Perot Systems: Can a High Performance Company Have a Human Side?
Although computers have been around for decades, only in the 1990s has their full application potential been realized by companies around the world. Leading the way are internationally recognized Information Technology (IT) service firms, including IBM Global Services, Electronic Data Systems (EDS), and Computer Sciences. Sales in the consulting, systems integration, and project management computer services industry were at $90 billion in the late 1990's according to the U. S. Department of Commerce.1 An important entrant into this field is Perot Systems, which began in 1988 by Ross Perot. As the sixth largest IT firm in the world, can Perot Systems provide solutions for the elusive goal of fully integrated management systems in large, global organizations?
A Rich History:
Ross Perot is one of the true masters of the American economic free enterprise system. Born in Texarkana, Texas on June 27, 1930, he has led a life filled with one significant achievement after another. Having lived his whole childhood in Texarkana, he entered the U.S. Naval Academy in 1949, where he served as class president and battalion commander, an experience that even to this day motivates him to hire many of his top company officers from ex-military personnel.
Upon his discharge from the navy, Ross married and began working for IBM's data processing division as a salesman. In 1962, with $1000, he started a one-man data processing company which he called Electronic Data Systems. Drawing on his experience in the military, in addition to recruiting a large number of ex-military personnel, Perot was able to build his firm into the premier data processing company in the U.S.
In 1984, EDS was sold to General Motors for $2.5 billion. GM wanted to greatly increase its use of technology in its manufacturing process and viewed its EDS purchase as an effective way of meeting this goal. As a result of the purchase, Ross Perot became one of the single largest holders of General Motors and a director in the company. However, Perot had great difficulty adjusting to GM's bureaucratic, autocratic management style, and he was eventually bought out of GM in 1986. After waiting the required two-year noncompete period, he started Perot Systems in 1988.2 Interestingly, GM spun EDS off in 1996, as it became obvious that the two entities did not make a good fit.
Throughout his career, Ross Perot has always been a model of citizen volunteerism. In 1969, the U.S. government asked him to determine what action could be taken to assist the prisoners-of-war in Southeast Asia. In recognition for his work, he received the Medal for Distinguished Public Service, the highest civilian award presented by the Department of Defense.3 In 1992 and again in 1996, Ross Perot ran for president of the United States representing a new third party, the Reform Party, which he founded as an alternative to the Republican and Democratic parties.
Perot's campaign efforts forced him to step down from daily involvement in Perot Systems. That year, Mort Meyerson, who had helped him build EDS into a world-recognized leader in data processing, stepped in to assume the chief executive officer duties. Although he had worked closely with Perot at EDS, Meyerson did not share Perot's desire to recreate EDS's "young, male, military model" corporate climate at Perot Systems.4 He was convinced that times had changed.
"In purely financial terms, my seven years running EDS had been unbelievably successful. When I left, I was very proud of the people, the company, and our achievements. From the day I started as president in 1979 to the day I left in 1986, EDS never had a single quarter where we lost money. We never even had a quarter where we were flat — every quarter we grew like gangbusters. That kind of economic performance made a lot of our people very rich. I used to take enormous pride in the fact that I was instrumental in getting a lot of equity into the hands of the people at EDS.
What I realized after I left was that I had also made a lot of people very unhappy. Our people paid a high price for their economic success. Eighty-hour weeks were the norm. We shifted people from project to project and simply expected them to make the move, no questions asked. We called our assignments "death marches" — without a trace of irony. You were expected to do whatever it took to get the job done. In terms of priorities, work was in first place; family, community, other obligations all came after."
Meyerson's concern was the emphasis on profit at the expense of people. He believed that technology, customers, the market, and what people in organizations wanted from their work had all changed from his previous time at EDS.6 He asked himself two fundamental questions:
1. To get rich, do you have to be miserable?
2. To be successful, do you have to punish your customers?
Meyerson wanted to move Perot Systems toward a corporate model that recognized that the larger issues in life mattered as much as the demands for profit-and-loss. Listening to a senior manager talk about how they handled low performers on teams bothered him.
"I heard talk of "drive-by shootings" to "take out" non performers; then they'd "drag the body around" to make an example out of them. They may have meant it only as a way of talking, but I saw it as more: abusive language that would influence behavior. Left unchallenged, these expressions would pollute the company's culture."
Meyerson was fully aware that he had not only supported this environment at EDS, but encouraged it. As president for seven years, he had been largely responsible for the high performance atmosphere that demanded so much from EDS employees. He tells a story in which an employee named Max missed a day of work due to a snowstorm and how Meyerson himself called the employee at home to question his loyalty to EDS. The employee took the first opportunity he could and left EDS. He was Max Hopper, who later went on to design the highly successful SABRE reservation system for American Airlines.
