Earnings season arrived and I am wondering how long big companies can keep their current structures and business models . Size is not always an advantage – it can actually destroy the value of a company .
Big companies try to attack this problem by firing a lot of people . But I have hardly known a company that has succeeded much that way – only very few pull that off .
The problem with firing enmasse is that you have to use broad policies to determine who needs to go . When you fire 1000s of people – not only do you end up firing people who could have done wonders , you lose other good people who will leave because they feel they can do better elsewhere . Firing people lower down in the hierarchy rarely does any company any good. Those are the peeps who do actual work – and they are not usually the ones who made the decisions that turned bad and led to management needing to fire people . Micro corrections throughout the year are a whole lot better in my opinion than mass firing . But at large size and matrix organizations – you cannot optimize . I know that first hand – I have tried and failed , repeatedly .
Large IT companies that have HW and SW have a problem – HW becomes a leading indicator for software , when investors look at the whole company . So if HW declines now , market assumes software will suck pretty soon too . The worst part is if you also have services in the mix . Services trail both HW and SW . So for such companies – if they don’t stop bleeding for HW, market will probably punish them for a long time in future .
The move to cloud is what seem to screw up the larger companies . Cloud is a low margin business – which a large company doesn’t really want to be in . If they don’t do it – they will become obsolete . If they do it – it takes a large amount of time for market to absorb the shock of lesser top and bottom lines . Damned if you do and damned if you don’t . Essentially cloud economics seem to work only for companies who don’t do anything else but cloud business .
When companies solely depend on EPS as a way to set goals for investors – they just lock themselves in jail and throw the key away . To beef up EPS, you can only do three things . Make more revenue , spend less cost and buy back shares . You can’t make more money in cloud – it’s commodity business compared to legacy revenue streams . Your marketing and data center and retraining costs will make sure you can’t spend less . So the only way they can survive is by buying back shares aggressively . That is money they can’t invest back in business. As soon as investors see it – they punish the stock . It’s kind of funny in a sad and weird way how this tactic seems to boomerang
So how exactly do they come out of this vicious cycle ?
I think the sustainable way is to sell off low margin businesses as stand alone entities and double down on what you know best . And if that doesn’t work – then split the company into smaller entities that don’t have to bear huge over heads because of checkers and double checkers . I don’t think any big IT company board is ready to do anything that drastic . They can try to innovate their way to glory – except it is very rare for innovations to scale to an extent that it compensates for the drag caused by deteriorating legacy businesses .
So I guess I will just keep wondering what will happen to all these goliaths . Is there a silver bullet somewhere ? A lot of people I care for work in those places and for their sake , I hope good things happen to those companies