Can IBM Become Relevant Again? Sorting out the biggest basket case in tech (UPDATED)

Can IBM Become Relevant Again? Sorting out the biggest basket case in tech (UPDATED)

FOREWORD (Added as Update)

Before getting into the merits or otherwise of the current strategy at IBM, and what needs to change, I should point out that every major enterprise software and systems company from the pre-cloud eras, including IBM, HP, Oracle (including the former Sun part), SAP, Cisco, EMC, and Dell, are facing the same extreme existential threats that are driving the decline of IBM. Like most companies with powerful existing franchises built during the latter decades of the last century, they have second-guessed the danger represented by the new consumption business model that has arisen via cloud computing until almost too late. Dell fell into disarray before HP or IBM, and recently took itself private with the help of $24bn. in private equity financing. HP is splitting itself into two companies in an attempt to enable each to play to its strengths rather than continue to operate a sub-optimal, compromised business model. Cisco’s core switching and routing business is suffering virtually the same agonies as IBM, and Oracle is hurting too, especially because everyone with a major hardware business is having their main offerings commoditized by cheap servers, virtualization and new high-redundancy architectures.

It’s not inconceivable today that IBM will be broken up into smaller units, or will be taken private in order to shrink before managing to grow again with a new, more nuanced business model, something that is almost impossible to pull off successfully while in the glare of the public capital markets. So let’s be clear about one thing. There are no “guilty” parties in business unless actual crimes are being committed. But there are executives who act like ostriches with their heads in the sand for too long, and need to be removed. Their “sin” is to deny the inevitable for too long, playing games to conceal the reality of their plight to appease investors until their businesses enter a vortex of accelerating decline. This is the risk that IBM faces today. The remainder of this post is written in this context.

 


 

“Leadership problem: IBM has no vision, none, nada, zip. CEO Ginni Rometty and her cadre have no clue how to fix what’s wrong with IBM. And even if they did, they are too tainted by the current state of the company – a state they created. IBM executives are for the most part in a state of paralysis. They don’t know what to do. They know their business has serious problems. Even if they knew what to do they’re afraid to act. Ginni and the $20 EPS target had most of the senior executives frozen from doing anything. This type of management style can be fatal for business. The CEO should be helping each division become more successful. Because $20 EPS has been the only goal, IBM’s senior leaders have become unable to manage their businesses.”

– Robert X. Cringely, in a recent blog post

Like Bob Cringely, a writer who has covered IBM for years, I’d prefer to do something to prompt positive change at IBM rather than get stuck criticizing what’s going wrong. Cringely’s last post on the company titled “How to Fix IBM” included coherent suggestions on what IBM needs to do to repair the problems in its software, services, cloud, and mobile businesses, as well as to readjust its approach to overall quality and people, particularly its employees.

The one element of Cringely’s analysis that I don’t agree with is his recommendation that IBM use its scale to become a high-volume, low-cost provider. The simple fact is that IBM’s avocation is and always will be as a complex systems company, which is why it has shed all of the volume ops businesses it has owned over the years, from chip-making to PCs, to low-cost servers. Being the best complex systems company is incompatible with being the best volume operations company (IBM should leave that task to companies like Microsoft, Amazon, or Dell). The two models do not go together, just as Charles Schwab can’t be expected to operate like Goldman Sachs, and vice-versa. This is not to say that complex systems and volume operations businesses do not collide in the marketplace. They do. It’s just that they have distinct value propositions with different advantages to offer to customers.

Before I get off this point, until HP’s split into two separate companies takes place next year, that company remains the best example in tech of a company trying to be both a volume ops and complex systems company, and thus never achieving the power or performance (especially profitability) that investors expected over the years. Another example is Symantec, a volume ops company that acquired a successful complex systems business, Veritas, many years ago and has underperformed ever since. In contrast, GE remains the most visible example of how to successfully house complex systems businesses such as jet engines and volume ops businesses such as light bulbs under the same roof, where the roof is basically a holding company. In GE’s case, apart from overall financial oversight, the one common thread brings these disparate business models together is a very specific and differentiated management culture that routinely churns out world-class middle and senior managers. Otherwise each operating division in GE is entirely self-contained, with the complex systems and volume ops businesses goaled, resourced, and measured quite differently from one another. But GE is a highly unusual example, and it’s unlikely that IBM could successfully adopt that hybrid “holding company” model in a rapidly changing and highly volatile industry like high tech. In a nutshell, I believe that IBM at its core must continue to be a complex systems company, helping enterprise customers solve complicated and difficult problems by, for example, employing advanced analytics-based systems to drive and manage their businesses.

