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6, 2000 April, 2000

Highlights—November 14, 2015

  • Forbes:

    Five Reasons Warren Buffett Should Take His Losses On IBM. By Peter Cohan. Excerpts: Warren Buffett is a living investment legend. But he’s not always right. He made a mistake when he invested in IBM — the 412,775-employee, $92.7 billion (2014 revenues) IT company — that has been shrinking every year since 2011. ...

    When Buffett bought IBM, he justified the decision based on a specific financial target – to hit EPS of $20 a share by 2015. As Buffett said, “They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015.”

    I estimated that he bought IBM shares at $185 apiece in 2011 — they’ve since lost 25% of their value. And in the ensuing years, he’s acquired more shares at lower prices. So his cost basis is below $185. Forbes estimated that IBM shares trade 15% below Berkshire Hathaway’s cost basis in them.

    Here are five reasons Buffett should take his losses on IBM. ...

    2. IBM’s products lack universal appeal I will concede that organizations do buy computer hardware, software, and consulting services and IBM is in all those markets. But the IBM brand does not have the power that Coke has created and maintained for all these years.

    3. Customers lack an addictive need to buy IBM’s products IBM was a leader in the IT industry. But is it still? If customers had an addictive need to buy IBM’s products, I would expect it to be a market leader in all its product lines. ... Sadly, it is not the leader in...

    4. IBM has no moat IBM used to have the best business sales force in the computer industry. It used to be said that nobody got fired for buying from IBM. But IBM faces serious competition in every market in which it participates — except perhaps for mainframe computers. ...

    Selected reader comments follow:

    • Uninspired and imitation leadership is the root cause for IBM’s fall from grace. IBM has all the pieces for a strong come back; it lacks strong leaders who understand the future trajectory of technology and business and how to position IBM to take advantage of the major shifts in both. Playing catch up in technology is hard; as a company dominates a niche it becomes a monopoly (Google in search, Facebook in social, Paypal in payments, Amazon in commerce and cloud). Rometty’s current strategy is to play catch-up in not only one area but in five different areas (CAMSS), if the chances of success in one area are low, the chances of success in five are nil.

      Buffett and the BOD should nominate a new leader and executive team that can use IBM assets to confirm its leadership in the one area it dominates (analytics) and orient the company to become an enabler for the many businesses that need to mount a defense against the onslaught from Amazon and the champions of the sharing economy like AirBnb and Uber. IBM will then advise and help the Sears and Macy’s of the world on how to adjust to a world that’s moving to online shopping, Hertz and Hilton on how to adjust to the sharing economy and old energy behemoths on how to work with distributed energy, micro grids and renewables.

      Buffet can no longer ignore technology since technology companies are disrupting every business, and every business including his beloved insurance business will be disrupted and transformed. IBM can go back to its roots and help the world solve very complex problems, the world has so many like climate change, exploding healthcare costs

    • Let’s also remember that layoffs have their limits. And IBM did very little hiring in the first world…preferring to hire 22 year olds in India and China. IBM succeeded because tribal wisdom and ingenuity was passed down from older IBMers to new hires. IBM USA always led the way in patents. The destructive force of continuous layoffs to make some arbitrary metric like EPS also caused major customers to jump ship. Think about a big customer that has a I/T specialist dedicated to that account for years. Suddenly that person is replaced by someone in the 3rd world.
  • LinkedIn:

    Lou Gerstner is IBM's Rorschach Test. By Peter E. Greulich, President, MBI Concepts Corporation. Excerpts: There are hundreds of thousands of IBMers that are in what I call the transition generation: those that were hired in the late sixties to mid-eighties and worked at IBM into the 21st Century. Early in their careers, Tom Watson Jr. still wandered the halls of Armonk, talking directly with many of them. They have experienced a range of IBM leaders, good and bad: from Watson Jr., Learson and Cary, to Opel, Akers, Gerstner, Palmisano and Rometty. An adaptable group, this generation includes everyone from those who built the first mainframe to those hired to construct Opel's 1990 Hundred Billion Dollar IBM. They have experienced the Basic Beliefs, but also the ongoing changes in pension and health benefits, resource actions and financial impacts around IBM’s earnings-per-share road maps. Some have survived thirty-plus years like the elder generation, but most have not.

    Most of them--like myself--have a hard time listening to Lou Gerstner when he speaks. Lou Gerstner used his 2002 book, Who Says Elephants Can't Dance? to claim not only strategic and financial success but cultural. He deserves credit for the first two but not the later. Our business schools should teach all its students to read any business book--but especially self-evaluations by Chief Executive Officers--with a healthy dose of skepticism. This is my perspective. It is a different perspective that business schools should consider when studying Lou's leadership of IBM. ...

    In 1999, after achieving financial stability and with a U.S. pension plan that was overfunded by $7 billion, IBM’s senior vice president of human resources sent an e-mail to all U.S. employees advising them that effective July 1 IBM was converting its U.S. defined-benefit pension plan to a cash-balance plan.

    The implications of this change were not readily apparent. Pension plans are complex financial instruments, and it takes an actuarial genius to interpret the impact of most changes to them. But it did not take long for a small group of vocal IBMers to understand how much they stood to lose: most understood they would need to work years longer to reach retirement; many realized they would never be able to retire, or would have to retire with a reduced standard of living; some grasped the concept of a “wear away” period (an industry term describing the time it takes just to “break even” after a conversion); most failed to notice that they had lost their retirement health care. But all employee-owners realized that the change impacted them in some way, that they had no choice and that their company had become just another corporation like the rest.

    The pension plan changes of the nineties affected 140,000 U.S. employees, almost half (45.5%) of the worldwide, full-time IBM population. With the setting up of a new Yahoo! website to disseminate information, instead of 5,000 Gerstner Guerrillas there were now tens of thousands of IBMers using guerrilla warfare to fight an internal corporate change — a first in IBM’s eighty-five-year history. These employee-owners wrote, called and petitioned their government representatives. Within a few months the brightest of spotlights was placed on cash-balance conversions, a topic barely discussed in the news media before. Congressional hearings were scheduled, detailed reports were requested, and the IRS got involved (placing a moratorium on conversions).

