Note: Updates to this article linked below...
IBM’s first female CEO, Virginia “Ginni” Rometty, is in after Sam Palmisano parachutes out with $127 million, but not until he leaves a wake of wreckage in his trail. Ginni will have big challenges to overcome if she is to be successful leading IBM, and in this blog, I will outline the Top 10 Reasons Why Ginni Rometty Will Fail as IBM’s new CEO.
1. IBM Forgot Who They Were. The “M” in IBM is for Machines. Machines for International Businesses; that is who IBM was. Who is IBM today? Somewhere along the way, IBM figured out that it was much cheaper to sell services than it was to produce goods, and so they focused their efforts on these “high margin” services instead of equipment that was capitally intensive, was quickly commoditized, and was not able to sustain such a strong business model. What has happened since is that the services business is now impaired, not able to generate the kinds of profits IBM wants, and is now the source of huge cost cutting measures to try to save it (or prepare it for sale). Ironic to be sure, but IBM used to build things, they used to build things of high quality, and they used to service those things extremely well. Now, they are increasingly focusing their business around sales guys who sell services, and services people who are increasingly low skilled because they are cheaper than highly skilled resources. Hmmm, something may be wrong with this strategy. If Ginni’s not able to create a new understanding of who IBM is, she will fail as its new CEO.
2. Ginni Has No Vision for the Future of IBM. Or if she does, she hasn’t told anyone yet. Since becoming CEO, Ginni only promises more of the same from IBM -- continuing to pursue more “high margin” areas in the business --- YAWN! IBM needs a new vision for the future, not the same old boring rhetoric. What will *her* vision be for IBM, and how will she make that a reality? When Gerstner devised this high margin pursuit strategy, it was a tactic to save a dying company, not a complete vision for the future. IBM hasn’t been able to move beyond this temporary fix to the next evolution of what it will become in the future. If Ginni’s not able to clearly articulate her vision for the future of IBM, and if it’s not substantively different from what it is today, people won’t believe in it and won’t rally around her, and she will not be able to save IBM, and will fail as its new CEO.
3. IBM Executives are out of Touch. IBM has gone through major transformations before, and the last major transformation was designed to make the company more lean, more efficient, and able to make better decisions. One of the stated objectives of that reorganization was to reduce bloat, simplify management, and connect the company to the decision makers so they would make better business decisions faster and more effectively. Today, IBM has more layers of management than it did before these efforts, and that executive bloat has not only cost the organization more money, it has further insulated top decision makers from developing a real understanding of the business, and therefore their decisions are not as good as they can be. What’s worse; there is no real accountability for these bad decisions because they don’t see the real field impact, and are not able to decipher what’s working and what isn’t, rendering them as useless politicians that merely manage their careers. Her closest advisors will be giving her junk advice. If she can’t figure that out and slash through it, she’s done. Also, if Ginni can’t slash management layers, improve decision making, and create more accountability with (far fewer of) these career IBM politicians, she will fail as IBM’s new CEO.
4. IBM’s Sales Culture is Poison. IBM’s sales culture has nearly ruined the company as many of its executives have no real knowledge about the products and services they sell, rather an obsessive desire for more “high margin” sales. IBM’s sales aspirations, and its plan to achieve those objectives, will ruin the company if not revised. IBM has developed growth objectives for earnings, and all indicators of the plan to achieve these aggressive targets seem to come at the expense of jobs, primarily jobs based in the USA – in favor of shipping them overseas, as this is thought to be ‘less costly’. The scale of a reduction required to achieve the aggressive growth targets for earnings suggest that while executives and sales folks will stay, most everyone else will need to go. The staff changes will require massive cuts in technical folks. The very same technical wizards who invent the products, get the patents, establish a new and innovative technology that can create a dominant market position are the ones that will need to go to achieve the targets. IBM’s sales culture and its current strategic plan will kill IBM if Ginni can’t stop it, and so far, she is only promising more of the same.
5. IBM’s Executive Compensation is Misaligned. IBM has aligned executive compensation to its earnings per share targets, and if the executives achieve their targets, again, primarily by downgrading skilled workers in the USA, and moving labor from the USA to lower cost countries, which will be a move that kills the ability of the company to innovate and solve complex problems, they get stock incentives. This executive compensation misalignment continues to drive behaviors towards activities that are killing the organization, yet the strategic plan hasn’t changed, nor has the executive compensation arrangement changed since Ginni’s arrival. If this continues under the current model, the executives will make out, IBM customers will suffer, a great number of IBM employees will lose their jobs, and a great American institution will go down in flames. Ginni needs to change where she places the cheese if she wants to change the behaviors of her executives, but again, that starts with a new strategic vision, and that has not yet been espoused in a clear, articulate and compelling way; in fact, quite the opposite. If Ginni can’t reset IBM’s executive compensation plans to better align them to the right behaviors to foster growth, innovation, quality and excellent service, she will fail as IBM’s new CEO.
