Since Ginni Rometty became chief executive officer in January of 2012, the shares have fallen 16 percent -- 14 percent of that this year alone. Investors have dumped the stock as Rometty struggles to re-imagine International Business Machines Corp. as a contender in cloud computing, data analytics and mobile technology. So far, those new areas haven’t made up for a decline in sales of legacy hardware and technology consulting services.
The following five charts show that Rometty will struggle to turn IBM around because the company is generating less free cash flow than before, underspending peers on research and development and boosting debt to help pay for dividends and share buybacks. ...
IBM spends about $6 billion a year on research and development, which has led to offerings like its Watson data-analytics supercomputer and has helped it churn out more patents than any other company for 21 straight years. Even so, IBM is spending only about 6 percent of its annual revenue on research and development — an investment that’s crucial for tech companies to develop the next wave of innovative products. That’s half the average that its S&P 500 Index information technology peers are spending. Competitors like Google Inc., Cisco Systems Inc. and Oracle Corp. typically spend about 13 percent.
“Ultimately, the R&D underinvestment may be one of the fundamental flaws of the recent EPS roadmap and weakened the company’s positioning over the long term,” Kulbinder Garcha, an analyst at Credit Suisse Group AG, wrote in a Nov. 17 note.
IBM has run the same playbook for two decades. It sells low-margin businesses, cuts expenses, buys some profitable software companies and returns a lot of cash to investors. Over the last four quarters, the $152 billion company has spent more than $23 billion on dividends and buybacks.
The problem is that IBM is investing too little. It has spent only about $11 billion over the last four quarters in total on research and development, capital expenditure and acquisitions. That’s a problem in technology, where old products soon become obsolete. Google spends about 16 percent of its sales on R.&D., but IBM spends 6 percent.
The effect is becoming clear on the top line. Revenue has shrunk for 10 consecutive quarters. Costs have been cut to the bone, sending customers fleeing to better service providers. In a good year for stocks, IBM’s shares have fallen more than 15 percent. That means IBM has overpaid on its last three years of buybacks. ...
IBM’s focus on financial, rather than product, engineering has caused low employee morale, falling sales and shareholder dissatisfaction. It’s time to invest.
I don't see how IBM can survive without a complete reboot. They tout their cloud initiative as being the focus of their future, however, Amazon and Google are so far ahead of IBM, I can't understand why ANY company would choose IBM's cloud products.
The other area IBM is investing heavily in is their Watson initiative. But IBM has not been able to generate revenue with it — and, should Google or Amazon decide to commoditize their cognitive computing efforts, Watson will quickly become irrelevant.
One fellow told me how someone came up to his desk and gave him an award. However he had no idea what the award was for and the fellow handing him the award couldn't say either.
While I was there, I happened to work very briefly on an internal project they had going. It was to come up with a super-deluxe resume handling system where a consultant (among other things) could put in up to 50 different "skills" he/she was adept at.
This was IBM's "solution" to the problem of staffing assignments or projects end up being staffed by "the wrong people" (i.e. Joe Blow is put on a project where he doesn't really have the necessary experience).
The only problem with that solution was that consultants were more or less encouraged to exaggerate their qualifications in order to "jump onto the next project". (Not particularly unique to IBM, BTW)
And was "creativity" rewarded at IBM? Well probably in some fashion or other in some part of the organization. But from what I saw, the thing that really counted was billable hours.
And of course there was the abrupt change in strategy where someone from far above would decide an area was redundant. So a whole whack of people would suddenly be laid off.
Try having a cohesive organization when everyone is looking over their shoulder and padding their resumes to avoid being laid off.
The IBM of yore has been changed into a cheap cardboard replica. What a shame.
(BTW, I am not, not ever have been, an IBM employee).
It's pretty sad that most employees there know what the company's priority is.
In the services/consulting business, they ask employees to try to bill an extra day sometimes in a quarter just because they want the extra revenue. It's not because the client needs an extra day of work, or because the project is behind, it's just so that they can get 8 more hours at $xxx/hr to pad their bottom line. It's ridiculous. Why would an employee be motivated to work an extra day just for that?
Middle managers like myself would be under such pressure to make their quarterly objectives they would discount to bring in revenue and set a new price point in the market that was unprofitable.
The company has such a great legacy and so many assets and client relationships it can be turned around but they need to do a reset and invest as the author of this article suggests.
The news on IBM is hardly surprising. As one might expect from a firm that has the most explicit long-term commitment to maximizing shareholder value as reflected in the stock price, IBM has destroyed more shareholder value than any other company in the Dow. ...