    Less than three months after his decision, Gerstner finally buckled under the pressure. But he only buckled halfway. A simple amendment offered a choice between the two plans, but only to individuals forty years of age or older with more than ten years of service. Even with this change, more than half (53.5%) of the U.S. employees still had their future retirement plans forcibly altered — 78,000 IBMers live today with drastically altered pensions and no or reduced retirement medical plans. Some were friends of mine who at the time were thirty-nine years old with nineteen years of service. ...

    But it was not a great furor among a small group of IBM employees — rather, it was a great furor among a very large group of IBM employees. Although it arrived too late, U.S. Senator Bernie Sanders (Vermont) documented the effects of a cash-balance conversion. He requested a study using the congressional retirement plan as a benchmark.

    The study documented losses ranging from 30% to 75% if a similar plan had been forced on Congress. Marie Cocco of Newsday wrote, “Sanders’ own benefit would be cut by 72 percent under a cash-balance formula.” From this congressional report, it is easy to visualize the impact of the 1999 pension changes, and to understand why so many employee-owners were so angry at a policy change that was unnecessary for the competitive or financial health of the company. ...

    It was--and still is--IBM's game plan, based on the distributive injustice of me-first and -only, that drives its shareholder-first and -only strategy. And it was--and still is--this CEO- and board-driven, first-and-only strategy that subjugates all other IBM initiatives.

    Selected reader comments follow:

    • Pete has done a great job of explaining how IBM went from a "One for all, all for one" environment to "Everybody for themselves". The take away of medical and pension benefits broke the promises that had been made to employees and eliminated the trust that they had in the company.
    • Pension plan as described here was for US employees only. Getting rid. Of the IBM Basic Beliefs was in my opinion one of the biggest mistake together with abandoning hardware innovation to replace it by the acquisition of Consulting. Companies. When there is no more respect for the individuals there is also no respect for the company and no more dedication. It's time to bring new true EXECUTIVE LEADERSHIP for IBM to thrive again.
    • Peter E. Greulich: I couldn't agree more on the basic beliefs. That is why I spent the first half of my book discussing the 20th Century IBM and its history under Watson Sr. and his "Democracy in Business," "We Forgive Thoughtful Mistakes" and "We Are All Assistants." That evolved into the basic beliefs under Watson Jr. that we knew as Respect, Service and Excellence.

      The pension changes in the U.S. were a symptom of a new generation of U.S. leadership that put more emphasis on me-first and -only rather than service to man in all our various aspects of life: consumer man, employee man, investor man, and man as a member of society.

      I do disagree with your "pension plan was for U.S. only." I document very clearly in my book the pension changes in the U.K. that caused employees to burn their Quarter Century Club Certificates in front of IBM labs there. I also have friends in Canada and Germany that sigh and have said "it is similar here" but have not documented those changes. The U.K. decisions is still being contested in the courts with initial wins going to the retirees at this point.

      Anyone that has information on pension changes as they occurred (outside the U.S. and U.K.) and how it affected you can reach me through my web site. We can talk over Skype and all conversations are confidential. It just gives me more background information to ensure I keep writing from a more "international" perspective. I did not include the U.K. discussion here to keep the article to a decent length.

    • Pete love what you have written about the highs and lows of IBM past-present-future. Me, 1981 Poughkeepsie, various sales jobs to 2000 and returning in 2012. I always say Gertsner got way to much credit for "saving" IBM. It was/is such a big company he was able to make some changes to many parts and in the end saved a lot of money but ruined lots of lives and careers. Yes a huge quarterly loss was a big wake up and yes for too long IBM was worried too much about Hitachi-Fujitsu-Amdahl and the other Japanese PCM plug compatible machines. Yes IBM did not know what the PC would evolve to. Yes IBM screwed up PS/2, OS/2, Token Ring etc. Yes at 1 point IBM saved Intel and owned 20%. Yes Bill Gates was smarter than the IBM execs that negotiated the Windows license. Etc etc etc. Done right there would be no Intel or MSFT today.

      Met Gerstner at my first 100% Club. Most arrogant guy in the universe. I will spare you what he actually said.

      His biggest problem was he never understood technology. Had a short temper. His way or the highway. And his biggest flaw; he always hid behind "shareholder value" yet left IBM with $400M. The worst CEO's hide behind shareholder value when that is so short sighted. CEO's and companies have an ecosystem to keep healthy that is much more than just shareholders. It has employees, suppliers, stake holders, customers etc etc etc.

      What should have happened was the employees that were lied to should have risen up like this regional supermarket chain did in the Northeast. Market Basket. Absolutely fascinating story for you to dig into where the entire chain went on strike for months to oust greedy company CEO and bring back their beloved Artie T Demoulas, i.e. Watson senior. Had that happened, the great IBM Pension robbery would have been over in weeks or months. IBM should/could have simply stated all new hires would be on the new plan. They did not, and exploited legal loopholes. Then more loopholes with financial engineering and buybacks etc. Oh well.

    • Peter E. Greulich: There are several IBM Gerstner myths that I wanted to clarify with this article:
      1. A myth that this was the first time IBM had been in so desperate a situation and therefore he had to take drastic measures. Untrue. I describe the Watson Jr. example above. The other is 1921 when Watson Sr. laid off the entire development staff and almost 10% of all employees. He then was not prepared to catch the resurgence of the "Roaring Twenties." This lead him to being consistent in several things: doubling down on research and development during recessions and starting a full employment tradition (it was never a policy). IBM grew because of this for almost eight decades - some other companies should sit up and take notice. (where would IBM be today if it had invested 158,000,000,000 in new research and development over the last fifteen years - through the 2008 and 2002 downturns - instead of in paper)
      2. A myth that Gerstner had to do all these desperate things to "save the company." In fact the 50,000 IBMers he cut lose had been hired back within a few years and I believe the data shows that Akers had done most of the heavy lifting for Gerstner in this respect with early retirements and back to field movements. Akers lost us because he lost his faith in the feet-on-the-street through things like his "water-cooler" statement.
      3. A myth that change was hard at IBM. We were ready for a change after Akers. When Lou came in we went back to work with renewed energy. We were ready and accepting of change. He faced opposition at some high levels at IBM because by then the opinion surveys had been stopped which allowed a whole level of bad executives to filter through the company. Unfortunately, the one he left in power (Palmisano) was a poor choice on his part.
    • IBM execs in the 80's thought IBM was a "money pump"... you just pump the handle and the money flows. Senior execs typically did not call on real customers back then. Everything they saw was white-washed with wishful thinking. Global outsourcing and the rebirth of the mainframe saved IBM in the 90's. I don't give Gerstner credit for that. He just cut people and benefits. Today it seems that IBM leadership learned little from that period. I think IBM is in a much greater crisis now than when Gerstner came on board. I hope they can pull it out of the downward spiral as I need my pension.
    • Excellent historical explanation, Pete. Today, IBM executives continue to play an accounting game of spending corporate profits to buy back IBM stock on the open market (at the same time issuing huge amounts of options).
    • Andy: Pete, thanks for this great recap. I left IBM in 2000 with 19 years of service after figuring out the financial impact of the plan changes you so clearly articulated. At the time, I was shocked at the total impact it had to my retirement plan.
    • Peter E. Greulich: Andy, I can relate. If it hadn't been for the vocal few that really started the IBM Yahoo Pension Board so many would have lost even more. It was a shame that a choice wasn't offered. I consider this one of Lou Gerstner's most strategic mistakes of his IBM career. If he had just given a choice I truly believe that most of "us" would have not even noticed what was being taken away. He would have gotten more money with less fuss.