After almost three years of declining sales and/or profits, the lack of revenue growth despite almost $20bn. in acquisitions, alongside the obsession with financial engineering by the company’s leadership – CEO Rometty, her executive team, and the board – has now become a chronic disease. When established tech companies stop growing, they stop being capable of constructive disruption, which arguably is their main role in the world. Instead, they typically harvest their existing but soon-to-decline businesses, and then become sitting ducks for disruption by new, aggressive, and innovative players. The manner in which Amazon Web Services has grabbed leadership in cloud hosting, a business that IBM could have and should have been playing for the past several years, is just one example. When a $100bn. behemoth like IBM over-ripens to the point that their executive team spends most of their time and energy thinking up creative schemes to shore up a broken business model with financial trickery rather than defining and executing a coherent growth strategy, they become Fortune 50, then Fortune 500 lame ducks, and soon risk obsolescence or worse. You don’t have to look far to see the fallen giants of recent years – Blackberry, Kodak, Motorola (pinging back and forth between acquirers like a smashed-up piñata), among many others.

HP and IBM are of course two distinct cases, at different stages of their respective attempts to survive and hopefully resuscitate. They’ve each been guilty of different, often self-inflicted, wounds, although the main straws that have broken their backs are (a) having become cripplingly self-absorbed and (b) having thus missed or been very late to exploit successive waves of new technology – from cloud, to mobile, to social. However, big data / analytics and the industrial internet (or internet of things) are emerging macro-categories in which each company may be able to play an important role, provided that they get their respective acts together by determining what their technology crown jewels are (or could be, via R&D and/or acquisition) and how to leverage them to create new leadership positions in the market.

By and large, turning around a juggernaut like IBM from an accelerating decline to a new growth trajectory, takes between 3-5 years to produce solid results. We need go no further than the turnaround led by Lou Gerstner two decades ago, during which he and his team re-conceived IBM as fundamentally a services-led technology company. That effort took three or four years to produce results that convinced customers and investors that IBM was “back”. From then on, IBM recovered its credibility in the market and once again became top dog as a global systems company, while HP, Sun, and Dell strove but ultimately failed to dislodge it from that position.

Earlier this year I wrote an open letter to CEO Rometty and the board in which I laid out a blueprint for IBM to pursue new growth in its analytics and cloud businesses. My thinking at the time was that perhaps the company was lacking a few elements in its own planning to formulate a coherent and actionable strategy. Since that time, however, after many discussions with current and former IBMers including one or two of Rometty’s team, it has become obvious to me that the company’s problems are not fixable by today’s team. This conclusion gives me no satisfaction, because like many other IBM observers and customers I wanted to believe that Ms. Rometty could bring a new impetus for growth to the company after Sam Palmisano’s decade or more of “optimization”, for want of a kinder word.

It makes no sense to expect that the current leadership team can conceive of, let alone execute, the change that is required today. If, by insisting on a dead-in-the-water strategy for so many years, they have allowed things to deteriorate this far, what basis is there to believe that they are the right crew to turn the ship around? It’s too bad to have to admit this, but over the past ten or twelve years Palmisano and his successor Rometty have dismantled IBM’s cultural crown jewels – its world-class competence in managing enterprise customer relationships, enabled by its fabled “respect for the individual” value system, and the continuous pursuit of excellence that Tom Peters wrote about in his 1982 classic, In Search of Excellence. Through their obsession to create artificial profits and in the process squeeze the life out of the company, they have transmogrified IBM into a soulless and enormously frustrating organization to deal with, whether you are a customer, an employee or partner. At this point, enough said, because many before me have joined in condemning this strategy.

