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`TRADING TECH EXHIBIT 2067
`IBG ET AL. v. TRADING TECH
`CBM2016-00009
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`Mr. Gilbert and his team talk a lot about “iteration cycles,” “lateral thinking,”
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`“user journeys” and “empathy maps.” To the uninitiated, the canons of design
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`thinking can sound mushy and self—evident. But across corporate America, there is a
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`rising enthusiasm for design thinking not only to develop products but also to guide
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`strategy and shape decisions of all kinds. The September cover article of the Harvard
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`Business Review was “The Evolution of Design Thinking.” Venture capital firms are
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`hiring design experts, and so are companies in many industries.
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`Still, the IBM initiative stands out. The company is well on its way to hiring
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`more than 1,000 professional designers, and much of its management work force is
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`being trained in design thinking. “I’ve never seen any company implement it on the
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`scale of IBM,” said William Burnett, executive director of the design program at
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`Stanford University. “To try to change a culture in a company that size is a daunting
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`task.”
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`Daunting seems an understatement. IBM has more than 370,000 employees.
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`While its revenues are huge, the company’s quarterly reports have shown them
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`steadily declining in the last two years. The falloff in revenue is partly intentional, as
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`the company sold off less profitable operations, but the sometimes disappointing
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`profits are not, and they reflect IBM’s struggle with its transition. Last month, the
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`company shaved its profit target for 2015.
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`In recent years, the company has invested heavily in new fields, including data
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`analytics, cloud computing, mobile technology, security, social media software for
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`business and its Watson artificial intelligence technology. Those businesses are
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`growing rapidly, generating revenue of $25 billion last year, and IBM forecasts that
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`they will contribute $40 billion by 2018, through internal growth and acquisitions.
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`Just recently, for example, IBM agreed to pay $2 billion for the Weather Company
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`(not including its television channel), gaining its real—time and historical weather
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`data to feed into Watson and analytics software.
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`But IBM’s biggest businesses are still the traditional ones — conventional
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`hardware, software and services — which contribute 60 percent of its revenue and
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`most of its profit. And these IBM mainstays are vulnerable, as customers
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`increasingly prefer to buy software as a service, delivered over the Internet from
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`remote data centers.
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`Virginia M. Rometty, IBM’s chief executive, has warned that this will be a
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`difficult transition year. It will take time, she says, before its new businesses are large
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`enough to become engines of growth for the whole company. The strategy, she
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`insists, is the right one. What remains is to move ahead faster. “People ask, ‘Is there
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`a silver bullet?”’ Ms. Rometty said in a recent interview. “The silver bullet, you might
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`say, is speed, this idea of speed.”
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`Ms. Rometty is pulling other levers to accelerate the pace of change at IBM, but
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`she said, “Design thinking is at the center.”
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`Breaking With the Past
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`Recognizing the importance of design is not new, certainly not at IBM. In the
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`1950s, Thomas J. Watson Jr., then the company’s chief executive, brought on Eliot
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`Noyes, a distinguished architect and industrial designer, to guide a design program
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`at IBM. And Noyes, in turn, tapped others including Paul Rand, Charles Eames and
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`Eero Saarinen in helping design everything from corporate buildings to the eight—bar
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`corporate logo to the IBM Selectric typewriter with its golf—ball—shaped head.
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`At that time, and for many years, design meant creating eye—pleasing, functional
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`products. Now design thinking has broader aims, as a faster, more productive way of
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`organizing work: Look at problems first through the prism of users’ needs, research
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`those needs with real people and then build prototype products quickly.
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`Defining problems more expansively is part of the design—thinking ethos. At a
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`course in New York recently, a group of IBM managers were given pads and felt—tip
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`pens and told to sketch designs for “the thing that holds flowers on a table” in two
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`minutes. The results, predictably, were vases of different sizes and shapes.
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`Next, they were given two minutes to design “a better way for people to enjoy
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`flowers in their home.” In Round 2, the ideas included wall placements, a rotating
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`flower pot run by solar power and a software app for displaying images of flowers on
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`a home TV screen.
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`Mr. Gilbert came to design thinking as a technologist and a software
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`entrepreneur. He helped build Lombardi Software, in Austin, Tex., first as its chief
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`technology officer and then president. Over the years, in trying to develop software
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`faster and to improve products, he studied and adopted some of the design
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`principles of people like David Kelley, chairman of the global design company IDEO
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`and a founder of the Stanford design program.
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`In 2010, when IBM bought Lombardi Software, with its 220 people, he had no
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`inkling of what lay ahead for him.
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`When Ms. Rometty became chief executive in January 2012, she told her
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`executive team that she wanted to improve — “to rethink and reimagine” — the
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`experience of IBM’s customers. This was motivated partly by a shift in how
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`businesses were buying technology. As more purchased software as a service over the
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`Internet, buying decisions were often being made by workers in functional
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`departments — human relations, sales, marketing and data analytics — rather than
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`by a central corporate information technology office. In this new market, software
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`that was tailored to workers’ needs and could be used without technical help from IT
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`employees would win the day.
