As always – all of this is just my personal opinion here .
As a former IBMer, I was absolutely delighted to see that the IBM CEO finally said last week that the company is letting go of its 2015 EPS strategy. The best time to do that was the day she took over as CEO, but better late than never.
It was a ridiculous goal to begin with. The board and the previous CEO Sam Palmisano did not set Ginnie and the company up for success with this EPS of $20 by 2015 goal. I don’t know too many employees or executives in the company that truly believed this goal was achievable. IBM is like the military in many senses – it is a command and control style organization. So when the marching orders came, people shook their heads and then dutifully went out to try their best to make it happen. If there was a corporate equivalent of a death march – this would surely have made the shortlist.
There are only three ways in general to boost EPS
1. Cut cost
2. Increase revenue
3. Buy back shares
IBM tried as hard as they could on 1 and 3, but doesn’t look like they did much on 2.
For sure – IBM has a LOT of management overhead. Between all the companies I have worked for and have consulted to – I don’t think there is a more matrix management oriented company than IBM. When I had my first quota carrying role at IBM, I remember five or ten people (most of them I did not know ) would check in to see if I am on track to close a given deal. Most of them just managed spreadsheets . This is just the sales side of the equation. Similar kind of overlay functions existed in every part of IBM. So, yes – Sam absolutely was right in assuming that he can cost cut his way to EPS nirvana just by firing people if nothing else worked .
Unfortunately – that is not what happened, at least as far as I know. The top heavy organization more or less continued to exist – probably because they were the decision makers. Instead the people who got cut were the ones who were paid a lot less, and who actually had skills to do actual work. Well eventually some of the top management also got their pink slips – but more of a too little too late case.
The double whammy of a result is there for all of us to see – revenue going down all the time for last several quarters and then later profit stopping to go up .
IBM did try to buy back shares as a way to boost EPS . (IBM also pays a good dividend every quarter ). It helped for a while – but then that is the money that did not get spent on buying companies or reinvesting back in its own business . This is money that could have resulted in new revenue , but that is not the path IBM took. I don’t have the exact math – but I think IBM spent probably four or five times the money they spent on M&A on share buy backs .
So now what is next ? How will IBM regain its glory ? Here are a few thoughts that I wish IBM Management will consider
1. Minimize the management over head . There is absolutely no way to justify 10 people checking in on every deal .
2. Sell off aggressively every part of the business that is low value . I would start with hardware and consulting – both have low value parts . What is low value for IBM might actually be what another company might need to grow . Like say consulting – there are multiple indian outsourcers who might do well to buy parts of IBM services business to move up their value chain
3. Bring back “respect for the individual” as a core value . Start treating employees on par with the customers and shareholders . Employees are the ones who need the most attention now . Take care of them , and they will take care of customers better . And that will take care of shareholders a lot better over the long term than buying back shares . It’s the sustainable model unlike the last attempt
4. IBM has an amazing leadership training program – I know that first hand . And it has more leadership bench than most of its peers . What is missing is that such enablement is not there lower down the ranks . If IBM needs to be a powerhouse in IT again – the customer facing organization needs the kid of leadership training and attention that executive ranks get .
5. Put the best sales and technical teams possible on cloud , big data and Watson . There are plenty of good people in IBM who could be retrained on these areas. And there are experts who can be – and need to be – hired . For existing business, automate everything repeatable like crazy . Make delivery excellence truly mean customer success as much as profitability .
6. Set realistic expectations with employees , customers and the street . Set stretch goals – IBMers can meet and exceed stretch goals . Just don’t venture again to the realm of impossible targets .
Despite all its current troubles – I am still an optimist on IBM returning to its past glory . There are three things that make me an optimist on IBM’s future
1. IBMers – past and present – are a special breed . I have all the confidence that the good people left in the company are as good as any in the industry to make the turn around possible
2. IBM has a brand value that opens doors at customers across the globe . IBM needs that brand to sell more cloud , Watson and bigdata solutions to customers .
3. Through thick and thin, IBM has invested billions of dollars on research . The time to plant a shade tree was in the past and IBM got that right big time . That has already paid back IBM many times in past and I am fully confident that it will continue to do so .
As they say , Once and IBMer , ALWAYS an IBMer !