Missed opportunity bingo: IBM's wasted years and the $92bn cash splurge The past six years have been unkind to IBM but top brass only have themselves to blame: the firm generated tens of billions of dollars but bought back shares and returned money to investors rather than doing something radical. This is according to respected Wall Street number-cruncher Tony Sacconaghi at analyst Bernstein, who …
It's a problem in many large companies that reward their top executives shares and options based on metrics that aren't necessarily what's best for the company's long term prospects.
Since infinite growth is an impossibility, mature companies need to start looking at different ways to earn money and keep their product line up or services relevant as technology changes (if applicable). A solid company that pays a reasonable and consistent dividend can be a better investment than a company with a growing stock price that could crumble at any moment.
Acquiring companies that don't fit into a company's product mix or into long term strategies can be a dead end especially if the company being bought is behind in its tech. For IBM, buying SalesForce might turn out to be a division that sits out on its own and doesn't add anything to any other IBM division. It might be better to look at something like Dassault Systems (SolidWorks, Catia and other CAD/CAM) that works with very large firms such as Boeing and Lockheed that need company-wide, worldwide hardware/software systems with the need for performance and interoperability. IBM's experience in high performance computing would be great for having a centralized computing center for complex simulations along with distributed data centers that make accessing company engineering easy for teams located in different geographical areas.
"I was just about to give you an up-vote, then I realised that you had written LiMux rather than Linux..."
You realise that Limux was largely developed by IBM? And that quite a lot of the work was done for free just to try and shaft Microsoft. We all know how that ended. (Well if you are one of the few that don't, Munich are ditching their legacy *nix / OSS stack and migrating to Windows 10. And they only wasted about €100 million along the way!)
Issue with the theory that IBM should have acquired businesses, rather than its own shares is that it assumes IBM is capable of successfully integrating the purchased business and maintaining and then growing the revenue stream.
In my direct first hand experience it just can't do it - and I can't honestly recall meeting with anyone who had seen or experienced a successful M&A such as you'd see from someone like Cisco. As a former IBMer, I've no love for anything Ginny does or did, but I think there was a general acknowledgement amongst the less indoctrinated senior management that anything they bought they also tended to kill.
Having been inside the asylum, and now looking at it from the outside, the real way to turn IBM around would be to cull about 50% of the management - save money, increase morale, and boost productivity. For a couple of quarters I had five line managers - two direct, and three dotted line, and I was a simple sales specialist fer chrissakes! 95% of my time spent causing myself long term brain damage with Domino/Notes and endless reports and spreadsheets... every now and then I'd find an hour a month to indulge in my actual role of selling stuff.
The standard IBM acquisition way was to pick pick small targets that they hoped they could massively expand the customer base for by marketing them across all existing IBM clients.
Of course , they would also "bluewash" any incoming products, and often forcibly merge them with some existing (unsuccessful) IBM product in order to minimize their success chances. As well as crushing the spirits of any incoming acquired employees under the weight of IBM process and policy.
As someone who came in thru one of those acquisitions, and yes, my alias is not a complete secret, I can tell you that any acquisition goes thru this process.
And having been in this industry for far too many years, I can tell you that what happens at IBM is not alone in this process.
IBM, Oracle, Teradata, EMC, etc ... they all do this and unless you've spent time working for a mega corp, your soul will get crushed because you are not prepared for it.
There's more, but I can't really say because of friends still within the belly of the beast even today.
I can tell you that what happens at IBM is not alone in this process.
And it isn't unique to the tech sector. I have experience that matches Salestard's sorry tale, almost word for word, but in the energy sector. There is, I think, a link, and that is the concept of "incumbency". The belief by management that they are too big too fail, that (evidence not withstanding) they are successful, and that more generally the world owes them a living. Mr Gumby's list of other practitioners tends to support this, I think.
I think Salestard is also bang on the money with the cure. Clearing out the stables, and dumping entire legions of senior managers is the only way forward. Break up the cosiness, get rid of the inertia and obstructions. The boards of these companies also need reform. Since none of them were paupers when they joined, one solution is a pay scheme that is entirely comprised of stock grants - some immediate, some mid term, some long term. That would mean they'd ALWAYS have skin in the game, even if they leave. Whether that works well for employees I'm not so sure, but at least it would help resolve some of the "agency" problems of managers who don't act in the shareholders' interest.
I had a similar experience at MSFT, awful things such as 'managing your manager' and 'managing up' were positively encouraged. I guess it's symptomatic of any large sales driven organisation that have been around for a while. When this is systemic then there is literally no time to care about your customers.
An analyst whose firm specializes in M&A analysis - and charges BIG bucks to consult for businesses for their help in that field. OF COURSE they're going to point to cases where a merger or acquisition would have been the right call.
Had IBM spiked over the past five years and Apple took a tumble, they'd be writing this exact same research note about how Apple should have done some big M&As and looking in hindsight at companies they could have bought and claim the tens of billions they poured into stock buybacks was misused.
