Slow death of IBM
After reading the recent news about IBM’s most recent RA, being a former IBMer, I thought I should write about why I left IBM.
Under Sam Palmisano’s leadership, IBM steadily increased earnings using “the dumbest idea in the world, i.e., Roadmap 2015.”
Cost-cutting
The cost-cutting, which began in 2010 has continued, long after obvious fat has been removed. Workers complain that the cuts now affect IBM’s muscle bone and vital organs.
Cheaper expertise
IBM shifted technical expertise from high-paid US staff to low-salaried staff in India, while cutting back on staff in the US. Its Indian operations grew from 3,000 to well over 100,000 employees.
Culling of staff
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, is highlighted by Information Week. 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by IBM was even more humiliating: it only highlighted how technically inferior its proposal was and so the bid was withdrawn.
Bureaucracy
Despite talk of delayering and collaboration across silos, IBM still has a steep hierarchy, with thirteen layers of management. When combined with the relentless cost-cutting and offshoring and the fear that these practices generate, the agility of the organization tends to be compromised.
Acquisitions instead of innovation
Despite spending some $3 billion on R&D, IBM has been falling behind its competitors technically. IBM’s response has been to buy firms with needed expertise, such as Aspera, which helps clients move large volumes of data quickly; Cloudant, a service for mobile and Web apps; TeaLeaf, a tool for retail marketers, and SoftLayer Technologies, a cloud-computing firm. What remains to be seen is how well those acquired firms will do when faced with the demands of the IBM bureaucracy.
Reliance on financial incentives
“People need to understand,” says Palmisano, “that if they execute the model, they will be rewarded.” The problem is that when incentives are purely financial, motivation suffers. And when the financial incentives are as skewed towards the top as they are at IBM, the costs in terms of motivation are considerable.
Sagging staff morale
When layoffs are a central part of the business model, especially needless layoffs for financial positioning, it creates disaffected employees. Even IBM’s fans concede that staff morale is low. Despite many talented and committed staff, the relentless cost-cutting, the steep hierarchy and lack of agility have taken their toll, particularly in key areas like innovation and generating customer delight.
Imploding business model
IBM has three core businesses: services, software, and hardware. When times are good, they work in concert. A decline in one of these businesses can hobble the whole company, a destructive spiral IBM is fighting to break. As more customers get their computing done cheaply in the cloud, IBM is selling less hardware, which imperils its high-margin software products. Any perception that IBM is adrift threatens its ability to advise clients on anything at all.
A cloudy future strategy
“The cold-sweat scenario for IBM,” says Business Week, “is that it does catch up to Amazon and other cloud providers – only to find that competition has driven margins toward zero. In March a price war broke out among Amazon, Google (GOOG), and Microsoft, as each announced cuts of as much as 35 percent on computing; 65 percent on storage; and 85 percent on other services.
Ginni Rometty has made two promises to investors: to lead corporate IT into the cloud and to deliver lustrously thick margins. Those goals may be irreconcilable, as long as IBM faces competitors willing to make the cloud a place of ever-diminishing returns.”
When Rometty took over as CEO, she had a decide what to do about the tension between the Roadmap 2015 and the internal problems that it had caused. She opted to live with the tension and continues implementing the roadmap.
The real challenge for Rometty is a fundamental shift in business goals and culture. Instead of a world where a high-pressure sales teams can lock in customers to long-term contracts for using unchanging software with high margins, now IT services providers have to compete with firms that offer continuous innovation, pay-as-you-go fee structures and freedom to exit any time. To compete successfully in this emerging world, the IT service providers will have to delight their customers on a continuing basis, by offering continuous innovation.
A new kind of management is required, focusing on customer delight as the new bottom line of the firm’s business. The old giants will have to learn how to disrupt their own cash cows and rapidly develop new products that have not even been heard of. Innovation has to happen not in sporadic “values jams,” but on a continuous basis.
Traditional management won’t get the job done. Firms will have to set aside traditional mantras like ‘maximizing shareholder value‘. They will have to learn how to be part of the emerging creative economy. IBM has made other transitions in its long life – will it be able to transition again?
Twitter @bigdatabeat
Excerpts from: The Dumbest Idea In The World: Maximizing Shareholder Value by Steve Denning