Dispirited staff: After years of relentless cost-cutting, driven by the goal of boosting EPS, workers complain that the cuts now affect IBM’s muscle bone and vital organs. IBM has also shifted technical expertise from high-paid US staff to low-salaried staff overseas, while cutting back on staff in the US. The automatic culling of staff has also taken a toll, as managers are required to cull a certain percentage of their staff, regardless of absolute performance.
Fading technical expertise: IBM’s failure to win the bid for the CIA’s cloud computing contract, worth some $600 million, was telling. This bid should have been IBM’s “home field,” given its long experience with mainframes and government contracting. Its bid was 30 percent lower than Amazon’s, which had no experience with government, yet IBM’s bid was rejected on technical grounds. An appeal by IBM was even more humiliating: it only highlighted how technically inferior its proposal was and so the bid was withdrawn.
Flawed implementation of acquisitions: IBM has tried to plug these holes with acquisitions. But “IBM taints an acquisition’s successful product with its own goals and strategic direction,” suggests analyst and author, Peter Greulich. “It acquires a product that was usually easily priced, inexpensive, sometimes fit on a thumb drive, had a time-to-customer-value measured in hours, and outstanding installation and ease-of-use characteristics; it then exchanges that for a product that is more secure, hard to price, costly, and blue-washed. Blue washing—an internal IBM process—brings an acquired product up to IBM standards: hard to install because of the supporting product infrastructures required, impossible to even download easily from the Internet, and installation, usability and time-to-value characteristics that are hard to describe until experienced. It takes IBM’s best product managers to retain a startup’s customers, and IBM’s best product managers have their hands tied by IBM finance and development teams spread out across the globe.”
Unusual accounting: A goodwill impairment is admitting that an acquisition that was once a great deal has failed to produce the expected value. Most firms that are active in taking goodwill impairments, since not all acquisitions work out. “Since goodwill impairments came into being in 2001 – covering more than 142 acquisitions – IBM has never taken a goodwill impairment,” writes Peter Gruelich. “IBM, by not taking impairments, has failed to hold its middle and upper management accountable for negative customer impacts arising from the poor execution and long-term negative results of an acquisition.” ...
Analysts noted how sad and even painful it is to see how far this once-preeminent IT company in the world has fallen. “Big Blue” is not so big any more. For instance, IBM’s market cap is now a fraction of other firms in IT.
“It’s like watching Eastman Kodak in slow motion almost,” suggested Joe Kernan on CNBC. ...
IBM’s case isn’t hopeless, if it builds on its strengths. Yet it’s hard to see how it can accomplish this with an obsolete management philosophy of maximizing shareholder value as reflected in the stock price. It has been evident for some time that IBM has been heading down the wrong path. According to Nick Summers at Bloomberg BusinessWeek, IBM’s leadership has been “like a driver obeying the commands of a GPS system even as passengers shout that the car is clearly headed toward a ditch.”
Selected reader comments follow:
Advice to Senior Management: Nearly all the managers and leaders should quit. Nothing will change unless they bring in new leadership and management.
Pros: Flexible on working at home. Great opportunities to volunteer. Lots of online training. Amazing global community of exceptional people.
Cons: Poor morale. Ridiculous workload. Volunteering discouraged and not rewarded. Aging admin processes and systems. PBC process demoralising and opaque. No payrises or bonuses for year after year. Concerns about where growth is coming from. Expense constraints strangling business. Employee payment on growth-driven profit totally out of line with senior executive remuneration from cost-cutting. The overwhelming feeling that you are not valued.
Advice to Senior Management: Start investing in people again. They need payrises, promotions, expenses to travel, time to think. They can then focus on customers again, and start growing revenue. Start seeing share price as result of doing good business rather than as an end in itself
Pros: Work from home. It wants more then 20 words, but currently beyond having a pay check, and hunkering down, hoping the nightmare will end, there is very little else.
Advice to Senior Management:
Pros: There used to be Pro's. Management removed them one by one until there was nothing left.
Cons: Management and executives are absolute idiots. They treat employees like we are garbage. No raises, no promotions, no education, no pension, no affordable healthcare after retirement. Hopeless.
If you object management tells you that there are a thousand Indians who would love to take your job, so be thankful you still have it. IBM is rapidly replacing all of their US employees with Indians, Brazilians, and even Africans. They do everything they can to get the CHEAPEST labor possible and as soon as they do they kick their US employees out the door.
Executives try to fool investors into thinking they are making money by buying back stock at a horrendous rate while all the time IBM's revenues are drying up. This is not a technology company, it is a farce.