      As great a strategic thinker - as most think he was - this was a complete failure on his part to understand human nature. I think this played on his weakness: an inability to see things the way the folks in the trenches did.

      This was a strength of both Watsons. They understood what motivated a person and "if" they had seen a necessity to change the IBM Pension Plan, they would have communicated it well, ensured it had the same impact for all (employee - executive alike), and they would have provided a choice to those that would have been impacted.

    • Bruce: Lou Gerstner was a lot more painful (and a lot more expensive) than a Rorschach test. A Rorschach test won't screw tens of thousands of workers on their pensions, while carrying home millions in salary and stock options worth LOTS more in his own pockets. Ask survivors at Nabisco and American Express, they'll tell you the same story when he was there. He cut the heart out of those companies before he did the same at IBM. Look at IBM now. Is it 7 years of declining revenues? And where is the next generation of leadership to step up and take over IBM and reshape it back into profitability and growth? They left the ship a long time ago! They were tired of being treated like the commodities they supposedly were and went somewhere their talents were valued. Thanks Lou! You left a hell of a legacy.
    • Peter E. Greulich: Bruce, thanks for the comment. Many folks I have interviewed have the same response. I understand because I was there too.

      On the pension: Even those of us that didn't lose as much because we were second choicers were left feeling guilty because the only reason we got what we did was our age. On our team, some were older and kept the older plan with healthcare, some were younger and wanted to get rid of the pension plan as it did have a lot of holes - such as being back-end loaded. I did sweat out those last twelve years to make it to a qualified retirement. Too many very good friends did not make it. That is why I wrote my book - to get the pain of those days across and compare it with the IBM of the past.

      I wrote another LinkedIn article entitled, "The Dancing Elephant is Crying this Week" to communicate that pain. It has been read by over 65,000 people with almost 300 comments - I think they get it.

      On leadership: I absolutely agree. The way I put it in my articles is that IBM's 20th Century turn-around leadership has been replace with 21st Century jettison-now management.

      On talent: I still know some great people that are there. More leave or are jettisoned every day. Good talent arrives daily, but the environment isn't conducive to staying around - many are there to get there time-in-service and move on. The environment is definitely not conducive to 120% performance efforts when the chips are down. The next economic downturn won't have the IBM Culture there to buffer it.

      I agree he left a horrible legacy. I write to get that across. Hopefully more business schools will get this across. I do try and balance my perspective and remember how I felt "at the time" and when he joined. As I said, "I believed his words." Unfortunately, his words were not to be believed.

      This is a humble opinion and what I see when I see or hear Lou Gerstner speak - my Rorschach test.

      Thanks again for the comment. You are not alone in your expressions. Many use the "reply privately" function on LinkedIn to let me know what they think. I can say what I want to as a retiree - some can't - yet.

  • New York Times:

    IBM’s Design-Centered Strategy to Set Free the Squares. By Steve Lohr. Excerpts: Phil Gilbert is a tall man with a shaved head and wire-rimmed glasses. He typically wears cowboy boots and bluejeans to work — hardly unusual these days, except he’s an executive at IBM, a company that still has a button-down suit-and-tie reputation. And in case you don’t get the message from his wardrobe, there’s a huge black-and-white photograph hanging in his office of a young Bob Dylan, hunched over sheet music, making changes to songs in the “Highway 61 Revisited” album. It’s an image, Mr. Gilbert will tell you, that conveys both a rebel spirit and hard work. ...

    The company is well on its way to hiring more than 1,000 professional designers, and much of its management work force is being trained in design thinking. “I’ve never seen any company implement it on the scale of IBM,” said William Burnett, executive director of the design program at Stanford University. “To try to change a culture in a company that size is a daunting task.” ...

    Virginia M. Rometty, IBM’s chief executive, has warned that this will be a difficult transition year. It will take time, she says, before its new businesses are large enough to become engines of growth for the whole company. The strategy, she insists, is the right one. What remains is to move ahead faster. “People ask, ‘Is there a silver bullet?’” Ms. Rometty said in a recent interview. “The silver bullet, you might say, is speed, this idea of speed.” ...

    As software becomes more an online service, analysts say, the big corporate contracts that have sustained IBM’s software business will become less frequent. “For IBM, the dollars are going to have to come from sharply expanding its customer base so that developers at all kinds of companies, including start-ups, see IBM as a place to go to build new things,” said Frank Gens, chief analyst of the market research firm IDC. “That’s not been IBM’s reputation, and that’s the challenge Bluemix faces.” ...

    The company’s predicament today has echoes of the past. IBM is gaining ground now, but it was late to the cloud business, behind Amazon, Google, Microsoft and Salesforce. The company’s financial performance is deteriorating, but it is still a corporation that generated nearly $16 billion in net profit from continuing operations last year. Its old-line businesses are in retreat, but with Watson it seems to be at the forefront of applying data-driven artificial intelligence to mainstream industries. ...

