The Most Dangerous Man in the Business

Jerome B. York is not afraid to take on anyone. Just ask former IBM chairman and CEO Lou Gerstner or former executives at Chrysler Corp. prior to its merger with Daimler-Benz in 1998. York, who as CFO at both Chrysler and later IBM, was known as a legendary cost-cutter at both companies. At IBM, York was loved by Wall Street and by customers but feared by employees. Though recruited by Gerstner in 1993 as IBM's CFO, York ultimately took on his boss regarding how to approach acquisitions. The showdown, of course, left York on the short end of the stick. York moved on to join financier Kirk Kerkorian to run Tracinda Corp., which was Chrysler's largest shareholder at the time. Tracinda made two failed attempts to acquire Chrysler that, by some accounts, could have left York in charge of the third-largest automaker.

York's not sitting quietly these days, either. In addition to serving on the board of Apple Computer, he joined Northwest Airlines chairman Gary L. Wilson and other investors such as Michael Ovitz and took over the struggling catalog reseller Micro Warehouse. As chairman and CEO, Micro Warehouse was not just a place for York to hang his hat. York has already slashed the company's 1,700 employee work force in half and is transforming the company from a sleepy inbound catalog marketer of PC gear to an outbound reseller that is looking to move upmarket.

In a recent interview with VARBusiness editorial director Robert C. DeMarzo and senior editor Jeffrey Schwartz at Micro Warehouse's headquarters in southern Connecticut, York discusses the challenges in the IT industry, the issues he faces running Micro Warehouse and, of course, the ups and downs of IBM.

VB: Do you think the IT industry is going through an inflection point?
York: It reminds me a little bit of the evolution of the auto industry. If you look at auto sales in the United States, they grew at very, very nice rates, with a pause during the Great Depression and World War II. And that growth continued until the late '60s and into the early '70s. Then, of course, you had two fuel crises six or seven years apart. You had foreign competition going from nothing to 25 percent of the market. Coupled with slower growth%85everybody in the car business was doing what you more or less just described in technology. They were saying: "How do I make money in the car business?" Various answers have come along,minivans, sport utility vehicles. That's what's going on in IT now. I think your usage of the word "inflection" point is going to be borne out when we all look back five or six years from now, and we'll see that something of a permanent slowdown in growth took place. So people will be scrambling, looking for the minivan mousetrap and the sport utility mousetrap. There will be, in my strong view, a major amount of consolidation. Companies that aren't flexible,that exhibit too much rigidity in hanging onto the past,are going to be at grave risk.

VB: Do you see the consolidation taking place among companies like Micro Warehouse, vendors, the service channel or perhaps the entire IT industry? Who do you think will be hardest hit?
York: I think it's difficult to say. I meet some people that are knowledgeable in the industry that think the distributors have a huge problem long-term because, at the end of the day, there's not enough margin for a two-step distribution process. And on the other hand, I hear people say that there's a definite place for them, particularly in servicing smaller resellers that can't afford to stock a lot of inventory. But I think it's going to be real, real interesting during the next five or six years. And, as you know better than I do, there's already been very substantial consolidation in distribution. And some of that may continue. From our perspective, where our strategy is to carry tens of thousands of SKUs or offer them to our customer, I should say they play a very valuable role because we stock the relatively high-volume stuff in our own logistics facilities and buy the lower-volume stuff from distribution.

VB: What are some key strategic changes you had to make?
York: The principal issue, I think, was not so much strategy, but getting some people into the company that had the right knowledge sets and skill sets to help Micro Warehouse make the transition from what is loosely called the catalog/inbound sales model, which was extremely successful for the company through about 1997, to an outbound/relationship model. We've been successful in doing that during the past year. Prior to that, quite frankly, we found that we couldn't [recruit] because you'd call up some executive or have a search firm approach someone in another company and the answer you would get was, "Sure, I'm interested, but you're going to have to write me a check for $5 million to buy me out of my stock options."

VB: How difficult was the transition to an outbound marketing and sales company?
York: The transition is a work in process, and it's difficult. Call centers and the skill of the people that work in those centers is an art form and a science. It's not something [where] you can just go pick up a couple of Harvard Business Review papers and whatever and put it in place in a few months.

VB: Can you compare your three years at Micro Warehouse with your three years at IBM?
York: They are entirely different in nature. IBM was the preeminent IT company in the world; it arguably still is. But IBM's problem was twofold. First, for many, many years,decades,it had been the proverbial safe buy, so it could command a premium%85But then, when computing started expanding out of the mainframe environment into the Unix and WinTel environments, particularly, IBM never developed large market shares of either one of those spaces. I believe just going back to the 1960s, that even when you had seven or eight other companies making mainframes, IBM's share of that business was never below 70 percent on a worldwide basis. But when you looked at the total pie, and the Unix piece started expanding, and the WinTel piece started expanding and, indeed, at that point Apple still had 10 percent of the desktop and laptop space, IBM started losing share overall.

The combination of the pressure on its mainframes and the expansion of these other spaces where it had relatively low share, led to plummeting gross profit margins. Then, obviously, the other challenge also was to get the company growing again. Its revenue had actually shrunk from 1990 to 1993. I guess you would have to say there were some similarities with the Micro Warehouse situation. We weren't losing share to a major shift that was taking place in a product sense like IBM, but we were losing share in the shift from the catalog/inbound model to the outbound relationship model. And there were also some cost issues. Our systems were inferior. The way I look at personnel in the company is very simple in this business. There're two types of people: There are sellers and then there is overhead, including myself. And the sellers are the cash registers and all of the rest of us are here just to help sellers. But you can only afford so many of us in a business that has probably ever-shrinking gross profit margins driven by Moore's law.

VB: What is the model for Micro Warehouse?
York: The old classic story is the way you grow a sales business is to maintain a strong hold on your existing customers and try to expand your business with them. But, inevitably, you're going to have some attrition and so your new customer acquisitions have to exceed the attrition rate. Historically, again, through 1997 and even into 1998, the response rates on our catalogs were spectacular, up in the 3, 4, 5 percent range. And the catalogs, by and large, were pretty well paid for with co-op advertising. And so it was almost like if you wanted to grow more, just mail more catalogs and the economics worked. But as the response rates have come down, that economic model doesn't work anymore, and you have to be much more scientific about your catalog mailings. We've acquired people to do that.

The key is to have a system where anytime you get a new customer, no matter how he comes to you, whether it's in response to a catalog mailing, in response to an e-mail campaign or just word of mouth, the key is to have the systems in place to try to keep those customers. And we get about 20,000 new customers per month. The idea [is] to have various approaches of retaining them. You can do that through e-mail, perhaps with special offers; for example, if somebody buys a laptop from you but they don't buy a carrying case, then you follow it up with an e-mail. We'll also do telephonic follow-up.

VB: What kinds of customers are you seeing?
York: Our business is heavily the low end of small to midsize business. We're about 15 percent consumer and 85 percent commercial, including government and education. And one of the reasons we're so high in consumer is that we are Apple's largest reseller and, of course, their products in relative terms are more attractive to consumers,or those that look like consumers,than to the business space, where they're limited to graphics type of applications.

VB: Is Dell a competitor of yours?
York: I'd have to say that Dell is a competitor. It's taking share, while HP, IBM, Toshiba, are going in the other direction.

VB: How has the tenure that you had at IBM and Chrysler and elsewhere prepared you for this role?
York: A huge difference is the fact that during the three years I was at IBM, the economy was going up, up, up the whole way. By contrast, of the 12 quarters I've been here, I've had three good ones and the rest of them have either been headed south...and, in a low-margin business, that is a formidable challenge.