6. IBM’s Rape, Pillage & Burn Acquisition Strategy. This is an area where IBM deserves some credit. At least they get the sequencing right. If they were to burn first, they wouldn’t be able to rape & pillage, so at the very least, let’s give them credit for knowing how to ruin a company properly. One of the ways IBM has cloaked its demise is to continue to buy highly profitable businesses with the hoards of cash the company controls. Once they do buy a new company, however, as a matter of routine, they saddle those organizations with bloated IBM processes, force them through standards processes that strip out much that was special, unique and cool about the acquired entity, they increase charges back to the mother ship to siphon off profits, and ultimately, they make the company no longer able to satisfy its customers, who eventually leave. Once IBM has sucked out all the blood, they leave the body for dead and go find another new company to buy (and subsequently ruin). If Ginni would change this model to be one of finding innovative companies that offer excellent services and provide high quality products, and helping those companies grow and develop, IBM could turn it around, but all internal signs indicate a continued focus on lowering skills, slashing R&D, eliminating innovation, and selling more promises with fewer deliveries of those promises. If this acquisition strategy persists, Ginni will fail as IBM’s new CEO.
7. IBM’s Offshore Model will kill its Services Business. I hear a lot of people say that IBM is a services company. Well if that’s the case, they are actively trying to commit suicide by killing off their services business. Over the last five years, IBM has aggressively pursued an offshore staffing model, seemingly believing that more unskilled workers are a more effective way to do business than having fewer higher skilled workers. Apparently, IBM doesn’t understand that you can’t outsource making a baby in a month to nine women in India. Not only does this create problems with logistics, language, communications and other issues, it eliminates the organization’s ability to solve complex problems. Many of our clients who subscribe to this model are dramatically disappointed with IBM’s lack of effectiveness on resolving issues, and amazed at how long it takes, and how many people it requires to get resolution. The aggressive offshore model particularly affects IBM Global Services, which represents a disproportionate share of revenue and employee head count, so the impact here will be severe. In the last 18 months, NET(net) has noticed a sharp increase in the number of disenfranchised clients who have terminated their agreements with IBM and sought arrangements with other suppliers. If Ginni allows the IBM Offshore model to continue in Global Services, the company will further convolute its ability to execute, become less able to solve complex problems, and will continue to lose more business at a faster rate.
8. IBM Sells Futures. What is IBM’s strategy? Smarter Planet? No, my laundry machine doesn’t do the wash when it knows I have plenty of excess hot water. No, my irrigation system doesn’t water the lawn when water prices are the lowest. No, my refrigerator doesn’t order groceries for me from the store when I’m running low. No, my car doesn’t sense when I am driving angry and schedule me in for a massage. IBM needs to stop selling futures, and just make stuff that works, service it well, and help its customers get value from it. IBM seems less capable more so today than perhaps at any time in recent history to solve complex problems, and it’s too busy worrying about airing commercials that look like a United Nations conference than it is about building stuff that works. It seems like IBM has been selling futures for as long as everyone can remember, and for decades, they have gotten away with it. It seems more and more however, customers are less willing to buy the hype, and are more concerned about buying stuff that works.
9. Watson is not the Panacea. One thing is clear, as IBM has studied various business models, it has determined that vertically integrated systems like those found in Big Data, (where the hardware and the software of these systems are sold together as a bundle) are highly profitable, and do not require a lot of people to service them. This idea is seen predominantly in Watson, IBM’s enterprise version of Apple’s Siri, a hugely expensive and likely a highly profitable, amalgamation of hardware and software, bundled together in a highly valuable enterprise application. Could this be where IBM is heading? They want to make huge enterprise class iPhones with Watson instead of Siri? Who knows. What is clear is that many of IBMs investments have been around enterprise infrastructure, enterprise applications, analytics and Big Data, many of the key ingredients for Watson-like functionality. This is a general industry trend as organizations like HP, EMC, Oracle and others are on a similar path of selling vertically integrated systems with hardware and software bundled into a supposedly “highly tuned” bundle that offers greater overall value. In our experiences, buying the integrated system certainly costs a lot more than buying its individual parts, but our clients have questioned the supposed “highly tuned” claims, and don’t report any more value than they would have otherwise achieved by buying the parts on their own.
10. IBM Seems to be Preparing to Sell is Services Business. Like IBM jettisoned the PC business years ago, citing a highly commoditized market and the inability to make enough profit, IBM’s services business is under similar pressure and may be being secretly prepared for sale. Feedback from insiders suggests that the cuts are so deep in recent months, that there is really no other viable explanation other than the services business is being prepared for sale. If this is true for services, it is also true for many other business units at IBM. Will Ginni’s legacy be overseeing a garage sale of IBM businesses? If Ginni can’t stop IBM from selling off its business units that do not drive enough bottom line profit, she will not only fail as its new CEO, she will go down in history as IBM’s worst CEO of all time.
Ginni, you have many challenges ahead of you, and we wish you all the best! It would be great to see you turn IBM around, but that leadership starts with a strategy that’s designed to impress more than just Wall Street investors. To this point, we have not seen much that would change our views on the top 10 points above, which makes us concerned that your leadership at IBM is “more of the same”. Our clients could really benefit if IBM became great again, so we are hopeful you will announce a new vision for IBM that includes making great things, helping clients get great value from those things, and servicing those things extremely well. Our clients benefit with a strong IBM in their corner, helping to deliver high value low cost solutions that result in an improved business.
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UPDATE: It seems Ginni may be failing faster than even I had predicted. Read my recent blogs on this topic:
The latest on her 2020 ouster here.
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