    The pace and trajectory of the business are the big questions about IBM today. IBM’s stock price has declined 16 percent in the last year. Ms. Rometty is under pressure — and that pressure will not ease until its new businesses overshadow its legacy products. “The theory is that the new lines of business grow faster than the old ones decline, but we’ve not seen it yet,” said A. M. Sacconaghi, an analyst at Sanford C. Bernstein & Company.

  • New York Times:

    Gene Amdahl, Pioneer of Mainframe Computing, Dies at 92. By Katie Hafner. Excerpts: Gene Amdahl, a trailblazer in the design of IBM’s mainframe computers, which became the central nervous system for businesses large and small throughout the world, died Tuesday night at a nursing home in Palo Alto, Calif. He was 92. ...

    Dr. Amdahl rose from South Dakota farm country, where he attended a one-room school without electricity, to become the epitome of a generation of computer pioneers who combined intellectual brilliance, managerial skill and entrepreneurial vigor to fuel the early growth of the industry.

    As a young computer scientist at International Business Machines Corporation in the early 1960s, he played a crucial role in the development of the System/360 series, the most successful line of mainframe computers in IBM’s history. Its architecture influenced computer design for years to come.

  • TechRepublic:

    OS/2: Blue Lion to be the next distro of the 28-year-old OS. Arca Noae is developing a new full distribution of OS/2 that should ease the pain of upgrading or deploying the OS on modern hardware. By James Sanders. Excerpts: The WarpStock convention — the annual gathering of users, developers, and enthusiasts of IBM OS/2 — was held in Wichita, KS on October 23 - 25, 2015. For an operating system whose principal development stopped in 1996, it may be surprising that the OS/2 community is vibrant enough to warrant a convention — and likely even more surprising that it has two, as WarpStock Europe will be held in Cologne, Germany in May 2016.

    This year's event, however, may well be the most consequential in several years, as it marks the return of OS/2.

    Arca Noae, an organization run by veterans of the OS/2 ecosystem, obtained a license from IBM to sell a new distribution of that OS, which at present is codenamed Blue Lion.

  • Seeking Alpha:

    The IBM Valuation Disagreement. By Brian Grosso. Excerpts: Probably, the most interesting thing about IBM is that Warren Buffett owns it. That's fair. But I think the No. 2 most interesting thing about this animal is the valuation disagreement that has been going on among bears and bulls for the last few years. IBM is a complicated company, which makes valuing it complicated. At the poles of bearishness and bullishness, investors are using very different valuation methodologies to support their conclusions. The question that has been bothering me for some time that I will try to determine in this article is: which approach is right? ...

    I think most investors looking at IBM would be content with 10% annual returns over the next five years and the expectation of that level of return seems very reasonable to me. Valuing IBM is complicated, but in general, the bull approach to valuing the stock using a straight PE seems closer to the mark than the bear method including financial debt and pension liability grounded in unrealistic assumptions in the company's enterprise value.

    Selected reader comments follow:

    • IBM is a long term play at best and a not very good short term bet. The issue about IBM is a technological and a corporate culture one which is why we are even having a discussion about it t all. It has wasted a tremendous amount of advantages including economies of scale, high quality research, and first to develop many technologies. Sadly its corporate leadership and culture continues to degrade.

      Not to talk about these leads one to fundamentally misunderstand why its share price continues to be increasingly discounted.

    • Cringely: This is another financial analysis that ignores operating strategy and company psychology. The way these things go the authors acknowledge that times have been tough at IBM but then go on to apply historical (longer term) results as a logical expectation. What's logical about that? The company's current trajectory is toward oblivion, management is for the most part sticking to its guns (the wrong guns), and if you actually talk to people who work at IBM, they are depressed and have lost ALL confidence in their company.

      Here IBM's big problem.

      At the end of 2013 Global Technology Services was a $38.5 Billion per year business. Per the 3Q14 announcement pre-tax Income is dropping at an 11% rate. Global Business serves was an $18.4 Billion business and is dropping at a rate of 15%. These two business units account for 57% of IBM's revenue. Bottom line 57% of IBM's business is now declining at double digit percentage rates. IBM's cloud is now a $3.1 Billion a year business. How long does it take to grow the cloud business to the approximate size of GTS? ($31B, or 10x growth)

      • at 7.5% growth per year -- 32 years
      • at 10% growth per year -- 24 years
      • at 15% growth per year -- 16.5 years
      • at 25% growth per year -- 10.3 years

      Just as Sam Palmisano came up with a 10 year business plan to get the company to $20 EPS, isn't IBM doing about the same thing with Cloud? To grow Cloud to become a major business in IBM it will take at least 10 years of spectacular and sustained growth. How many firms in history have been able to sustain a 25% per year growth and over 10 years?

      IBM could now be killing GTS at a rate FASTER than it can grow the new businesses.

      Can IBM grow the new businesses at a strong rate with a damaged GTS? Will IBM's gutting of GTS put its other business plans at risk?

      A Microsoft VP once told me 'if it doesn't increase market share or revenue, Microsoft isn't interested in it.' If the intent of IBM is to grow several new, major lines of business how does dumping over $100B in stock buybacks help increase market share or revenue?

      No one is saying IBM has a poor business vision. The emphasis of Cloud, Analytics, Mobile, and Securely are all squarely aligned with the future needs of IBM's customers. The important question that continues to go unanswered is this: "Is the destruction of IBM's biggest business necessary for its future growth? Or is it putting IBM's future at risk?"

      IBM's new round of stock repurchases, furloughs, and more layoffs shows the dominant priority of the company is short term shareholder value. The future business is a very distant second priority and the existing businesses are not a priority. This is NOT going to end well.

    • Cringley has indirectly pointed out the destructive nature of spreadsheets. The prevailing thought at IBM is that all spreadsheet cells are independent. Some IBM spreadsheet jockeys hold the following assumptions:
      • Headcount cuts don't really effect revenue attainment.
      • Reducing benefits and employee costs doesn't effect productivity.
      • Not selling a given product only effects revenue from that product.
      • ]Mindshare with customers is valuable but you can cut coverage and simultaneously move up the solution value chain.

      Finally IBM is in a variety of businesses with fundamentally different valuations. I don't know why folks don't, at a minimum, deconstruct the revenue streams, project them and reconstitute valuations based upon the piece parts and comps for the companies represented by the piece parts.