So what does IBM need to do to get back on its feet? Here is my “dream” set of moves. As I stated above, IBM needs a new CEO who has the chops and the energy to lead a re-invention of the company and its business. This new leader should more likely be a 40-something executive fluent in the demands of today’s mobile- and cloud-centric world. More of a Nadella than a Mulally, to use last year’s very public CEO search at Microsoft as an example. The new CEO will form their executive team and, hopefully, help to reshape the board into an active and supportive body that understands the technology trends and market disruptions that are taking place in virtually every industry today. No more of the complaisant, passive board, that seemed to merely rubber-stamp the CEO’s nutty “strategy”.

This new leader will announce an immediate end to financial engineering as the management’s core skillset and purpose. Rometty’s recent admission to what we all knew, i.e., that the sacred $20EPS target bequeathed to her by Palmisano (muy amigo) was a doomed mission, has at least paved the way for the new chief to replace this mantra with a market-focused mission that will excite customers once again.

The first reconstructive strategic priority for this CEO and their team will be to define the role the company needs to play in the world from now on. They must answer the question: What does the world most need from us that no other company can provide? Perhaps it will make sense to take a leaf out of playbooks used by major players in other sectors have done to remake themselves and remain relevant – companies such as P&G, Apple, or Levi’s, and even from GE’s initiative to remake itself as a set of software-enabled businesses to leverage the emerging industrial internet.

As the new company repositioning effort takes shape, the next priority will be to decide how to restore and refresh IBM’s former values and culture around respect for customers, partners and employees. In the process, recover from its institutional memory the company’s core differentiating competence in managing customer relationships. Redefine what the company expects of itself and its people in terms of the pursuit of excellence. Without doing this, for example, the critical services business will remain demoralized and mediocre, and that will undoubtedly handicap the rest of the business.

Next, re-examine the company’s technology and product lines to leverage its massive investment in analytics, the main bright spot in today’s line-up. My straw man is that IBM would double-down on the analytics business to become the number one enterprise IT services provider for big data, mobile, and the industrial internet. In the process, the company would need to reposition Watson in its rightful place as just one of the arrows in its quiver. I say this because in recent years, IBM got carried away by over-promoting Watson and setting delusional goals for its growth and profitability. You could argue that at one point Watson and the Smarter Planet campaign became bigger brands than IBM itself, which might not be so damaging if the business was already an actual business rather than still a distant promise.

In concert with this decision, the team would develop a roadmap to acquire or partner closely with a handful of internet, mobile, and big data businesses in order to get jiggy wit it, as far as the new IT environment is concerned. Promote as many as possible of the “acquired” entrepreneurial and executive talent into the senior ranks of the new IBM. This reverse talent acquisition would be a critical ingredient in filling out the ranks of middle and senior management for the various businesses, and if successfully pulled off, would be a master-stroke. Clearly, attracting and retaining entrepreneurial executives who have become accustomed to working in exciting high-growth organizations is non-trivial. But I think the right leader can sell this idea to enough of them, to significantly rejuvenate IBM and make it a player once more.

Just for coffee-table talk, examples of potential acquisitions – or at the very least, strategic alliances – might include companies such as Akamai (web content and application delivery) Blackberry (for its still superior secure mobile messaging technology), Cloudera (big data platform), Splunk (machine-based analytics), Tableau (data visualization), Monitise (mobile banking), Lithium (customer engagement and collaboration), or Box (large-file storage and transfer). To be clear, I am citing these companies merely as examples.

For many years the market has relied on having IBM as its patriarch and HP as its matriarch. HP has always been the comforting Mom to counter-balance IBM’s more disciplined Dad. I am sure the market will continue to value the reassurance that these two companies can bring to counter-balance the volatility and uncertainty that are inevitable in the tech world, provided that they quickly learn how to operate a consumption-based business model, and also figure out what major trends such as cloud-based systems, mobility, social media, big data, analytics and internet of things requires from each of them going forward. Otherwise, one or two new “parents” will eventually step in to take their place.

12 Comments

Subhash Chowdary

about 3 years ago

This is a classic case of Stockholm Syndrome.

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philiplay

about 3 years ago

Well observed! You could have saved me the trouble of writing the article... Thanks for your comment.

