The Downfall of IBM

First in a series. This is my promised column about IBM -- the first of several on the topic, all to be delivered in a series. The last time I wrote at length about Big Blue was in 2007. I have been asked many times to revisit the subject, something I haven’t wanted to do because it is such a downer. Writing the last time I hoped the situation, once revealed, would improve. But it hasn’t. And so, five years later, I turn to IBM again. The direct impetus for this column is IBM’s internal plan to grow earnings-per-share (EPS) to $20 by 2015. The primary method for accomplishing this feat, according to the plan, will be by reducing US employee head count by 78 percent in that time frame.

Reducing employees by more than three quarters in three years is a bold and difficult task. What will it leave behind? Who, under this plan, will still be a US IBM employee in 2015? Top management will remain, the sales organization will endure, as will employees working on US government contracts that require workers to be US citizens. Everyone else will be gone. Everyone.

Now industries and businesses change all the time because they have to or want to. Big companies and small have to adjust to the realities and changing reward structures of their markets and cultures. Or they change to better adapt to new opportunities. But what’s happening at IBM is different than that. It’s different because this incredible American success story, if it continues to follow its current course, will utterly fail. It’s different, too, because neither IBM management nor Wall Street seem to have the slightest notion of the peril facing the company. My deepest fear is they simply don’t care.

Fixation on Process

The first question we need to answer is why this is happening? I think much of that answer can be supplied by Apple co-founder Steve Jobs. In my film, Steve Jobs -- The Lost Interview, here’s what Jobs had to say about IBM, circa 1995. It applies just as well today.

If you were a product person at IBM or Xerox, so you make a better copy or a better computer, so what? When you have a monopoly market share the company is not any more successful. So the people that can make the company more successful are sales and marketing people and they end up running the companies and the product people get driven out of decision making forums. And the companies forget what it means to make great products.

Sort of the product sensibility and the product genius that brought them to that monopolistic position gets rotted out by people running these companies who have no conception of a good product versus a bad product. They have no conception of the craftsmanship that’s required to take a good idea and turn it into a good product and they really have no feeling in their hearts usually about wanting to help the customers.

This is the first thing to understand about the IBM of today: the company is being run by executives who for the most part don’t understand the products and services they sell. The IBM of today is a sales organization. There is nothing wrong with sales if you can also deliver, but increasingly IBM can’t deliver.

The reason IBM can’t deliver is also explained well by Jobs. It’s IBM’s maniacal fixation on process, once a strength but now a cancer.

Companies get confused. When they start getting bigger they want to replicate their initial success. And a lot of them think well somehow there is some magic in the process of how that success was created so they start to try to institutionalize process across the company. And before very long people get very confused that the process is the content. And that’s ultimately the downfall of IBM. IBM has the best process people in the world. They just forgot about the content.

In this instance content means the deliverable, whether a product or service. IBM smugly thinks it knows so well how to do things that they can export their entire business model to cheaper labor forces in less expensive places to do business. While this is correct to a very limited extent it has been embraced as religion in Armonk.

Offshore Rising

IBM seems to believe it is cheaper to replace a skilled worker with two or three unskilled workers to do the same job. That is like hiring nine women to make a baby in one month. While it looks good on paper it is not practical and is not working. The language barrier for IBM’s Indian staff is huge, for example. Troubleshooting, which was once performed on conference calls, is now done with instant messaging because the teams speak so poorly. Problems that an experienced person could fix in a few minutes are taking an army of folks an hour to fix. This is infuriating and alarming to IBM’s customers.

IBM’s five year plan ending in 2010 was supposed to double EPS from just under $5 to about $11. (Today it is closer to $13.) During the last five years there was an accelerated push of jobs offshore for cost reasons, high attrition rates, and longer product release cycles. The next five year plan for 2015 is to again double EPS to about $20. Can this be done? Probably, but the particular way they are going about it is also likely to destroy IBM.

IBM’s biggest money maker is its Global Services business, which also employs the most people. Ten years ago Global Services was an even larger part of IBM but the company is now making a lot less on its contracts, and the turnover of business is brisk. It is in Global Services where you see the most jobs being shipped offshore. But the problem is the offshore teams often lack the skill and experience to do the work, problems mount, customers like (most recently) The Walt Disney Company get upset and leave.

I’ll be providing more details in subsequent posts, but I want to end here with a point about how patently unfair and simply stupid this is. When I wrote about IBM five years ago the cost reduction program was called LEAN and it was supposed to mold from Big Blue a hyper-efficient business machine. Yet today IBM has more layers of management than it had in 2007. These extra layers come at a cost both in dollars and in accountability. Those extra layers insulate IBM’s top management from responsibility for their decisions. At the highest levels in Armonk they think things are going beautifully because they are out of touch with the reality of their own company.

Today at IBM the US workers who try to save the business are the first in line to lose their jobs. Management accountability is gone. The people who mess up get to keep their jobs; and those trying to retain the business lose their jobs.

How fair is that?

Reprinted with permission.

Also in this series: "Why is IBM sneaking around?"; "It's a race to the bottom, and IBM is winning"; "How do we just fix IBM?; "IBM as at a tipping point"; "Today's IBM, rotten to the core"."

Photo Credits: Tomasz Bidermann/Shutterstock (top); wendelit teodoro/360Fashion (Cringley -- below)

Robert X. Cringely has worked in and around the PC business for more than 30 years. His work has appeared in The New York Times, Newsweek, Forbes, Upside, Success, Worth, and many other magazines and newspapers. Most recently, Cringely was the host and writer of the Maryland Public Television documentary "The Tranformation Age: Surviving a Technology Revolution with Robert X. Cringely".