    • "What company is better positioned to be at the center of managing all of the data which flows from the push to 'internet of things' than IBM?" Microsoft and Google comes to mind. In fact, I'd even say managing data flowing from the "internet of things" is a core priority of Google. They've done a respectable job in this area too.
    • Cringely: While efficient allocation of capital makes sense for IBM in theory it doesn't work as well in the context of an actual business being conducted in a real market by normal humans. For example, IBM has gone from being one of the most generous employers to one of the meanest. The company's mindset when it comes to "resources" (IBMspeak for employees, co-workers — you know, people) is that a resource in India is identical to a resource in the USA only cheaper and therefore better for the company — more efficient use of human capital. Except it doesn't work that way.

      Cultural differences and time differences, not to mention the fact that IBM's Indian workforce is less educated than its U.S. workforce (less than 50 percent of IBM's Indian analysts have undergraduate degrees -- did you know that?) result in big efficiency declines. Yes, four Indians are still cheaper than one American but IT TAKES FOUR INDIANS to do the job. So the results compared to the projections that led to them are always a disappointment because one doesn't equal one, FOUR equals one. This is just one example of how the capital allocation theory fails.

      Another example is IBM's sale last year of its Intel server business to Lenovo. The allocation of capital theory says Intel servers were a low-margin business so IBM sold it to recover capital while they still could and reallocate it to other -- higher-margin -- purposes. Go back and read the press releases at the time because they are telling. What higher-margin business did IBM cite as their new server priority? Remember IBM can't just bail out of the server business because that would leave a huge hole in their product line.

      IBM SAID it would be investing more in their own Power8 chips and servers, which do have dramatically higher margins EXCEPT CUSTOMERS AREN'T BUYING THEM. Customers aren't stupid so they are sticking to Intel servers because of their dramatically higher performance efficiency. By dropping its Intel server business IBM WALKED AWAY FROM THE MARKET.

      Ironically, IBM could have followed Apple's example and kept the division but not its factories. They could have gone to contract manufacturing, dispose of factories, keep the business, make it more competitive AND INCREASE MARGINS. Why didn't they do that? IBM didn't do that because they valued more the $2.3 billion in cash coming from Lenovo that (in IBM management's view) "saved" the earnings report for one quarter. That's not allocation of capital, it's short-term market placation at the expense of longer-term results.

      Look at IBM's cloud growth in that same quarter when they sold the Intel server operation. They included in their definition of "cloud" the sales of Intel servers used to make the cloud AND THE SALE OF THE DIVISION THAT GENERATED THE REVENUE. No other cloud company does that. It made IBM's cloud business look better by including revenue that it is not only hard to argue is even cloud-related, it was accompanied by statements claiming this revenue growth was part of a longer-term trend. How can you have a trend that's based on a one-time event (the sale to Lenovo)? You can't.

      Allocation of capital is a great excuse, but it's not IBM's true motivation, which is just making it through another dismal quarter.

    • Cringely, I agree with your comments about offshore workers. Although in the outsourcing arena, some IBM USA employees are nothing to brag about either since a very large percentage of them came from the outsourced companies (because IBM makes that implicit promise to the companies that are outsourced), and they are not the type of people that will get the job done. Also, some of the USA employees are long time IBM employees who only have a high school education (no chance they could graduate from college even if given the chance). Then IBM tries to use draconian layoffs to thin the herd and cut benefits.

      I also agree with your comment that, although "four Indians are still cheaper than one American, but IT TAKES FOUR INDIANS to do the job." This seems to be a problem with IT management in almost all USA companies, that they don't understand this. There is a herd mentality in corporate management these days, and companies are trying to do what everyone else is doing, whether it makes sense or not.

      With regard to the IBM X-Series servers (Intel servers) sold to Lenovo, IBM has always had problems being cost competitive. IBM has for a long time outsourced the actual manufacture of all the circuit boards and components to contract manufacturers, and only final assembly of systems is done by IBM employees. But that is what everyone else does also, and IBM has a bloated management and sales infrastructure, so they could not compete.

      In an attempt to continually find even lower cost of manufacture, they used less reliable contract manufacturers, and eventually quality suffered. By the time IBM sold their X-Series servers to Lenovo, they were losing significant business because many servers were arriving at customers DOA. I know of one very solid Blue shop that switched from IBM X-Series to Cisco Intel servers because of hardware failure problems on X-Series servers, and I am sure there were others.

      It's sort of like the restaurant business. Often, when a restaurant starts having financial problems, they cut costs in order to cut prices to attract new customers. But that usually ends up affecting the quality of the product, and then it is just a short amount of time before the restaurant closes.

    • Washington Post:

      IBM Watson is going to change how you think about the weather. By Dominic Basulto. Excerpts: IBM Watson continues to find new career callings. This time it’s as a weather forecaster. With IBM acquiring the digital assets of the Weather Company for a reported $2.5 billion, it’s only a matter of time before the world’s most famous supercomputer starts coming up with new insights at the intersection of atmospheric science, computer science and big data.

      The focus at IBM is not so much in getting Watson involved in making better weather forecasts, but in putting the world’s most famous supercomputer to work in mining epic amounts of data in order to help businesses come up with actionable insights about the weather on both a real-time and long-term basis.

    • Reuters, courtesy of Yahoo! Finance:

      Amazon debuts in Thomson Reuters 2015 top 100 innovators list. Excerpts: Online marketplace Amazon.com Inc made its debut in the 2015 Thomson Reuters Top 100 global innovators list, leaving International Business Machines Corp, the world's largest technology services company, out of the list.

      Amazon joins the innovators list for the first time for innovations in data centers, devices, electronic methods and systems, according to its latest report.

      The Thomson Reuters Top 100 global innovators program identifies innovators annually through an in-depth analysis based on a series of patent-related metrics that analyze what it means to be truly innovative.

      There are 27 companies that are dropped from the list this year, including AT&T, IBM, Siemens and Xerox.

      "For IBM, although they regularly top the list of U.S. patentees by volume of patents each year, the Top 100 Global Innovators listing evaluates not just volume, but also success, globalization and impact," said Bob Stembridge, analyst with Thomson Reuters IP & Science.

    • Seeking Alpha:

      IBM: The Poster Child Of Capital Misallocation. By Foundation Investing. Excerpts: IBM has quickly become the poster child of the popular "buybacks-trump-everything" financial engineering phenomenon. This will not end well for its stock price.

