Big Blues: Why
IBM Is in Trouble
By Robert X.
No word this
week from Sam Palmisano. The CEO of IBM was strangely silent following my
column last week about Google and Microsoft that also touched on the malaise at
IBM -- a malaise very much of Mr. Palmisano's making. But the troops inside IBM
Global Services DID reply, and uniformly supported my grim news from last week
that their company has entered a death spiral of under-bidding and then
Why would a
company DO that? Why would they compromise a reputation built over decades?
Because decades no longer matter to publicly traded American companies. All
that really matter are fiscal quarters.
Much of this
began on Lou Gerstner's watch. And while I am generally a fan of Gerstner, who
retired from IBM at the end of 2002, Sam Palmisano is generally reaping what
was the first-ever outsider brought in to run IBM, and did so at a very dark
time in the company's history; John Akers had self-destructed while trying to
carry out the vision of HIS predecessor, John Opel. Are we beginning to see a
When Opel was
CEO and IBM was almost strictly a mainframe computer maker, the company went
through a huge growth spurt based almost entirely on what the first President
Bush would have called "voodoo economics." IBM began urging its
largest customers to switch from leasing their mainframes to buying them
outright, which overnight raised revenue from those customers by ten or more
times. IBM had a huge sales surge, generating crash that made the company look
richer than ever, but also had to be put to use in the business. What made this
voodoo was the company's expectation that this sales level would be somehow
sustainable even after all the leases had been bought out. By that point, of
course, Opel was gone, Akers was in, and IBM was better known as a PC company
-- a PC company that couldn't make a profit.
clueless to fix the problem, but Gerstner wasn't. He downsized the company by
more than 100,000 workers, spun off several business units, and most
significantly, built the very services business that is now causing such
of services to IBM was based on the inherently high profit margins of that sort
of activity. DOING things turns out to be a lot more profitable than MAKING
things, and a LOT more profitable than inventing things.
profit margin is around 36 percent, which means in the very simplest terms that
for every three dollars the company takes in, one dollar in profits is
generated. Inventing things makes IBM a lot less money than that. One of the
things Gerstner did when he took over the company was he started aggressively
licensing IBM's patent portfolio, taking it from generating about $30 million
in revenue per year to over $1.5 billion, which was touted as nearly 100
percent profit. The only expense was for the legal department.
things costs money -- about $5 billion per year for basic research at IBM. IBM
saw this as simply a cost of doing business for an industry leader; hence it's
being ignored in the patent revenue calculation. But the money was still being
spent and had to come from somewhere, so this technology licensing business was
generating $1.5 billion in profit for $5 billion in expenses for a gross profit
margin of around 30 percent. That means that for IBM inventing things -- while
still seen as vital to the identity of the corporation -- was actually a drag
on earnings. The same was true (but even more so) for almost all of IBM's
Once you have
eliminated as many of these business lines as you can without compromising the
very identity of the company, the only way left to give Wall Street the
quarter-on-quarter earnings growth it likes is by taking on more high margin
service business, which is exactly what IBM did, first under Gerstner and then
This is not
inherently bad, but if you combine it with a lack of vision, the strategy
eventually falls apart. Remember that IBM's mantra in this was to "fulfill
customer requirements." That's a clever slogan that sure sounds like it is
based in six-sigma customer service, but it really isn't. That's because most
customers don't really know what they want. And if you count on fulfilling these
unknown and certainly un-vetted requirements as your corporate raison d'etre,
well, it leads to where the company is today -- milking (and ultimately
bilking) its customers.
Here's how one
IBM employee put it recently as he resigned: "Unfortunately, I see IBM as
a place run by salespeople and project managers with a sell and install
mentality, even in services. There is no technical leadership, innovation or
proper understanding of our customer's needs and requirements. The architecture
profession is dysfunctional and cannot remediate itself. These factors may
change, but not in the short term and when it does it is likely to be brutal,
and I'm not patient enough to wait around until it does."
word from another IBMer who is sticking around for now: "As part of the
cost cutting, IBM cut some of its billable rates to help get business. The
problem is, consultants are expected to bill more and more hours to make up for
the lower rates. For some (including myself), we're expected to bill 93.5% of
2080 hours yearly. The problem is, when you factor in vacation, a sick day or
two, etc, that leaves almost no spare time. What's happening is that IBM is no
longer providing training to their consultants, expecting us to pick things up
on our own. This is leading to a much lower quality of work on projects. In
addition, the demand for more billable hours is resulting in some ethically
questionable actions. Starting four weeks before the end of each quarter, we
start get emails asking us to try and bill more hours. They always include
statements saying "to help improve customer satisfaction and meet
deadlines", but with a wink-wink it's implied that you add on an extra
hour or two. The resulting billable hour crunch has also led to less people
exceeding or meeting their goals, leading to an overall lower yearly bonus
(called variable pay). Many people are quitting IBM, and IBM is now in a hiring
crunch because it can't fill projects. The result is that they're stuffing
anyone available onto projects (regardless of skill level), again lowering the
quality of our deliverables. The lowering of bonuses and increased utilization
has prompted many (former Price Waterhouse Coopers) people to jump ship. So IBM
is sacrificing the long-term health of IBM Global Services, to keep up the
quarter-to-quarter results. Delivery quality is down, employees aren't getting
trained in newer technologies because of the crunch to get more billable hours,
and people are leaving IBM because of the impact on pay and overall low
There is a
perfectly good solution to IBM's situation, but it requires candor, courage,
and personal accountability on the part of management (that would be you, Sam).
IBM first needs to be honest and realistic about its situation. IBM needs to
put together a business improvement plan and invest in itself. IBM can go to
Wall Street and say, "We've neglected some of our strategic core
businesses. We are going to invest in them and bring them back to health. For
the next "n" quarters we will be reporting lower profit numbers. This
investment will position us to increase future revenue and deliver services at
a lower cost, and generate more value to the shareholders."
actually likes plans of this nature and -- when they are explained properly --
responds by not beating-up the stock too much. The price might even go up.
The trick is
to be able to execute on the plan and deliver the goods. IBM is good at
overpromising, overspending, and underdelivering on its proposals. They don't
know how to design and implement small, super cost-effective projects that
result in real benefits. They are probably incapable of fixing themselves.
IBM's vaunted Global Technology Center (GTC) in Austin has created a new
"help desk" system called eESM. It is big. It is expensive. It is
gold plated. It is millions over budget. It is years late. It is unreliable. It
doesn't provide the features the business needs. The intent was to put every customer
on eESM, then move all the help desk and server admin functions outside of the U.S. (If you are an IBM USA-based server admin,
watch out!) The problem, of course, is that
eESM won't really lower costs at all, and probably won't make anyone happy.
There is talk of scrapping it altogether.
the auto industry. Why is it possible to ship iron ore and coal to Asia, where
they can build a car, then ship it back to the USA and sell a better product at
a competitive price? The answer is QUALITY. When your QUALITY is crap, your
costs increase. You compensate by throwing more and more people at the problems
that result from poor quality. When you try to cut costs, the problems increase
and the quality suffers even more. IBM is in such a death spiral, and it is a
direct result of a management decision to sacrifice quality and NOT to properly
invest in improving and automating its services businesses.
management is not based on business results. It is based on documented
deniability. A successful IBM project is completing everything as originally
documented. If it works or not, it doesn't matter. The folks in the GTC will be
quick to tell you eESM is a great success and it exceeded all the requirements.
Sadly, its users needed something better and a lot less expensive. In most
businesses, this project would be considered a failure. In IBM, it isn't. And
the organization keeps spiraling towards the ground.