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Subhash Chowdary

about 3 years ago

Couldn't resist responding to your posting a second time. IBM has to get external wisdom (emphasis is on 'wisdom') for building a new business entity, relevant in the future instead of trying to transform itself. Having used IBM equipment since the age of Punched Cards, Unit Record machines (if anyone remembers such things). 1401s etc these comments are from close and personal experiences. A relevant example of how Apple had to transform itself painfully from near bankruptcy comes to mind. The decision to bring John Sculley (though not popular) did provide the shift and foundation for what Apple is today. need to give some credit to where credit is due. Was it by chance, design or fate is a separate discussion. The formal thought process, documented and design of Personal Digital Assistants (PDAs) was initiated in 1989 as one of the product solutions in Apple's 3 Phase strategy during Sculley's short era. Remember the 'Knowledge Navigator'? After Sculley, it was the Newton. This is a published fact, so no secrets being revealed here. IBM had invested heavily in SAA (System Application Architecture). Apple obsoleted that investment with VITAL. The catalyst was the process and enterprise thinking that allowed all the geniuses at Apple to continue to be geniuses while connecting the brilliance to deliver something sustainable beyond a 2 year attention span. The iPhones and iPads now continue to make history 25 years and counting.

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Martin Lee

about 3 years ago

I do not recognize this version of Apple's history. My recollection is that Sculley's incompetence as head of Apple (while perhaps visionary to some extent) nearly led it into bankruptcy and irrelevancy, and led the board to bring back Steve Jobs by acquiring his company, NeXT. What saved Apple was Jobs subsequent upending of many of the things done under Sculley, narrowing the product focus greatly, then rebuilding upon his success with the original iPod and iTunes combination. At least that is what I recall.

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Peter Fillmore

about 3 years ago

Phil - Excellent article on the IBM situation today. The TALC seems to have this way of leading to a numbing level of financial focus, and a sad loss of the dna needed for innovation. ...Peter

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Philip Lay

about 3 years ago

Peter, Thanks for your ind comments. I agree with you about the unfortunate effects of life-cycle decadence regarding companies and their business franchises.

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Kemal Danisman

about 3 years ago

Good choice of words "attention span" .. while I was in IBM it was both too short (quarterly) and also too focused on financial engineering .. great analysis of exactly what we suffered inside IBM, respect for the employee and clients evaporated when the attention moved to EPS and quarterly results. As a friend of mine always says, IT systems security is a byproduct of a quality design - similarly, good financial performance for me will be a byproduct of treating employees, partners and clients with the respect they deserve.

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Philip Lay

about 3 years ago

Kemal, Thanks for your reinforcing feedback. Amazing how companies, even formerly great ones, can go so far off track. Philip

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Gerardo Dada (@gerardodada)

about 3 years ago

Great post Philip. It could be a great case study on strategy. You hit many great points.At a fundamental level, a company that uses a profit target as its guiding post is destined to fail. IBM should focus on finding (again) its unique strength in serving customers. Profits should be a consequence of doing it right.

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Philip Lay

about 3 years ago

Precisely, well said.

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Martin Lee

about 3 years ago

Great article as usual! That's why I'm a long-time subscriber.I think you hit the nail on the head there with the notion of needing new leadership to rejuvenate IBM. One thing that you touched on but did not expand on is the difference between GE and IBM in terms of management development. As you noted, GE has a management culture that routinely churns out world-class middle and senior managers. IBM did not and apparently does not, as after Gertsner and Palmisano, there is need once again for change, making it a one and done type of transformation deal that Gertsner led. Financial trickery, as you termed it, appears to be the legacy of the Palmisano era.I like your "dream" set of moves. IBM does have assets that it can still exploit in the future (much like how Gertsner did when he took over, but obviously a different set of assets now) and now it's up to them to execute or become the extinct dinosaur everyone thought it was when Gerstner took over.

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Chris Lynn

about 3 years ago

Your tactical prescriptions sound sensible, but an IBM exec (which I am not) would no doubt argue that the strategies you recommend - focus on analytics, get with the new IT environment - were already featured in the 2013 annual report.But perhaps all corporate elephants need to be re-taught to dance every couple of decades. Xerox seems to be in a similar slough of despond. I'd be interested in your take...And - per Gerardo Dada's comment above - it is dispiriting to find, in this day & age, that EPS is touted by top management as a motivational target and not the outcome of a credible and motivating vision and strategy.

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