"None of that happened by accident. I had helped design EDS to operate this way, using the compensation system to motivate people: I tied their pay to profit-and-loss performance. If you ran your project very profitably, you were richly rewarded. If you didn't, you weren't. I routinely spent an extraordinary amount of my time on compensation and rewards — roughly 15 percent. I did it because I knew that compensation mattered most.
The system worked; that is, we got exactly what we wanted. We asked people to put financial performance before everything else, and they did. They drove themselves to do whatever was necessary to create those results — even if it meant too much personal sacrifice or doing things that weren't really in the best interests of customers. Sometimes they did things that produced positive financial results in the short term but weren't in the company's long term interest. That's a charge you'd usually apply to a CEO — but I've never heard it said about individuals down to the lowest ranks of a company. Yet my pay-for-performance approach effectively encouraged that behavior from all of our people."
Upon his arrival at Perot Systems, Meyerson inherited a company of 1500 employees and a revenue of $170 million. His initial effort went into meeting with the top 100 leaders in the company. Through these conversations, Meyerson concluded that he had heard "a laundry list of horrifying bad news."10 He set about to change the company's culture, including a training seminar that over two-thirds of the firm's employees (including Meyerson) attended. Individuals who could not adjust were asked to leave. Meyerson's objective was clear:
"We still tell people we'll give them everything we can in the way of financial rewards. In fact, more than 60 percent of our company is owned by the people who run the company. So if we go public someday, we'll still make a lot of our people very rich.
But we will have done it without having first made them miserable — by offering them another dimension they can't get in most other high performance companies: a human organization. If any of our people has an interest outside the company, we will encourage and support them; if they have needs outside the company, we will recognize them."
Meyerson's other major concern was how EDS had treated customers. He described negotiations as intense, with EDS's desire to win every penny possible from the customer. Not just to win, but to dominate.12 At Perot Systems, Meyerson promoted a much closer working relationship with customers and designed the reward system to reflect this newfound cooperation.
"Here again, at Perot Systems, I turned to the compensation system to help us live the lesson. We use 360-degree evaluations for our people - asking boss, peers, and subordinates to participate - and always include input from our customers. We also ask our customers to give us report cards - and then we temper bonuses based on customer ratings of how well we support their needs."
Similar to other information technology service firms, Perot Systems concentrates on particular industry groups in order to provide enhanced expertise. These include financial services, energy, travel and transportation, health care, communication, manufacturing, and construction.14 Several of the contracts that Perot Systems obtained reflect this new corporate vision.
Project: Avis Rent A Car
Avis Rent A Car System, Inc. selected Perot System Corporation to provide and maintain a state-of-the-art imaging and workflow solution for customer document processing in its Garden City, N.Y. World Headquarters and Virginia Beach, Va. Processing Center. The decision places Avis on the cutting edge of technological advancements, and the services agreement frees Avis to focus on what they do best, serving their customers.
Project: California Electrical Grid
The ISO Alliance, a limited liability company owned jointly by ABB Power T&D Co. and Perot Systems Corp., was awarded a contract to develop and implement one of the most critical new business systems the state of California needed to operate its electricity markets under deregulation. The systems were to help the state administer the bidding and manage the usage of its power grid to ensure reliable service much the same way an air traffic control system coordinates take-off and landings at airports to maintain order and manage congestion. California is the largest U.S. power market.
Swiss Air March 4, 1997
Perot Systems Corporation today announced it has purchased a controlling stake from SwissAir Corp. in Icarus Consulting AG, a Zurich- and Frankfurt-based management consulting firm that serves the travel and transportation industries in Europe. Founded in 1988, Icarus had been owned 55 percent by SAir Group, the holding company of SwissAir, and 45 percent by Icaruss management, respectively. After today’s agreement, Perot Systems will have a 70 percent stake in Icarus, with a fixed option to purchase the remaining 30 percent from SAir Group over a three-year period. As an example of its work, Icarus recently conceived and implemented a new air cargo system that combined the services of SwissAir and Sabena Airlines. Under this unique arrangement, Sabena has essentially sold its airline cargo space to SwissCargo, the SAir Groups cargo arm, giving up marketing and operational costs in exchange for a guaranteed revenue stream. SwissCargo gains added capacity and market share and can utilize its existing sales infrastructure much more efficiently. This is a good example of the consolidation of core competencies by major air carriers, said Ludwig Bertsch, the Zurich-based managing director of Icarus. In the coming years we will see some airlines specializing in the design and management of hub systems and routes designs as network managers. Others will excel in flight operations. Still others will create strong niches in catering, cargo services, or maintenance.
The change from data processing to systems integration has been motivated by globalization and the need for full supply-chain management. Companies depend on information systems to tie all the functional areas, including marketing, customer support, logistics, service, and operations together into a seamless whole. Rather than develop these competencies on their own, companies are increasingly depending on outside consultants such as Perot Systems to provide the expertise to run these complicated systems.
The New Face of Leadership?