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`At a top—management meeting, Robert J. LeBlanc, a senior software executive,
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`mentioned that there was a guy in Austin, at a start—up IBM had acquired, who was a
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`design and user—experience fanatic. Mr. LeBlanc called Mr. Gilbert and asked if he
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`thought the design work he was doing in a small corner of the software business
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`could be done across IBM. Mr. Gilbert replied that he didn’t know but it was worth
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`considering. After a couple of days’ study, Mr. Gilbert came back and said that to
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`have an impact, IBM had to be prepared to hire and train 1,000 designers.
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`Mr. Gilbert assumed that would be the end of the matter. But two weeks later,
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`he got a call from Ms. Rometty. “Go,” she said, as he recalled. “And how fast can you
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`go? How many can you hire in the first year?”
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`The Need for Speed
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`Since the program began in August 2012, IBM has hired several hundred
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`designers, about two—thirds of them freshly minted college graduates and a third
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`experienced designers. By the end of this year, IBM plans to have 1,100 designers
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`working throughout the company, on the way to a target total of 1,500. They are
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`embedded in IBM product teams and work alongside customers in the field or at one
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`of 24 design studios around the world.
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`IBM has hired designers from top schools like Stanford, Carnegie Mellon, the
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`Rhode Island School of Design and Parsons School of Design. But initially, recruiting
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`required skillful persuasion. When Mr. Gilbert first showed up at the graduate
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`design school at Stanford, he was greeted with skepticism. “These are millennials in
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`Silicon Valley — they think Google is an old company,” Mr. Burnett said, recalling
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`their first impression. “To them, IBM was a historical relic.”
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`The recruiting pitch made by Mr. Gilbert and his colleagues has been essentially
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`twofold: First, you can make a difference in socially important fields because IBM’s
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`technology plays a crucial role in health care, energy, transportation, water and even
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`agriculture. Second, you can be part of a groundbreaking effort to apply design
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`thinking in business.
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`At Stanford, the prevailing view of working for IBM, Mr. Burnett said, has
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`shifted from “Are you kidding me?” to “This is a pretty interesting opportunity.”
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`Joe Kendall thinks so. Mr. Kendall, 28, finished a two—year graduate design
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`program at Stanford and joined IBM in June. He chose IBM over Apple, where he
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`would have worked in its iPhone business. At Apple, he figured, his opportunity
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`would be to help make a great product a little bit better. At IBM, Mr. Kendall sees a
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`different opportunity. “No one is using design thinking to solve problems on this
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`scale,” he said, adding that he could be part of “changing the future of this giant
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`entity.”
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`IBM’s senior managers have all been through design training. Ms. Rometty and
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`her executive team were among the first. The training varies, with executives getting
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`one—day sessions; product managers, a week; and new designers, three—month
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`programs. In all, about 8,000 IBM employees so far have had some in—person
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`training in design thinking. It’s an impressive number, but it’s also only 2 percent of
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`the work force.
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`How broadly design thinking is being embraced across IBM is hard to say. It is a
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`new, unfamiliar ingredient in the corporate mix. Doug Powell, a leading design
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`expert who joined Mr. Gilbert’s team in 2013, said, “It’s not as though the masses of
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`IBM were waiting for us to arrive.”
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`The incubator for the company’s ambitious experiment in corporate culture
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`renovation can be found in a building on a corporate campus in Austin. Above a
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`sprawling open—plan space, metal tracks fit movable whiteboard walls, creating
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`temporary rooms — “huddle spaces” — for small teams of workers, rarely more than
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`a dozen. The walls are covered with drawings, text and Post—it notes — “idea parking
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`lots,” they’re called. If teams have to travel and don’t meet for a week or two, the
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`walls come down and are stored in steel transport carts, notes and sketches intact.
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`The space constantly changes, as teams form or disband, add people or shed
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`them, according to the nature of the work.
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`“In a week, every one of these configurations will be different,” Mr. Gilbert
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`observed, as he toured the floor.
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`The work groups assemble from across IBM — hardware, software and services,
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`but also from departments like marketing and communications. Customers are often
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`in the mix, especially when collaborating with IBM developers to write cloud
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`software applications. Getting clients into the free—form work space, Mr. Gilbert said,
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`can help “fundamentally change their relationship with IBM.”
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`That proved to be the case for GameStop, a video game and electronics retailer.
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`Jeff Donaldson, a GameStop technology executive, recalled that IBM’s reputation at
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`the company’s suburban Dallas headquarters was as a slow—moving corporate
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`bureaucracy, dominated by a sales culture offering expensive hardware and software.
