, demand for the machines soared and Herman won contracts from other countries such as Austria, Canada, France and Russia, following his appearance at the Paris show. Every country was keen to use his invention to gather and process census data, and the machines now had a great track record. There was also demand from private companies, as Herman expanded the commercial uses of the machine to encompass freight and agricultural data.

The data collection for the 1890 census was completed in a staggeringly short six weeks, and the whole census itself was finished in just two and a half years. Herman’s invention had saved taxpayers $5 million.

At the end of 1896, Herman founded the Tabulating Machine Company to continue making and licensing out his machines. However, he was a far better inventor than he was a businessman, and he struggled to cope with the demands of managing a business. Herman also possessed a difficult temperament, often antagonizing both his staff and his customers. By 1911, he was finding it increasingly difficult to manage a growing business, was suffering from poor health, and had competitors biting at his heels. Herman decided to sell the business to an investor named Charles Flint, who was putting together a collection of businesses that would become IBM.

The man whom many regard as the face of IBM, Thomas, couldn’t have been more different from Herman. While Herman was awkward in social situations, Thomas proved to be a savvy manager and motivator. Also, unlike the well-read and educated Herman, Thomas was a man of humble beginnings who never went to college and who started full-time work as soon as he could. After a few jobs, his working career began in earnest in 1896, when he joined the National Cash Register Company (NCR), based in Dayton, Ohio, as a sales apprentice. Thomas was taken under the wing of John Range, who taught him all about sales, and his career began to flourish.

By 1903, Thomas had made a real impression with senior management and they called on him to work on a special project. With NCR backing, Thomas set up the American Second Cash Register Company, which was little more than an NCR front designed to crush the competition by fair means or foul. NCR’s business was selling new cash registers, and the company was therefore threatened by companies that bought and sold secondhand ones. Thomas’s goal was to drive out the competition by overpaying for used registers and even acquiring rival businesses on condition that they would not re-enter the market. The operation was highly successful, although later NCR would gain the unwanted attention of the federal government on charges relating to monopolistic activities. Indeed, thanks to Thomas’s work, NCR had gained 90 percent of the market by 1910.

Thomas’s work gained him a promotion at NCR to sales manager, where he worked directly beneath the company’s founder, John H. Patterson. From him, Thomas learned much about leadership and running a business, and NCR’s founder was to have a profound influence on Thomas’s own leadership of IBM. Patterson was an uncompromising and tough leader, who instilled both fear and respect in his staff. Although he was often ruthless and controlling, he extolled the importance of believing in his staff and developing teams. Patterson also taught Thomas how to win at all costs. The two became close—so close, in fact, that Thomas became one of the few people who could contradict Patterson and get away with it.

It was through NCR that Thomas heard about Herman’s tabulating machines. He was impressed with how they could be used to transform company data, and he hired some machines for his offices. It is clear that at this stage Thomas understood the importance of being able to measure performance, as well as the benefits of having a scientific approach to business.

In 1912, NCR’s management was indicted by the federal government for its corrupt and monopolistic practices, and John H. Patterson and Thomas Watson were among those indicted. The charges were made criminal and Thomas faced up to a year in prison. The indictment began a dark period in Thomas’s life and would go on to haunt him throughout his career. At the first trial, the company was found guilty. The defendants appealed, and eventually a deal was made. Thomas never admitted he had done anything wrong.

By the end of 1913, Thomas was finished with NCR. However, with federal charges still hanging over him while he awaited the appeal, he found it difficult to find work. He would have liked to set up his own business, but no one was likely to back someone who could soon end up in prison. However, after many trips between Dayton and New York looking for a job, Thomas would eventually enter the offices of Charles Flint.

Charles Flint is a colorful character in the history of IBM. He had been an adventurer, an explorer, an investor, an arms trader and a friend to high society, to US presidents and to dictators. Prior to meeting Thomas, Charles had acquired several businesses: the Tabulating Machine Company, International Time Recording, Bundy Manufacturing, and Computing Scale of America. The new company became known as the Computing Tabulating Recording Company (CTR). However, the acquisitions were not working out, and Charles needed a strong manager to turn his sinking ship around. It was a brave decision to make, bearing in mind the charges still standing against Thomas, but Charles saw in him a true leader in the making. The two struck a deal whereby Thomas would be manager until charges against him were dropped, and then he would become president.

