Mad Dog 21/21: Think Or Quit
May 6, 2013 Hesh Wiener
Ginni Rometty has to think or quit. And I don’t expect her to quit. IBM‘s revenue peaked in 2011, the year Rometty became the company’s president, replacing Sam Palmisano. While she wasn’t the boss when Big Blue’s all defining policies were put into place, Rometty had been a top executive since 2009 and an IBM employee since 1991. So, while only recently at the tiller, she could hardly be surprised at the company’s course. It is doubtful, however, that she anticipated the consequences of IBM’s strategic decisions, including her own, or the harshness of the prolonged economic winter.
Now in the middle of her second year in power, Rometty has to demonstrate the independence of mind and skill at wielding power that made Lou Gerstner a success. She has to show she is not John Akers in Jimmy Choos. And she has to learn that hypocrisy, like a fake pair of Choos, can be a costly misstep.
On April 23, Rometty sent a five-minute video message to every IBM employee, of which there are close to 450,000, telling them, among other things, that she expected them to respond to customer requests within 24 hours or have a very good reason why they couldn’t. Reports about this message were carried by the Wall Street Journal and its ugly step-sibling, Fox News. Consequently, the message reached one of Rometty’s key constituencies, the most special IBM clients–investors–soon after its in-house broadcast.
Sadly, the message went out nearly a week, not 24 hours, after investors and employees learned just how badly IBM had fared in the most recent quarter, missing some Wall Street estimates and shedding 10 percent of its market capitalization. Some of them probably had urgent questions like, “How come?”
Yep, IBM is in dire straits. It has severe problems in hardware sales and revenue in the segment that brings it the greatest profit, software, is off sharply in the most recent quarter from the pace of the prior three months. IBM says the dip reported for the first quarter of 2013 is a temporary aberration and promises to make up for lost revenue and profit during the remainder of the year. But it is not clear that IBM’s plans and forecasts are based on a proper understanding of emerging trends in information technology and, more particularly, IBM’s role in that unfolding future. If the information and analysis on which Rometty bases her decisions is incomplete or just plain wrong, the consequences could be severe.
IBM’s hardware business has been dying for decades. IBM sold off its client computer business, which had been a big factor since the debut of the PC in 1981, about nine years ago, at the end of 2004. Two years earlier it had sold its disk drive business to Hitachi. Eleven years prior, in 1991, it had sold its iconic Selectric typewriter business and related operations to Lexmark, a company formed to acquire and run the spinout.
This year or next, if the rumors pan out, IBM will sell its low-end server business (and possibly a lot more than just that slice of its hardware segment) to Lenovo. The speculative stories minimizing the predicted disposal of assets suggest that IBM will continue to make Power boxes and their cousins, mainframes, and that it might also keep building high end X86 processors, too. Basically, the gossips assert, IBM will lop off the weakest third of its computer manufacturing business. Like the hardware business as a whole, that portion of IBM’s business is losing money. Precisely how much money has gone down the drain is invisible to investors and customers. Only IBM’s bean counters and a handful of top managers might know the real story. It is possible that nobody near the top of IBM really has it figured out.
The software story is even more tragic than the hardware mess. IBM’s software has produced great results for Big Blue in recent years, despite arduous conditions in the financial climate. But IBM, with a history that includes pioneering work in assemblers, compilers, interpreters, database management systems and utility programs hasn’t been a major developer in quite a long time. Since the days of Gerstner, who acquired Lotus, and by some accounts even before that, the company has increased the size and scope of its software product portfolio by acquisitions not invention.
More to the point, while IBM claims, with some justification, that it is the leader in social software for large enterprises, that distinction is more important to the sales forces of the big research companies like Gartner and IDC than to the real world. In the real world, social media is typically invented by college students (or dropouts) and grows more due to the pull of enthusiastic users than the push of the developers or marketeers. It is a game for the young, creative, and ambitious, not the more settled, older folk who run IBM and all the other mature software companies.
IBM isn’t alone in this regard. Oracle isn’t very inventive anymore. Microsoft may imitate rather than acquire, as it has developing operating systems for mobile devices, but it, too, doesn’t have much of the magic that fuels significant invention. Google still has its mojo intact as does Apple, but even these two lively sources of software seem to struggle more with each passing year. Companies, like living creatures, age as long as they remain intact.
Nevertheless, it remains possible for IBM to grow, even in difficult times, even after its leadership has slipped. For inspiration, Rometty might want to review the process by which Gerstner saw the services opportunity and then seized it.
At the time, two decades ago, IBM entered services in a big and inimitable way. What eventually became IBM’s services segments–which grew by both invention and acquisition, notably the purchase of the consulting business built by accountants Price Waterhouse–were the result of Gerstner’s observation that its big customers were spending as much if not more on computing personnel as they were on hardware. These employees were developing and maintaining apps, many of them home grown. Also, a growing number of users’ apps were based on commercial products the users enriched and customized. In addition, Gerstner and his executive team saw that the service bureau business, epitomized by companies like EDS (part of Hewlett-Packard when that company got a bad case of IBM envy) not only picked up revenue that IBM’s customers would otherwise spend internally, but that the hosting outfits exercised quite a bit of influence over the choice of software run by users and the pace at which customers moved forward to more advanced versions of various software products. Adding to the appeal of this opportunity was the leverage large service bureaus had over software vendors’ pricing. Generally speaking, companies like EDS could license software at reduced prices and retain the savings, which fell right to the bottom line.
Meanwhile, the server business, which Rometty might soon shed, has become a drag on users’ ability to make progress. The software and services offered on unique legacy systems, from mainframes and Power to Sparc and Itanium, were always trying to catch up to successful systems and applications built on low-margin commodity equipment. There is no simple cure for this lag. The process of catching up requires a lot more than just a bunch of application coding. It requires the development of tools and techniques or the adaptation of these utility packages from the X86 and perhaps soon the ARM environments.
Just as Gerstner saw and seized the services opportunity more than two decades ago, and reorganized the rest of IBM to allow it to move vast expenditures from customers’ internal budgets to IBM’s services groups, Rometty will have to define and exploit the next huge category of customer expenditures that remains largely outside the reach of Big Blue. That opportunity, which may ultimately be known by a new name, is mobility. It includes the development or endorsement of new client hardware that includes a growing panoply of sensors, the creation or reshaping of the operating environments on those devices, the creation and popularization of apps that use all the features of the mobile devices as well as their networks, and the establishment within IBM of huge computing facilities that will ultimately generate the revenue IBM is losing as its decrepit hardware and ancient software businesses waste away.
To properly gain purchase in this emerging future, IBM may have to undergo some painful adjustments, as it did during Gerstner’s first few years. One particularly difficult example will involve the deprecation of what IBM calls (with poor accuracy) its enterprise social media effort. Social stuff, from Facebook activities to CRM apps for mobile clients, is just a part, and in fact a relatively shrinking part, of mobile computing. Similarly, IBM may have to learn to talk less about big data, which sounds too much like big costs, and talk about results, which can be made to sound like things customers can chew and swallow in digestible quantities.
The time is ripe for IBM and Rometty, if both can just think.