      Big Blue used to lead American innovation, but not anymore. Instead, it now epitomizes everything wrong with the greedy short-term thinking that plagues c-suite ideology.

      Let's first make it clear that we have NO problem with companies buying back their stock. In fact, we think it's a great way to reward shareholders. In many regards, it actually makes more sense than returning capital through dividends.

      But we do take issue with companies misallocating their capital to manipulate their earnings. Company officers intentionally skew earnings ratios to boost their own bonuses. This generally comes at the expense of a company's long-term future.

      This is particularly troubling when it happens at an American stalwart such as IBM. Especially when their business model faces more external threats than ever before. ...

      So what's wrong with IBM?

      Other companies have spent the last decade investing heavily into R&D, innovating new technologies and rapidly expanding their market share. IBM on the other hand has been stuck on a path set by former CEO Samuel J. Palmisano over a decade ago. And that is to financially engineer results at the expense of long-term growth. ...

      The company has been juicing its financial ratios by borrowing billions of dollars to buy back its shares. All just to make the company appear to be a better value so that IBM leadership can claim success. And this continues to occur as the company's true underlying fundamentals rot. ...

      IBM spent $5.4 billion on R&D last year. This is the LOWEST amount it has spent on R&D in over 12 years. And that is in absolute terms. R&D as a percentage of revenue has been even more dismal, at only 5% of sales.

      Yet Microsoft spent over 12% of its revenue on R&D just last year. And they have been increasing this amount nearly every year over the last decade. This substantial investment has paid off for them. The software maker has been experiencing consistent increases in growth in most of its fiscal quarters. ...

      IBM's focus on improving meaningless valuation ratios has led to their massive capital misallocation. As a result, IBM has either missed or underinvested in EVERY single major technology trend over the last 15 years. Just think of the three biggest technological disruptions in the last decade and a half. ...

      IBM has only itself to blame. Its focus on short-term and superficial earnings ratios will come at a great cost in the future. Throw in other major equity headwinds (rising dollar, slowing China, turning business cycle, and possibly rising rates) and you have a short opportunity handed to you on a silver platter. But hey, at least IBM CEO Ginni Rometty got that eight-figure bonus last year for improving the company's EPS.

  • New York Times:

    Large Companies Game H-1B Visa Program, Costing the U.S. Jobs. By Julia Preston. Excerpts: Congress set up the H-1B program to help American companies hire foreigners with exceptional skills, to fill open jobs and to help their businesses grow.

    But the program has been failing many American employers who cannot get visas for foreigners with the special skills they need.

    Instead, the outsourcing firms are increasingly dominating the program, federal records show. In recent years, they have obtained many thousands of the visas — which are limited to 85,000 a year — by learning to game the H-1B system without breaking the rules, researchers and lawyers said. ...

    “The H-1B program is critical as a way for employers to fill skill gaps and for really talented people to come to the United States,” said Ronil Hira, a professor at Howard University who studies visa programs. “But the outsourcing companies are squeezing out legitimate users of the program,” he said. “The H-1Bs are actually pushing jobs offshore.”

    Those firms have used the visas to bring their employees, mostly from India, for large contracts to take over work at American businesses. And as the share of H-1B visas obtained by outsourcing firms has grown, more Americans say they are being put out of work, or are seeing their jobs moved overseas. ...

    The top companies receiving H-1B visas in recent years, Professor Hira found, include Tata Consultancy Services, known as TCS, Infosys and Wipro, all outsourcing giants based in India; Cognizant, with headquarters in New Jersey; and Accenture, a global operation incorporated in Ireland. ...

    For example, federal law requires global companies employing large numbers of H-1B workers to sign a declaration saying they will not displace Americans. But there is a loophole: An exemption cancels that requirement if employers pay H-1B workers at least $60,000 a year — significantly less than an experienced technology worker’s salary in many parts of the country.

    Many of the outsourcing firms’ temporary workers earn $60,000 or just a little more, according to federal data compiled by Professor Hira. ...

    American titans like IBM, Microsoft, Facebook and Google also use H-1B visas and have pressed Congress to increase the annual quota.

  • Glassdoor IBM reviews. Selected reviews follow:
    • “Glam from external...Disgusted from within...

      ” Current Employee — Operation.

      Pros: The only upside is the flexibility to "work from home".

      Cons: Although the so-called "work from home" flexibility, this organisation crawls it back effectively by dishing out the worst pay increment/ performance bonus year-on-year based on my experience with them for the past 4 years given the fact that my performance rating is consistently on a "Above-Average Contributor" (2+), whereby a 1 rating is considered top performer. So is this really considered an employee benefit or simply paying out of pocket for this flexibility?

      In addition, I am expected to clock in minimum of 40 hours training per calendar year with ZERO training budget. This is the biggest joke thus far that I come across. And what counts into the training hours? Team meetings, internal so-called "cross trainings"...which are not creating a positive impact to my career growth in any way. This is on top of the ever-demanding work environment that I am placed into, while working with team members from across the other regions.

      Advice to Management: Continue chasing after the pipeline numbers...and in return you're chasing away your staff.

    • “Great Technology Environment”

      Current Employee — Anonymous Employee. Pros: Huge company resources are everywhere and you can learn as much as you would like. Cons: Huge company...you can easily get lost in all of the things that come with a huge company. IBM likes everyone in sales related positions to be in front of the customers so be prepared to live out of a suitcase. While they are stating they are working on it their employee ranking system is horrible and one might as well pick straws to determine if you are a valued employee, it not in the first line managers hands.
    • “IBM — GBS”

      Former Employee — Anonymous Employee. Pros: Depending on your position you have an opportunity to be self directed and the work hours and location can be very flexible. Benefits are decent although they have suffered some serious cutbacks in the past few years. The 401k and IBM match is very good. Cons: You are evaluated based on a bell curve. In a particular group there must be some % of low ratings. This can be very detrimental if you are part of a small high performing team. You are also responsible for finding work that aligns with your band. Advice to Management: Reevaluate the PBC rating system — particularly for small sample groups. It can be extremely unfair at times and you are losing good people.
    • “Process and quarterly targets over everything else.”

