Once an IBMer …


I left IBM a year ago – but have always held the company in high esteem . A lot of what I know today about the industry is stuff I learned in my time there . And I definitely had more good days than bad days there . I still own a tiny little bit of stock in IBM , and some of my best friends and mentors work there . Where I work now , IBM is both a partner and a competitor . And for all those reasons – I keep a close eye on IBM . As always – I am posting this as my personal opinions , not that of my employer .

It was pretty disturbing for me to read that IBM is planning another round of layoffs in 2014 and they have kept aside a billion dollars for that, like they did in 2013 . Having several friends who work there – it is pretty sad for me when I see IBM in such trouble .

When I joined IBM, I think the share price was a little less than $70 . And every year it kept increasing and at some point went well over $200 and now it is about $182 or so . So over the long term, they did pretty well and many employees and investors did well as a result . While there were always some unhappy employees – for the most part , IBM did ok .

IBM is unapologetically capitalist in nature . By the time I joined – there was no pension plan or life time employment type things . And the company was expanding rapidly outside USA. If you look at IBM as an American company , it is kind of hard to see it in a good light . But if you think of them as a global company – it made sense to make use of cheaper labor, better access to other markets and so on .

IBM , in Sam Palmisano’s time made the promise to investors that it will hit $20/share as EPS by 2020. And EPS has been on an upward trend through every quarter I think , irrespective of top line growth.

And then Sam handed over the reins of IBM to Ginnie Rommety . She had already managed services and sales for him, and was supremely qualified for the job . She also grew up the ranks at IBM and knew the company inside out . I thought it was a great decision to make her the CEO and Chairman . It was a pretty smooth transition too .

Sam not only grew the share price and EPS , he also did some savvy stuff like selling off the low margin PC division , investing significantly in IBM Watson etc . So all things considered – it seems Sam set up Ginnie for a decade of success . And Ginnie told the world that she is executing on current strategy .

IBM is laser focused on that EPS goal , and uses all possible levers . There are mainly just four things –
1increase revenue
2.decrease cost
3.buy back shares
4. show investment commitment to future revenues .

The latter three levers were the ones IBM seems to have played best in recent past . In Sam’s time – this was amply rewarded by the capital markets . But in Ginnie’s time – Market is punishing IBM for playing exactly those same levers . Not growing revenue is what is hurting IBM big time .

Selling the low margin part of hardware business to Lenovo seems like a good idea – but probably something the market has already factored in . I have mixed feelings of this sale – I have friends among the people in that business , and I can only wish them the best . But stemming that bleeding profit is good financially for the company .

All that being said – one question remains in my mind . Did Ginnie do the right thing by telling investors that she will follow Sam’s strategy and not chart her own course ?

Street likes predictability more than anything . So if a CEO resets expectations, market will usually give the company more time as long as the plan and time line is communicated well . In much worse situation, HP CEO asked for more time and the Market didn’t punish HP stock for that . If anything I felt HP CEO should have asked for even more time to steady her ship .

So if Ginnie had said “I am playing a long game – so I am going to extend the time frame of EPS roadmap” , would IBM stock have been punished more than the value it lost so far ?

Market is used to not seeing profits – companies like Salesforce and Amazon have gotten the market to believe that revenue/bookings growth should be rewarded even in absence of real profits . Yet, IBM will get punished for showing real profits and growing EPS but not revenue growth . I guess that is why capital markets have that mystic aura 🙂

Or maybe market is not that irrational – and IBM can’t cut costs forever and reach their promised glory . Like every large matrix organization, I am sure IBM has opportunities to cut costs and get leaner – but every time they do that, it does a lot of harm to its employee morale and that is not easy to repair . It is a hard choice to make .

Competitive landscape doesn’t make it easy either . IBM is an amazing technology company and has a habit of making long term bets – like Watson. But a mothership cannot always easily turn on a dime .

