Everyone’s on IBM’s Case – What’s the Best Response?

Open Letter to IBM’s CEO and Board

Dear Ms. Rometty,

As you can tell from the sheer number of articles in the business and technology press, investors and analysts are on IBM’s case, and the pressure is not letting up. For the past few months analysts have been issuing Hold or Sell recommendations and predicting sharp declines in IBM’s stock price, and other commentators are beginning to write IBM off as an industry power-player going forward. Despite your recent moves to reduce headcount and adopt other cost reduction, profit optimization or stock appreciation measures (such as buybacks), this pressure will surely continue until you and your colleagues manage to reverse the company’s decline in revenue growth.

Most importantly, IBM cannot afford to miss out on the current transformation of enterprise IT from proprietary on-premise DIY computing to outsourced IT services heavily influenced by open source and other new technologies and business models. The penalty for doing so will not only be loss of revenue growth, profits and a very lackluster valuation, but also loss of relevance to customers and thus to the industry. Although IBM was late to the mainframe-to-client/server transition in the eighties, the company was able to catch up with HP, Oracle and others by transforming itself into the pre-eminent services-led global systems provider, thus ushering in a new stage of relevance and growth for the company.

The crisis IBM is experiencing today is somewhat personal to me. As a former “IBMer” I still use on a daily basis the skills that I first acquired as an account manager at IBM UK over three decades ago. The company was then, and still is, the gold standard in enterprise computing. Beyond this, IBM has been the key catalyst in fostering the growth of the information technology industry and of internal enterprise IT over the past fifty-odd years. Providing expert technical guidance in complete systems – incorporating hardware, software and services – and, more importantly, being accountable for ensuring the success of complex implementations has made IBM the largest and most profitable global systems vendor throughout this period.

From a financial investor’s viewpoint, to see the company turn into an income stock – or, perhaps soon, a value stock – attractive only to P/E investors, rather than a beacon for growth, is not a good omen. Enterprise customers around the globe, and the tech industry as a whole, will surely lose out because until now no other major player has come close to IBM in terms of commitment to ensuring successful outcomes for enterprise organizations. You would have thought that HP, Oracle, SAP, and Microsoft could emulate IBM in this department. Unfortunately, they don’t have IBM’s DNA or secret sauce in relationship management, and they lack the “whatever it takes” culture and commitment to customer success.

Why are investors and even customers so concerned?

• Seven quarters of decreasing sales and/or disappointing earnings: Despite an estimated total of $17bn in acquisitions of analytics, big data and (most recently) cloud infrastructure companies over the past four or five years.

• Being late to the party: Too much time hedging your bets on when and how much to commit yourselves to cloud computing – while AWS and Salesforce.com in particular have emerged as early Gorillas in Infrastructure as a service (Iaas) and Software as a service (Saas) respectively. Overall, the consensus diagnosis seems be that the company is very late in making the transition from the “old” paradigm of on-premise computing to the new paradigms of Cloud, Analytics, Mobile, and Social (CAMS, to coin a new acronym).

• Slowing revenue growth: The most recent catalyst for bearish outlooks was that after several years of fanfare about Watson via the Smarter Planet branding and advertising campaign, IBM is only generating $100m. in revenues from Watson-based offers. When set against your published forecast of a $10bn business by 2017 or so, observers are finding it difficult to believe that such dramatic growth will materialize.

Where do we start?

Let’s first acknowledge that the type of situation IBM is facing today is quite normal, particularly for companies that have the most powerful, longstanding franchises (such as Microsoft, Oracle, and Cisco). In fact, companies with the most powerful franchises generally have the greatest difficulty in committing resources to achieve rapid customer adoption and revenue growth in new categories. Oracle is suffering the same problem right now, Cisco and Microsoft have been struggling for years and have had static or regressive stock prices despite some bright spots in each company, and HP has been slammed for its difficulties due to the accelerating decline in PC sales as well as server sales, misfires with its mobile initiatives, and general lack of new business growth.

What these established companies – including IBM, by the look of things – generally fail to understand is that they cannot afford to hedge their bets on marketing complex new technologies to the huge majority of pragmatic and conservative customers. Initiatives such as branding-focused ad campaigns (the highly visible “Smarter Planet” campaign comes to mind) or inclusion of new offerings in the existing portfolio of products that the salesforce and channel are quota-ed to sell, are too broad and shallow to succeed. Almost inevitably, these hedged – or prematurely mainstreamed – initiatives fall woefully short of their market and revenue objectives.

Things are now coming to a head. IBM today is starting to look a little like the beleaguered company of 1993, although for a different set of reasons. Undeniably it is absolutely crucial to resolve this IT transition and revenue growth problem.

What’s different this time around?

• First, IBM’s moat isn’t as high as it once was. Today, at least three other companies today can claim to be the “vendor of first/last resort”, the vendor that no CIO could get fired for choosing – this group includes Microsoft, Oracle, SAP, Cisco, and even HP. Furthermore, new claimants have emerged over the past few years, notably VMware/EMC, and more recently Amazon Web Services (AWS) in computing infrastructure, and Salesforce.com in business applications.