      Former Employee — Anonymous Employee in Auckland (New Zealand). I worked at IBM (more than 3 years). Pros: Great people to work with. Great history. Cons: Process > People Process > Clients Profit > Value. Advice to Management: Stop worrying about quarterly targets and trying to grow. Great a brand as a stable, reliable, good to deal with company.
    • “Program Management”

      Former Employee — Financial Analyst in Houston, TX. I worked at IBM full-time (more than 10 years). Pros: Having IBM on your resume sometimes helps. Cons: All good talent have left. All work is outsourced. Benefits are horrible. Raises do not exist. CEO is not moving fast enough for the market. Morale is poor. This is no longer a good company to work for and there is no room for growth. Employees are left on their own to manage their careers. No incentives.
    • “IT Specialist”

      Current Employee — IT Specialist in Hartford, CT. I have been working at IBM full-time (more than 10 years). Pros: Flexible work hours, excellent medical benefits for employees. Cons: Medical benefits for family members are too expensive, salaries are not representative of reviews and skill sets. Annual raises do not come close to keeping up with inflation let alone rewarding performance. Advice to Management: Repeated furloughs of contractors are counter-productive to quality customer service and client goals. The perception among most of my contemporaries is that IBM does not value its high achievers and focuses only on the bottom line.
    • “Assistant”

      Former Employee — Anonymous Employee in New York, NY. I worked at IBM full-time (more than 10 years). Pros: Ability to work from home depending upon your client's needs; especially during inclement weather. Cons: Company is outsourcing their administrative assistant roles to countries outside of the US. In addition, they are resourcing (IBM's term for layoff) assistants who are over 50 and have over 20 years experience with the company...not a good sign. Advice to Management: Be more aware of your older generation employees. Most of them work because they need to, not necessarily because they want to and finding other employment when over the age of 50 that pays reasonably well is extremely difficult.
    • “Amazing Company”

      Former Employee — Anonymous Employee in London, England (UK). I worked at IBM full-time (more than 3 years). Pros: Brilliant was so sad to leave! Cons: No cons really, a lot of travel though! Advice to Management: Keep doing what you are doing!
    • “Decent brand name, poor employee development.”

      Former Employee — Consultant in New York, NY. I worked at IBM (less than a year). Pros: Interesting company to learn from, since it is so old. Cons: Corporate structure has made it very slow moving against more innovative competitors. Extremely little support for recent hires. Advice to Management: Be more in touch with your new hires, or else divest your human capital programs.
    • “Life at IBM”

      Former Employee — IT Architect in Rochester, MN. I worked at IBM (more than 10 years.) Pros: Large company with lot of opportunities. Good benefits. Decent compensation. Enormous resources. Smart, hard working employees. Cons: Crushing bureaucracy at times. Process stifles innovation. Resource actions (layoffs) have killed morale. Advice to Management: Invest in employees. Stop managing company with knee jerk reactions to quarterly numbers...get some vision and drive the company to the vision.
    • “Are you a designer being recruited by IBM design? Still turn it down”

      Current Employee — User Experience Designer in Austin, TX. Pros: Pays well for Austin and some of your peers are decent designers. Cons: Where do I start? So many people quit after less than a year it's not even funny. Some groups are good but most are still run poorly. You'll see better marketing material than actual results. More and more of the designers have degrees from non-university sources (boot camps etc.) and it shows. General air of trashiness in the studio. (They put up giant cat pictures on the emergency exit). But at the core...you'll never accomplish anything. Do you enjoy taking home a paycheck for doing next to nothing? Great job. Actually want to impact the world? Don't join. Advice to Management: Fire the leads who everyone hates and people simply put up with. You know who they are.
    • “IBM Executive”

      Former Employee — IBM Executive. I worked at IBM full-time (more than 10 years). Pros: Talent can stand out in a large organization of long-time executives who have not had outside job experience. Cons: Very low salaries relative to the competition. Lots of bureaucracy and politics. Young talent is a target by the old regime. Advice to Management: Hire outside talent. Re-engergize the workforce. Hire and promote executives under the age of 50 and give them jobs with influence and authority to drive change.
    • “Change of culture”

      Former Employee — Financial Analyst in London, England (UK). Pros: Flexibility in work location, Ease of communication. Cons: Since 2008, all the skilled finance jobs are moving offshore. They no longer value skilled staff in UK, opting for cost saving only.
    • “Partner”

      Former Employee — Anonymous Employee. Pros: Breadth of services. Innovation. Opportunity to work on large deals. Cons: Very complex organization. Little personal touch. Employees are just numbers.
    • “Inability to tackle specialty markets”

      Current Employee — Anonymous Employee in Toronto, ON (Canada). Pros: It's a place to dodge, dip, dive duck and doge. A good place to hide and stay safe. Cons: There is no real opportunity to grow up in the organization. Band levels are bloated in the middle and you will be stuck at 9/10 forever. Advice to Management: Don't acquire companies that you can't execute on. You know which ones I am referring to. Just because you have the money doesn't mean that you should spend it.
    • “Not the IBM I came to work for 20 years ago...”

      Current Employee — Project Manager in Tallahassee, FL. I have been working at IBM full-time (more than 10 years).

      Pros: Fairly good pay, good medical benefits, opportunity to work with some really great people and good training opportunities.

      Cons: The new IBM management seems to think the best way to increase price per share is to reduce workforce or offshore work as opposed to doing better, more honest business. Raises are basically non-existent; I personally haven't even had a cost of living raise in over 10 years even though my ratings and revenue generated have always been high. At one time, working for IBM was very prestigious, but now many of the younger generation don't even know who IBM is. Very sad for a company that once was viewed as a world leader in the IT business.

      Advice to Management: Thin out the middle management, appreciate your employees more and be more honest.