Amazon is the Walmart of infrastructure providers with its everyday low price model . That is not IBM’s game . IBM needs to play up its “value added services make us better than Amazon” card really well to see if it works . While I don’t under estimate Mr Bezos, I actually think IBM can out do Amazon since it has staying power in abundance . Soft layer acquisition is a good indication of IBM doubling down . Also , while intel based HW is out – IBM still has Z and P business which can provide manufacturing expertise for their cloud . IBM microelectronics has cutting edge expertise on semiconductors too. But data centers are a capital intensive business and IBM will need to get to the efficiency of the consumer company data centers at some point . Not at all easy , but eminently doable in my opinion .

I am pretty positive that IBM will do well again . I have three main reasons for that

1. Before my time at IBM, they had a near death experience . They know how bad it can get if things don’t go their way . But they survived that and thrived . That is invaluable experience that they can use again

2. IBM has invested a lot in leadership development . People like Ginnie and Steve Mills are some of the best in the industry and they have plenty of leadership bench . I always bet of good leaders and I would be shocked if these people can’t pull it off . It’s not just the top leaders – they have some very bright engineers and an amazingly well trained sales force with great customer relations . This is a people business first and foremost .

3. IBM has continued to invest in research through all kinds of economies . They have more patents most years than other companies . That kind of IP is invaluable in the long term – and not easy for someone else to overtake them

Good luck IBM – I wish you nothing but the best . But in the few times that I have to compete with them – I will try everything possible to kick their butt . That is how IBM trained me 🙂

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7 thoughts on “Once an IBMer …

  1. I beg to differ.
    First of all, you are too emotionally attached to them for no reason. One can be devoted to his/her career or other colleagues but no way attached to a ruthless and faceless organization that will kick you in the butt as soon as they judge that your days are over, no matter how strongly you were committed.
    Secondly, IBM was once an admired company within the IT community, even at their monopoly days, mostly due to their unbreakable hardware and exceptional operating systems. This has changed dramatically when they decided to enter terra incognita, in the form of providing system integrator services to mega clients. This strategy shift may have helped them survive, but their scorecard is one of the poorest in the industry.

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  2. Vijay,

    we met at IBM and are now working together again. I fully share the view to have a heart with the former colleagues. IBM has really some of the very best brains in the industry and allows for a lot of technology investigation as Watson shows as its most prominent example. Yet there is bread and butter.
    I would personally go much further. I think that Ginni is doing a really low job of just keeping the track of Sam. IBM is much more than just a financial institution and is build on some fundamentals. I have seen how the employee morale is down to an all time low. The lemon can only be squeezed to a certain level. Ginni has not understood that there is no lemon left anymore and that that they are quizzing now the hand. Doing all the shifts IBM wants to do will require a more effort than you can do by just cost reduction. Selling off X86 business will also impact on the services.
    For sure IBM management knows what they are doing but now they need to make sure that the 450.000 / sorry 440.000 employees are buying this and follow it!

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  3. Vijay,

    Very insightful analysis. As an ex-IBMer myself, keeping up with IBM trends is also a hobby of mine. Despite the xSeries sale the hardware division is still bleeding. Not sure of its future. IBM current investments in cloud and in Watson may be the next wave of changes to meet the EPS targets. Will be interesting to watch.

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  4. Vijay, to be a 100 year technology company, an oxymoron if there ever was, you have to adapt. My biology background taught me that when change comes, you have 3 choices: 1) move, 2) adapt, or 3) die. IBM chooses to adapt. Adaptation is not always kind.

    Two recent announcements tell you a lot about IBM’s overall direction. We just announced we are selling off the xSeries (Intel based servers) (http://www-03.ibm.com/press/us/en/pressrelease/43016.wss) and expanding our Softlayer cloud by 15 data centers and $1.2B (http://www-03.ibm.com/press/us/en/pressrelease/42956.wss?lnk=ushpls1). In addition, SAP just announced that it is partnering with several cloud providers including IBM (http://global.sap.com/corporate-en/news.epx?category=ALL&articleID=22185) that will help make HANA more available to our current and future clients. It is about choice.

    I really enjoy when we get to partner together. I often think it gives the client the best options. And like you said, I also have no problem with competing and winning.

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