• Second, major enterprises and government agencies are responding to the offers made by new-age internet giants such as AWS and Google, who designed both their core service offerings and their internal IT systems around cloud computing architectures, behavioral targeting and other big data analytics, social networking, and mobility technologies, and are now aggressively marketing cloud infrastructure and applications to customers everywhere.

• Third, line-of-business executives are setting the pace in adopting “CAMS”-based offerings to solve mission-critical problems. CIOs are under siege – in fact, it’s worth asking if this could be the latest “Career Is Over” moment for CIOs. For example, enterprise CMOs are becoming newly empowered to make major investment decisions in cloud, analytics, mobile and social technologies. To be fair IBM has produced considerable thought leadership on this very topic in the form of white papers and events, but you have yet to capitalize on it.

• Fourth, the law of large numbers is not smiling on IBM. One analyst correctly pointed out this week that IBM has to develop at least two or three new high-growth multi-billion dollar businesses in order to more than compensate for the decline in your traditional mainframe and client/server services, software, and hardware businesses) in the next three years, in order to recapture favor with investors.

What to do about it?

• First, stop conflating nascent or emerging businesses with your established, maturing software, services, and hardware businesses. This is exactly the trap into which most large and successful companies like IBM fall into. They believe that their global direct and indirect sales channels can respond quickly to having more new stuff to sell, independent of the adoption and implementation-related complexities accompanying these new offerings. To be fair, the recent news that you have now decided to set up an independent business unit to drive the Watson analytics business is a step in the right direction. The key now is to resource and empower it appropriately. For example, it cannot be hamstrung by having to wait for the sales force to grant access to customers. And it must have a full range of functional resources sufficient to build the business rapidly to the $bn-plus level.

• Second, adopt new “exponential growth” metrics in line with aggressive CAGR objectives that will take your “Watson” business from its current $100m or so annual run rate to $1bn in 2-3 years and $10bn in, say, ten years. You cannot afford to be successful if you demand linear growth and resource accordingly. The numbers will just not add up, so your growth will not materialize.

• Third, target one, two, three (and so on) “visible” market segments where executive sponsors, such as CEOs and CMOs, to whom you can gain access are suffering serious problems causing unacceptable loss of competitiveness, revenues and/or profits.

• Fourth, make sure that you can provide a truly differentiated and repeatable solution to these problems, incorporating your software, service, and/or hardware resources, as well as those of key partners, and that you will be able to scale it as customer adoption accelerates.

• Fifth, make a firm commitment to double-down on the new growth initiative, and understand what doubling-down really means. The most important tasks are: 1) select a world-class GM to lead the initiative and recruit their team from among your high performers, 2) assign a compact group of your top-class entrepreneurial talent from different functions on a full-time basis to this initiative, and 3) support the team with your active sponsorship and give them unusual latitude to achieve the mission as they see fit. Most large companies pay lip service to these organizational and talent/resourcing factors, instead asking already heavily subscribed key players to straddle both today’s activities and the new initiative. This is a recipe for disaster.

There are additional best practices to implement as you execute this growth initiative, but these five are represent the places where most new-product initiatives falter or fail.

Above all, keep in mind these three principles:

1. Less is definitely more: This “breakout growth” initiative must start life as a Special Ops-type initiative insulated from the broad organization, staffed by relatively few but highly talented, entrepreneurial people from all functions required to get the job done. As the team achieves initial breakthroughs, it should naturally expand in accordance with growing customer demand. But it should not necessarily become a permanent BU. Instead, once it has achieved its main objectives, the “Watson” BU should probably dissolve back into your existing mainstream organization and be replaced by new breakout growth initiatives involving other emerging-technology offerings.

2. Define ambitious but narrow goals initially and understand what the tipping point looks like: Aim to achieve dominance in the top 1,2,3 target segments in 36 months or less before going “horizontal”. Start with one major target segment (the “head pin”), then once you are on course to achieving a critical tipping point, embark on the second segment, and so on. This means that you need to define what victory (the specific tipping point) will look like, at which time you will declare victory and move to ensuing segments. Do not try to grow rapidly in many segments at once (a very typical and costly mistake). Your job is to gauge when the target market has moved from resisting you and your new CAMS/Watson offer, to assisting you – this is when customers start doing your marketing for you, doing the intense self-referencing that pragmatist customers always do – thus saving you lots of demand creation dollars.

3. Learn – or relearn – what doubling-down really means: Do not allow your current businesses to steal resources back or “borrow” them part-time. Terms like “committed”, “focused” and “dedicated” mean just that. Take key players out of their current jobs and assign them to the new initiative on a full-time basis. But expect that your existing maturing businesses will do everything in their power to retain or regain the talent they had to provisionally cede to the relatively undefined “promising” new business. Senior executives including yourself must have the confidence and intestinal fortitude to resist these incursions. Most executives in large companies do not have this “muscle” or behavior pattern, and as a result, when the new initiative encounters early obstacles – as it surely will – they give in and de-resource the young initiative in one or other crucial area. Over time, the initiative loses steam and within weeks gets a bad name – not something that would be good for the company at this point because it is likely to prevent other growth initiatives from receiving the right treatment, and your obstacles to revenue growth will continue to exist.