    • “Software Engineer”

      Former Employee — Anonymous Employee. Pros: Very interesting projects. Good salary and interesting people. Cons: Limited flexibility and the working hours were exhausting.
    • “A Company in Transition — Not a Good Place to Be Right Now”

      Former Employee — Anonymous Employee. Pros: Helpful, friendly workers who want to do the right thing for customers. High brand recognition, a proud history. Cons: So much short-term trouble that the organization seems hunkered down in CYA mode. If you aren't directly working in the Watson Group, continuous layoffs (euphemistically called "resource actions") are the norm — never-ending. Advice to Management: Stop lying to your employees, start increasing the transparency, and articulate the vision for why IBM is still the place to work and will be in the coming years.
  • Alliance for Retired Americans Friday Alert. This week's topics include:
    • Donald Trump’s “Wages are Too High” Mentality is an Attack on Social Security
    • New Alliance Fact Sheet Explains 2016 Budget Agreement and Medicare Part B Premiums
    • Presidential Politics Complicate Trade Pact
    • It's Never Too Soon To Plan Your 'Driving Retirement'

    Download a PDF version.

New on the Alliance@IBM Site

http://www.endicottalliance.org/thedisintegrationofemploymentinIBM.htm To all Alliance supporters, send and share the above link to the article "The disintegration of employment in IBM" far and wide. Put it on your FaceBook page; send it to newspapers; send it with comments to your political reps and send it to your co-workers. Help break the secrecy of IBM job cuts. Put some pressure on IBM. -Alliance-

Job Cut Reports

  • Comment 11/07/15:

    Job Title: Previous security SDM; Location: Remote; Business Unit: GTS. Message: The writing is on the wall; IBM does not plan to keep the managed services unit outside of cloud. The business will either be sold or turned into a joint partnership with another company very soon. The best advise for GTS employees is to look for another job, either internally or outside of IBM. I left IBM about a year ago and I am MUCH happier now. There is life after IBM! -Anonymous-
  • Comment 11/08/15:

    Cutting 401k matches, cutting overtime, more RAS; 4th quarter will be brutal but Ginny will continue to get a raise in her salary, and the stock options will continue, and Ginny will get her big fat bonus at the end of the year. Vote Union. -Anonymous-
  • Comment 11/09/15:

    It's very sad to see all the news of job cuts. It's not a matter of "if" but "when" the RA will become personal. With the current state of business, how can a CHQ-Marketing organization schedule a meeting at a Disney resort in January for all its (worldwide) employees? Doesn't seem right. -Anonymous-
  • Comment 11/09/15:

    Word is that IGS SSO will be sold to Tata Consulting Services HQ'ed in India. -Anonymous-
  • Comment 11/10/15:

    I'm reading all of the comments (thank you) about the reduced 401k match, but I've heard nothing from my management. Is this a GTS only change? Shouldn't there be some company-wide notice getting said all at once? -Anonymous-
  • Comment 11/10/15:

    I never read the book "Elephants Can Dance" but when it came out the title created an image in my mind of a terrified elephant on a pedestal with Yosemite Sam in front, six guns blazing and shouting"DANCE...ah sez DANCE! I am sure many must feel that way.

    Fear and intimidation has replaced trust and appreciation. The appraisal system was clearly rigged; promotions often a joke. Another kick in the teeth is the luxury airline IBM maintains for the executives. I once had a neighbor who worked there; no expense was spared from what I could gather.

    Certainly, the long-term cost is being reflected in the stock price. Leaving IBM behind has been a tremendous relief for many, myself and family included. Of course, large companies rely on employee turnover to erase broken promises and mitigate management problems, but I suspect that elephant is very tired now. -Anonymous-

  • Comment 11/12/15:

    Very interesting this 401k match cut when viewed against the backdrop of the GTS sale rumours. New match will be 3%, but not all employees are effected. Is this to make a sale of GTS to TCS more attractive to TCS, which pays a 4% match? Or will it be presented as a 1% bonus increase to those transferred to TCS? What about those who did not have their match cut? Are they the ones staying within the IBM shell company, or will they be the ones transferred to TCS? Time will tell. -Ginny for pres, 2020-
  • Comment 11/12/15:

    Job Title: RA'd; Location: Australia. Message: IBM is toast. Future MBAs will study IBM in the same way they study other dinosaurs. IBM plays catch up by a trying to buy innovation. Employee morale will be a separate MBA Unit - it's impossible to describe how bad morale is, exacerbated by an increased proportion of 'managers' who think they are locked in to staying.

    The Alliance has done a fantastic job but IBM employees remind me of bisons herded over the cliff to be swallowed up. IBM has 'invested' nearly as much in buybacks as its current market cap; just leaving money in the bank would have been better for shareholders. A 2013 summary from Druckenmiller was spot on, and the music plays in! News Articles Archives -Anonymous-

  • Comment 11/12/15:

    Job Title: Ex PM; Location: US; Customer Account: Healthcare; Business Unit: Public Sector; Product Line: GTS. Message: Not directly to do with RAs, but this shocks and saddens me to the core! Yes, Amazon has beaten us to the punch in "cloud" but the new initiatives that IBM has bet the farm on like analytics and Watson may not be the koolaid we all think it is. This speaks volumes to the fact the IBM execs are busy counting the beans, where they can cut things and people, and then believe this is managing the business. It is missing the bigger picture. Fact is that to innovate, you have to do something positive with people, patents, process, technology and demonstrate leadership in every area of the business. When IBM no longer leads, it is in trouble. Amazon have eaten IBM's lunch and is now on to IBM's dinner. As a 35-year veteran who is plying his trade elsewhere these days, I just hope I am wrong! I still bleed blue. Maybe time to sell the shares? -Moved On-
  • Comment 11/12/15:

    The IBM ranking system which has been strictly enforced in the past years is probably engineered by HR to facilitate the waves of layoffs in recent years. This system is counter-productive as all it does is to induce fear and encourage competition among the peers. The system is also flawed in a sense that managers could often elaborate their employees' contribution without solid proofs. They could also collaborate with their peer managers in the voting process as they wish. And hard-working employees work every day with uncertainty of their ratings as it is all "relative" (aka, no matter how good a job you do, you could still end up ranking at the bottom and get a "3" at the end.) If IBM management thinks this is a great way to boost employees' productivity, they are flat wrong. Many good companies have already abandoned such process. -Anonymous-
  • Comment 11/12/15:

    Re Anonymous Ranking System... I was a very strong 2+ performer and still got canned. Geography, age, and retirement-eligible are also 3 factors that determine if you get canned. It doesn't matter how critical you are, HR and the execs think that you can be replaced by 3rd-world country resources. You won't get the same results, throughput or quality, but those are important to them. It's about your cost vs. the cost to pay for that clueless resource. -Anonymous-

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