Advice to Senior Management: QUIT. You guys are nothing but politically correct idiots. Rometty is a fool and so was Palmisano. Look what you have done to the stock value. There is more downside to come as the world sees more and more clearly that IBM is nothing but a farce.
Pros: People are IBM's greatest asset and part of what keeps people around. The commitment that management has to developing their employees and ensuring their success (if they want it) is unparalleled. That is how you cultivate relationships/talent and build loyalties in your organizations. There is a familial sense in some of these organizations that really drive a sense of belonging.
Considerable amount of flexibility in your work, the group will cause this to vary a bit. My experience has been that you do not have to be in your seat all day in order for your work to be seen. They are very much focused on what you are delivering and the timeliness of those deliverables.
Management in my group has been very adamant about taking the time you need for you, and your family. They are cognizant of the fact that people have obligations outside of their traditional working hours and make an effort to accommodate those reasonably. In addition to that, there is considerable time off given for vacation and holidays. Nearly 4 weeks of vacation when you first start and that progresses upward after a given number of years.
Cons: The macro environment is probably as bad as it could be. On an annual basis there is at least one layoff, with people leaving intermittently as a result of constant churn. The macro culture as a result of all this is suffering and there is a sense that people do not care nearly as much as they used to. Additionally, pay is mediocre and raises are often joked about as things of the past.
Advice to Senior Management: Flatten the organization, there is no need for a technology company to be as hierarchical as this one is. The structure stifles innovative thought and reduces individual contribution. Domestically there is a sense that the executive management is completely detached from the work required to drive their initiatives. A lot of the transformation that needs to happen in order to align this company with current market conditions would work much more efficiently if they eliminated some of the layers of management and better aligned themselves with the people that are driving the actions.
Pros: The culture around IBM is definitely one of change. It's obvious that the company knows that it currently thinks/operates like a dinosaur and is trying to modernize both its operations and its software development styles.
Cons: Still a dinosaur. In my experience they used old tools, old methods of software development, etc. I even saw developers email code to each other while I was there!
Advice to Senior Management: Give your interns cooler stuff and more fun events that are paid for by the company. While it is certainly a little dumb for us young folks (and coincidentally better engineers/designers) to be swayed by a company flying us out to Seattle for a Macklemore concert, it does, so take note.
Pros: A lot of good, helpful workers. Decent salary. Flexible work schedule.
Cons: Working 60+ hours a week not uncommon, including weekends, just to keep up with the work. Performance ratings are given out on a curve. So, even if you are in an area with a lot of high performers, only a small percentage are allowed to get high ratings and good performers will get low ratings. Those that get the lower ratings are candidates for being laid off.
Executives are focused on EPS and stock prices — likely due to the fact that a lot of their salary is in stock bonuses. Instead of focusing on delivering high-quality products and satisfying their customers to increase revenue, they rely on cutting expenses, including lay-offs.
The employees are fearful of the next round of lay-offs, which occur more and more frequently. There is no longer respect for the employees by the executives like there used to be.
Advice to Senior Management: IBM's #1 business principle used to be respect for the individual. This is no longer the case. Currently employees feel like they could be laid off at any time just to make the bottom line look better. This had lead to very low morale in departments.
Pros: They encourage telecommuting; they keep the focus on up and coming technologies; the people, in general, are cordial and professional. If you enjoy the global enterprise, high tech B-to-B environment—and you have technical skills—you'll probably like it. They company values integrity and high quality. CEO Ginni Rometty is sharp.
Cons: The company is very, very, big. It can take quite a while to understand how things are organized and who is who. You may feel like a cog in a wheel. The stakes are high and as in any organization, you need to watch out for a few sharks.
Advice to Senior Management: Keep moving forward with the changes that top management is pushing. Let go of the low margin stuff more quickly. Capitalize more on the deep vault of patents and inventions that never see the light.
Advice to Senior Management: Reorder priorities — Clients first, employees second, stockholders third.
A health scare that the doctor said was work stress caused made me re-evaluate priorities. I sat down with Fidelity folks, looked at finances, discussed with family and after over 30 years gave two weeks notice.
Words are cheap. I had been called a critical resource, yet when I said I was leaving there was only a nod towards the door. My health has improved, family life is better - one brings stress home. I enjoy my work now, adjusted to waking up looking forward to going to work — not worrying about RAs, PBCs, exhortations to do more with less.
Six colleagues over the years had heart attacks directly linked to work, five died. I had no desire to make my wife another IBM widow. -Anonymous-
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