Consistent with Mort Meyerson's new attitude toward business was a new emphasis on the shifting face of leadership. He concludes that the new leadership entails three jobs:
1. Make sure that the organization knows itself. Meyerson suggests that the leader's primary purpose is to support and embody certain core principles that identify the organization. These values do not have so much to do with business strategy, tactics, or market share; rather, they have to do with human relationships and the obligation of the organization to its individual members and its customers.
2. Pick the right people and create an environment where those people can succeed. In this sense, the leader is more coach than executive. This requires collaboration and teamwork among people at every level of the company. The leader is not viewed as the final authority in decision making; the team represents the source of knowledge.
3. Be accessible to the people in the organization. Meyerson insists that he be in email contact with all employees of the company. He personally answers thousands of email messages every month. No longer is the leader an individual who shows up every six months to deliver a pep rally speech. And the leader must be accessible on issues and concerns that transcend the traditional boundaries of work and the company.
Can a High Performance Company Have a Human Side?
While Mort Meyerson worked to develop his new view of leadership, Perot Systems struggled to earn a consistent profit. As one of the smaller players in the information technology field, Perot Systems' higher costs and lower net earnings troubled Mr. Perot. Operating margins at Perot Systems averaged 5.3 in the late 1990's percent versus 7.7 percent at rival EDS.19 During that time, the company went through three management changes and delayed a public stock offering during of a tech led historic growth in the stock market. Unhappy with these conditions, Mr. Perot chose to return to day-to-day operations in late 1997.
Initially announced as interim CEO, Perot has evolved into Perot Systems' full-time chief executive officer. "He has centralized reviews of spending and new contracts. He has directed every supervisor to attend a leadership training course that reinforces his precepts. He has cut expenses, stepped up recruiting from the military, reinstated mandatory drug testing, and assigned a reading list including his autobiography. He has promoted executives with military backgrounds who have been with him for decades, since his days as commander in chief of Electronic Data Systems. White shirts are in, and, under his current thinking, same-sex partners' health benefits will be out."
Not everyone is convinced that Mr. Perot can provide the same type of spectacular returns as he did in his EDS heyday. "The wheel he's trying to reinvent is rusty," an executive at a rival company said.21 When he stepped aside as Perot Systems' chief networked personal computers were just beginning to spread. E-mail addresses (Mr. Perot does not use E-mail; he relies on face-to-face communication) and Internet access were largely the domain of military overlords and university scientists, and Perot Systems was doing mostly standard corporate work on central computers.
"At EDS, he built an organization that was based on command and control," said Allie Young, an analyst at Dataquest, the industry research firm in San Jose, California. "It was 'my way or the highway.' At that time, that type of model worked. Companies wanted that. Today it's very different. Senior executives are involved in the decision making for contracts, very often the CEO. Information technology is a strategic decision. They don't want anything railroaded by them. They want a business partner."23 The question is: Will Mr. Perot's command and control approach work in this new environment?
The IPO:
On February 2, 1999, Morgan Stanley Dean Witter conducted Perot Systems' IPO at $16 per share, valuing it at $1.35 billion in the New York Stock Exchange flotation. By mid-afternoon, the price had risen $26 1/2 to a value of $42 1/2, thereby increasing Perot Systems' value to $3.6 billion. Analysts credited the movement to the current clamor for information technology shares and the glamour of Ross Perot's name. Perot's personal stake in the firm increased from $553 million to $1.4 billion on the move. (His personal wealth is estimated at $3.7 billion.)
It remained to be seen whether Mr. Perot's leadership style could turn Perot Systems into a major force in the information technology field. With competitors over 12 times larger, competition remained intense. EDS announced a deal with MCI Worldcom in which EDS would take over much of MCI's computer operations while MCI provides telephone and data communications services to EDS. MCI had determined that its computer services unit was just too small to compete for contracts.25 Could Ross Perot make the difference Perot Systems needed? What was the outcome three years later? According to www.hoover.com and the Wall Street Research Net, in March 2002 the company's profits in 1999 were 75.5 million, in 2000 profits were 55.5 million, in 2001 the company lost 2.7 million. Ross Perot attributed part of the 2001 downturn to the negative impact of the terrorist attacks on New York and Washington, DC on Sept. 11. In March 2002, the stock was selling for $19 a share, less than half its closing IPO price.
Review Questions:
Question: 1. Compare Mr. Meyerson's leadership style versus Mr. Perot's based on the Michigan and Ohio State behavioral theories of leadership.
Question2. Utilizing Fiedler's Contingency Theory of Leadership, explain how either Meyerson's or Perot's style might be most appropriate based on specific characteristics of the situation at Perot Systems.
Question 3. Evaluate the situation at Perot Systems from the point of view of the discussion on New Leadership.
The case should be prepared in the following manner:
a. State the problem
b. Summarize the case
c. Analyze the case by answering each question at the case, and
d. Your recommendation (s) or the appropriate course of action that should be taken to solve the problem