Thomas understood the importance of being able to measure performance, as well as the benefits of having a scientific approach to business.

Thomas began work at CTR but found the experience a miserable one. Unlike the well-oiled machine of NCR, his new company was structurally flawed. Its founder’s messy acquisitions did not sit well together, and the company had no discernible culture. It had 1,200 employees based at several locations, which made managing the business virtually impossible. Financially, the business was hemorrhaging money: it was valued at $3 million but had over $6 million in debt. Technically, it was bankrupt. Instinctively, Thomas wanted to impose on it the rational management techniques he had learned at NCR, but two big obstacles stood in his way: Herman, who had remained at the company, and CTR’s chairman, George Fairchild.

Herman had sold his business but retained a role at the company that gave him the right to approve or veto any new technological advance or product. The effect was to stifle the company’s innovation and prevent gifted engineers from bringing forward the next phase of products. Innovation was needed, as Herman’s patents were running out and competitors were cutting into the company’s markets. However, Thomas needed Herman, as his name was synonymous with the tabulating machines and the business traded off it. George Fairchild irritated Thomas with his interference, demanding to be consulted and informed while also being unavailable. However, as a member of the House of Representatives, he brought some respectability to the company, which offset Thomas’s questionable past at NCR. Thomas had little choice but to play the long game and placate them both.

Nevertheless, Thomas got to work on his sales team and soon proved himself a powerful motivator. He wanted to transform the approach his managers had toward their staff, encouraging a more nurturing approach. “Every supervisor must look upon himself as an assistant to the men below him, instead of looking at himself as the boss,” he told his managers.

Thomas also introduced what became known as “The Man Proposition.” On a blackboard, he wrote out the words “manufacturing,” “general manager,” “sales manager,” “sales man,” “factory manager,” “factory man,” and so on, covering all the positions within the business. He then crossed out all the words apart from “man,” suggesting that all were equal in the company. “We are just men,” he said. “Men standing together, shoulder to shoulder, all working for one common good.”

The Man Proposition would be repeated regularly at IBM for the next 40 years or more, and is one of Thomas’s biggest contributions to the company’s culture.

By 1915, the federal case against the management of NCR had concluded, and while most of those involved accepted a minor penalty for what they had done, Thomas never admitted to any wrongdoing. The federal government declined to pursue him any further. He therefore became president of CTR on March 15, 1915, and was determined to turn the company around and to run it in as moral a way as possible. It was a grueling challenge, as the US economy was then in decline as World War I raged in Europe.

Imbued by the Man Proposition, Thomas looked to find talent within his existing staff rather than recruit from outside. “The directors told me, ‘You’ll have to hire outside brains before you can build up this company,’” said Thomas. “I told them, ‘That’s not my policy. I like to develop men from the ranks and promote them.’”

Thomas’s own personal style and morality affected those around him. He never drank alcohol, and soon it became the norm for the executives to refrain from drinking as well. Thomas also had a love of fine clothes, and pretty soon those under him adopted his style of suits. However, while he espoused democracy and equality, he could also behave like a tyrant, subjecting staff to brutal tongue-lashings and tirades. At the same time, he engendered a love in his staff, which meant that most forgave or tolerated him, and he developed many loyal employees.

“The directors told me, ‘You’ll have to hire outside brains before you can build up this company,’” said Thomas. “I told them, ‘That’s not my policy. I like to develop men from the ranks and promote them.’”

In many ways, Thomas was becoming more and more like John H. Patterson, his old boss at NCR, aping some of his ideas as well as his management style. NCR had a Hundred Point Club whereby salesmen who hit targets would be treated to a weekend at a country club. Similarly, Thomas created the Hundred Percent Club, which served the same purpose. He strove for unity and cohesion, which wasn’t easy while managing what were effectively separate companies. “We want all of our subsidiary companies to feel that they are all one thing, one big family,” he said.