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`The reputation, he said, was “certainly not positive.”
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`But in the last year or so, the two companies have worked side by side — often in
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`IBM’s Austin studio — to figure out better ways to serve GameStop customers with
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`mobile devices and data. The floor staff at GameStop’s more than 4,100 stores in the
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`United States can now tap iPads to look up the past purchases of customers who
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`have downloaded the GameStop app or joined the company’s loyalty program.
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`Coupons, trade—ins and loyalty—point rewards can be offered on the spot, as well as
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`game recommendations.
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`The cloud software to make it happen was built in a few months, tested in a
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`small group of stores and then quickly rolled out nationwide. Further projects are in
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`the works to study how online behavior affects buying patterns.
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`“They’ve completely turned us around,” Mr. Donaldson said. “We’re working
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`with the fast company part of IBM.”
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`Strength From Adversity
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`If you ask people inside IBM for a design—thinking success story, they are likely
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`to mention Bluemix, a software tool kit for making cloud applications. In just one
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`year, Bluemix went from an idea to a software platform that has attracted many
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`developers, who are making apps used in industries as varied as consumer banking
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`and wine retailing. In the past, building that kind of technology ecosystem would
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`have taken years.
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`Software developers are just as important as customers to IBM, since both
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`groups create markets. “We wanted to redefine IBM for developers,” said Damion
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`Heredia, an IBM vice president who leads the Bluemix operation.
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`Like most of IBM’s new units, Bluemix is run much like a start—up, at arm’s
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`length from the corporate bureaucracy. Mr. Heredia, who worked closely with Mr.
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`Gilbert for years, is steeped in design—thinking methods. His team studied how
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`young programmers built cloud apps. Tarun Gangwani, a manager in the Bluemix
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`unit, recalled traveling to all—night “hackathons” to watch developers as they worked,
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`step by step. Guided by what they learned, the Bluemix team built prototype
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`software, tested it with users, and modified and refined it.
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`When a free test version of Bluemix was offered in February 2014, Mr. Heredia
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`figured it might attract 2,000 developers in the first few months. It reached that
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`number within a week, and a commercial version was introduced that July. Today,
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`Bluemix is signing up 10,000 new users a week.
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`As software becomes more an online service, analysts say, the big corporate
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`contracts that have sustained IBM’s software business will become less frequent.
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`“For IBM, the dollars are going to have to come from sharply expanding its customer
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`base so that developers at all kinds of companies, including start—ups, see IBM as a
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`place to go to build new things,” said Frank Gens, chief analyst of the market
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`research firm IDC. “That’s not been IBM’s reputation, and that’s the challenge
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`Bluemix faces.”
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`IBM has an impressive track record of corporate evolution over its 104—year
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`history. At different times, the minicomputer, the personal computer and the
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`Internet were seen as threats to its survival. IBM’s deepest crisis — and revival —
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`came in the 1990s after the collapsing economics of the mainframe business sent it
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`into a tailspin. IBM was often late to new markets, but each time it adapted.
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`The company’s predicament today has echoes of the past. IBM is gaining ground
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`now, but it was late to the cloud business, behind Amazon, Google, Microsoft and
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`Salesforce. The company’s financial performance is deteriorating, but it is still a
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`corporation that generated nearly $16 billion in net profit from continuing
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`operations last year. Its old—line businesses are in retreat, but with Watson it seems
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`to be at the forefront of applying data—driven artificial intelligence to mainstream
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`industries.
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`John E. Kelly, a senior vice president who oversees several of the new
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`businesses and research, is a 36-year IBM veteran who has experienced plenty of ups
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`and downs and shifts in strategy.
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`This time, Mr. Kelly observed, is different in one way. “In the past, we changed
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`what we were working on, but we were pretty much working the same way,” he said.
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`“Now, we’re changing how we work too. And the how element is always related to
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`speed.”
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`The pace and trajectory of the business are the big questions about IBM today.
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`IBM’s stock price has declined 16 percent in the last year. Ms. Rometty is under
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`pressure — and that pressure will not ease until its new businesses overshadow its
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`legacy products. “The theory is that the new lines of business grow faster than the
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`old ones decline, but we’ve not seen it yet,” said A. M. Sacconaghi, an analyst at
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`Sanford C. Bernstein & Company.
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`Asked what she tells anxious large shareholders, Ms. Rometty replied that “the
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`key message” is that IBM is the only technology company that is more than a century
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`old because it has reinvented itself repeatedly in the past, and it is doing so again
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`today. “And that does take some time — yes, it does,” Ms. Rometty said. “But don’t
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`underestimate us. This is in our DNA, this ability to transform.”
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`A version of this article appears in print on November 15, 2015, on page BU1 of the New York edition with
`the headline: Setting Free the Squares.
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`© 2016 The New York Times Company
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