Issue with the theory that IBM should have acquired businesses,
They did, the problem was is they then destroyed them. I was with PwC consulting we were sold to IBM and from that point on they forced the borg implants on us. They had no idea as to how we actually worked with our clients, all they wanted was to get us to ship boxes and outsource everything to india.
They just drove all of the good staff out.
IBM knew the cost of everything and the value of nothing.
They did, the problem was is they then destroyed them. I was with PwC consulting we were sold to IBM and from that point on they forced the borg implants on us. They had no idea as to how we actually worked with our clients, all they wanted was to get us to ship boxes and outsource everything to india.
There's the problem. What IBM needs to do is turn itself into a holding company rather than trying to be some monolithic vendor. When they buy a company they should allow the company to continue as an independent entity rather than trying to assimilate it into the Borg of Armonk. Because right now they behave like ill-mannered vampires, acquiring companies, sucking the lifeblood out of them, then discarding the husk. Instead they should just be buying, holding, and selling independent operations. Perhaps even picking up John Akers' original plan to break the company up (I think I understand what Gerstner was trying to do, but that would never have worked without purging out pretty much all the upper-management types).
I've even thought of a new name for them: "Computer Technology Resourcing" (CTR). Raise your hand if you understand the reference.
I don't think it's particularly controversial to point out that IBM, like a solid majority of big businesses, has grown a cadre of supremely incompetent senior managers. It's typical and commonplace because unless they are very, very careful indeed, almost all companies' senior strata, as they grow, become parasitised by people who think and act like politicians instead of professionals, and IBM—whom I have worked alongside, but never worked for—certainly appear to have that problem in spades. Once you have allowed the upper levels to be colonised by self-serving liars and greedmongers, it's all downhill.
This sad story perpetuates and multiplies because there are few consequences for failure, however abject. Being "rewarded for failure" is a cliché, almost, because of its widespread applicability to politics and big business.
And thus to IBM. It has been badly managed both strategically and tactically, making a decade's worth of unforced and sometimes even obvious errors, shortsighted, blinkered, unimaginative, hampered by institutional arrogance. What will its Board's pay cheques look like this year? Will there be bonuses, even? Will *anyone* responsible for this mess pay *any* kind of price?
Or shall we see yet another Marissa Meyer moment, as the architect of disaster, almost single-handedly to blame for a series of stupid decisions, walks off with a few million?
This strategy is probably going to catch on with other US companies. By lowering their "profits" and moving income to a smaller number of shareholders by repurchasing their shares, IBM have drastically reduced their tax bills and paid their owners (the remaining shareholders) a lot more money.
It would be interesting to know what proportion of the remaining IBM shares are owned by entities in Bermuda, Panama, Channel Islands, and the Isle of Wight.
Senior Management are out for themselves only and strategy only consists of dumb buzzwords.
Middle Management - goodness knows what they do except consume space and have meetings with each other.
Lower Management are overworked and have to stack and rack who will be chopped next in their group, adding to their stress, and have a target on their own back.
When I left my previous manager with 20+ years service had been assigned to a crappy job with lots of meaningless travel in the hope he would take early retirement.
My card carrying acting manager was off on stress related sick leave.
My 2nd level manager was appointed in an email no-one read, and he never bothered to email or speak to anyone under him - had to point out to him I was in his group.
When I quit it was a struggle to find anyone to give my notice to - had to go to a dotted line 3rd level person. HR never contacted me and had to shop around to find someone I could hand my crappy 4 year old Toshiba laptop to on last day. My colleagues even suggested I just go work for my new company and see how long it took anyone to notice.
Still at least all the data centres are now powered by Thomas J Watson spinning in his grave.
Anyway, old IBM joke that is still relevant:
2 lions escape from Whiteplains [insert favourite IBM location] zoo. One week later they meet up again. 1st lion is mangey and thin and stressed out, the 2nd looks not too bad at all. The 1st says - it was horrible, they came after me with guns, I had to hide all the time, there was nothing to eat! But you look great what happened? 2nd says - Oh I hid out in the IBM car park, I ate one middle manager every day, and no-one noticed!
IME the first three pars of your post could apply to almost any organisation more than 15 years old, with >=500 employees and >=$25m revenue.
What we technically capable types need to understand lies in the answer to the question "If I'm so smart, why aren't I rich?" - something I like to remind myself of every morning whilst brushing my teeth. If any idiot could be a middle or senior manager, why are we slogging our collective guys out designing, building, installing and operating computers, when we could be paid 5x, 10x, 100x more just generating PPT that leaves a brown stain wherever it goes and finessing expense claims?
I have a friend who was paid for ten months after walking out on IBM, purely because no-one noticed.
Then again my current employer (financial services, believe it or not) recently discovered they'd been paying someone for the last FIFTEEN YEARS after they left, so... IDK. "FML" is my usual conclusion.
Look, its no secret.
For over a decade, IBM executives have been buying back the company's stock to increase the stock share price as a way to earn major bonuses.
Ginny was promoted to Captain after the ship (IBM / Titanic) struck the iceberg. (Seriously, anyone who knows IBM... why would they put a woman in charge? She was set up to fail from the start.)
Under Sam P, they cut expenses to the bone. They moved everything offshore that they could, sacrificing customer sat in the process. All the time preaching to the sales team that for every percentage point of customer sat gain represented a billion dollars in additional revenue.
So when Ginny took charge, she was dealing with a company that still brought in a pile of cash, just less of it each quarter, and she needed to jump start the company.
She tried. and she was hobbled by her executive team who not only lacked vision, but also imagination. They were so brainwashed and hog tied by the bean counters not much they could do. Not to mention that the promotion ladder at IBM promoted the drone who would follow orders and lacked creativity. That were more process driven and didn't take risks... just do the same old thing because maybe this time it will work. Or they were fed so much blue punch that their brains rotted. (Just talk to any heritage IBMer who was fired... went thru the shock and found that life outside of IBM is much better.)
So don't blame Ginny because she lacked the staff needed to make the change.
You think Trump faces a deep state trying to usurp him? Ginny has it worse. And while I say don't blame Ginny, I haven't forgotten the fact that she too is a product of IBM and because she lacks perspective is also doomed to fail.
"Under Sam P, they cut expenses to the bone..."
Sam it was who said something like this to a collection of senior technical staff:
You don't need a PhD in Computer Science to understand the business model, a liberal arts degree is fine. Execute to the plan and we'll make the numbers.The plan of course included cutting expense and making sales. Couldn't be easier, no messy technology knowledge needed at all.
Correct. Gerstner actually understood that he was running a technology company, and listened to technologists. This did not apply to Palmisano and does not apply to Rometty. Hence the current death spiral.
Gerstner was a bit fortunate in that some of the old-style cash cow products were still viable in his time. He did try to bring on new technology, but Palmisano went the "services" route and, as you say, seemed to believe that human resources could be cut off the roll by the metre, regardless of skills and experience. Rometty learnt from him.
As I recall it, Lou Gerstner was the first leader of IBM to start the "borrow money to buy back stock" game. That was the beginning of the path to hell. IBM couldn't figure that they wanted to own the PC operating system, not lease it from MS. They made the specifications of the PC open for cloning. They'd already be hammered by DEC. The thing that saved them for a time was possessing the best hypervisor for making good use of vitualization on a mainframe. Now they're hoping they can get into the distributed file-system game, but they're at twice the price (it appears....) and the main speed components of their offering seem to be generic NVMe off-the-shelf items. Lou started the financial games way of managing. He had terrific press relations.
IBM took the offshore/onshore model to an extreme.
You don't need any skilled people, just bodies who can do what they are told and are cheap.
The big problem with this is is the ones we had where not able to do what they were told. And as the poor bastard that had to herd those cats it was always my fault even when I had no control over who was in the outsourced team. How the hell can you manage to sort out a large DB2 setup and config when you can't even get a DBA!
When you see a "business strategy" that targets $20 earnings per share you just know that such "management" as there is practices financial smoke and mirrors and no-one is even trying to actually run the business. A cynic might suspect that Palmisano picked this arbitrary (and rather high) number not to benefit the business in any way but because it would make him even richer when he retired/cashed-out (which it did).
Sure, Rometty finally abandoned Roadmap 2015 - in 2015 when it was totally bleeding obvious the game was up. But the senior "management" is still addicted to financial manipulation with unfortunate consequences for the business, it's employees, customers and ultimately shareholders.
Maintaining profits levels and a target EPS is not rocket science - as your earnings decline you reduce your costs (employees) accordingly and also reduce the number of shares (buy backs). But plot a timeline for this "strategy" on a graph and the slope inexorably heads downwards.
I was with IBM for 15 years and it was great to work with colleagues who were by and large intelligent, diligent and committed to customers. But I grew weary of miserly or non-existent pay rises and the ever present threat of capricious "resource actions" decided by some spread-sheet psycho. All the while seeing executive salaries and bonuses grow ever more lavish.
So when Ginny took charge, she was dealing with a company that still brought in a pile of cash, just less of it each quarter, and she needed to jump start the company.
....
So don't blame Ginny because she lacked the staff needed to make the change.
Ah, but you *CAN* blame Ginny, because she was one of those people implementing and DEVISING a lot of those bad decisions and policies under Palisamo's reign. All that happened with her becoming CEO was she continued doing more of the same. She either created or at least joyfully implemented the "LEAN Initiative" (you know, the one often called "Lay-off Every American Now"). So she's not some patsy put into place to fail, she was and is a willing conspirator.
If they want to maximize profit going forward, they should sell everything and fire everyone, and become a patent troll.
Lawyers rule!
If they were to do just that, we would not even have electronic calculators, back to pen, paper, and slide rules, maybe, if Apple were to file suit, you know, slide to "unlock the result", nobody could have a patent on Abacus, right ? Well ... not so sure mates ...
Booboo4u, please watch what you are wishing for ...
Got you! You missed the “/s” for sarcasm.
Unfortunately lawyers do rule, and it makes for unrewarding jobs for the majority of workers.
In the name of profits, putting out a good product/providing excellent service and establing customer loyalty takes a back seat. Does IBM still provide/value any of these things?
I’m feeling the need to watch Office Space again, because it’s so true.
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