How to fix IBM

Given IBM’s earnings miss last week and the impact it had on company shares I thought rather than just criticizing the company it might make better sense to consolidate my ideas for how to fix IBM. Here they are.

Early in his tenure as CEO, Sam Palmisano made changes that created IBM’s problems today. IBM customers are buying fewer products and services. Revenue has dropped each quarter for the past ten. Sam’s changes alienated IBM customers, many of whom are ending what has been in many cases a multi-decade relationship. No amount of earnings promises, no amount of financial engineering, will fix this problem.

IBM forgot the most important part of running a business. While shareholder value is important, it is customers that make business possible.

Under Sam’s leadership IBM began to cut quality, cut corners, and under-deliver on its commitments. IBM squeezed every penny out of every deal without regard to the impact it would have on customers. And those customers have paid dearly. The reputation IBM earned over a century was ruined in a few short years.

What Ginni Rometty and IBM need to do now is simple: Stop doing the things that are damaging IBM. Go back to customers being a corporate priority. They are after all the folks who generate IBM’s revenue.

The Services Problem -- IBM needs to fix Global Services, the company’s largest division touching the most customers and a catalyst for IBM sales. For IBM to succeed it needs a strong and effective services organization. IBM’s Cloud strategy, for example, cannot be financially successful without Services. If Services fail, IBM will fail. It is that simple.

IBM’s Global Services have seen the worst cost cuts and the most layoffs. These cuts have hurt IBM customers. Many contracts have been canceled and sales lost. IBM is no longer considered to be a trusted supplier by many of its customers.

To fix IBM it needs to invest in Global Services and in its people. Yes, there are already quality improvement programs and automation projects, but these efforts are new, few, and small. Their focus is at the account level, not the organization. Most of the problems are at the leadership level, where profit has been the only priority. Global Services is in crisis and IBM needs to get serious about fixing this organization.

IBM is hemorrhaging talent on a global scale across all divisions. It cannot retain good people. IBMers, as they call themselves, are underpaid, neglected, and have been abused for years. Most of IBM’s 400,000+ employees are no longer working for the company. Their jobs have become nightmares. They are prevented from doing good work. They know IBM is neglecting its customers, but they are powerless to do anything. The best they can do is to try to survive until reason returns to IBM’s leadership, if ever.

Every IBM staff cut now has a direct impact on revenue. After the 1Q 2014 earning miss IBM hit its sales support teams hard with layoffs, making it immediately much harder for IBM to sell products and services. Customers became frustrated and shopped elsewhere. In 3Q 2014 revenue took a big fall as a direct result of this earlier bonehead move. Formerly growing lines of business in IBM are now declining. After 10 years of continuous layoffs, any subsequent reduction has a direct and immediate impact on business. IBM can no longer afford to cut staff.

IBM needs to stop staff cuts and start doing the things needed to retain its good workers, including paying them better.

Global Services is horribly inefficient. There is very little automation. The business information systems are poor. IBM has too many people managing accounts and too few servicing them. Global Services is in serious need of a business process redesign and better information systems. For the last 10 years all IBM has done is replace skilled American labor with cheap offshore labor. IBM’s workforce of 400,000 workers looks impressive. Ask IBM how many of them have minimal education and have worked for IBM for less than 3 years? That huge workforce is now a hollow shell of a once great company.

If IBM can invest $1.2 billion in the Cloud, why can’t it invest $200 million in Global Services? A wise investment could cut in half the number of people needed to manage IBM’s accounts. It could allow IBM support teams to operate proactively instead of reactively. The client experience would be greatly improved – fewer problems, things running better. If IBM’s Services customers were happy, business retention would be better, more products and services could be sold. This division could again be the business catalyst of the corporation. It is time to manage it better and make modest investments in it.

To look at this another way, if IBM continues to neglect Global Services and does not invest in it, then those billions of dollars in investments in Cloud and Analytics will be wasted. If IBM is to grow again, Services must again become IBM’s most important business. As goes Services, so goes the whole corporation.

The Cloud Problem -- Cloud computing is one of IBM’s gambles for future prosperity. Cloud means different things to different people but what is important for IBM is to understand the business reasons behind the Cloud. It is part of an evolutionary process to reduce the cost of computing. This means less expensive computing for customers and lower profit margins for IBM. It means reduced hardware sales. It implies there will be reduced support costs from Services, too. This is the opposite of what IBM is now telling itself about the Cloud.

For IBM to be profitable in Cloud computing it needs to provide value-added services with its Cloud platform. Most Cloud offerings are a Platform as a Service (PaaS). There isn’t enough profit in PaaS for IBM to get a good return on its multi-billion dollar investment. IBM needs to provide additional things with its Cloud service -- Services and Software as a Service (SaaS). To provide Cloud SaaS IBM needs to have software applications that the market needs. It doesn’t. The biggest market for Cloud Saas is not with IBM’s huge legacy customers, it is the other 80 percent of the market consisting of not-so-big companies that IBM has served poorly (if at all) in recent years. They will want something that is cost effective and "just works". IBM does not have in its product portfolio the business applications these customers need. In this area IBM is dangerously behind and faces stiff competition from firms like Amazon, Microsoft, Google -- even Oracle. IBM urgently needs to invest in the software its next generation of customers will want to use.

The Software Problem -- IBM’s software business was one of its brighter stars in 2013. It enjoyed sales growth and good profit margins. The problem is IBM’s software business is far from where it needs to be. To understand IBM’s situation in software, look at Oracle. For years Oracle was a database company. Today Oracle is much more than a database company. It has developed and acquired a portfolio of business applications. If you want an HR system or an accounting system you can find it at Oracle. When it comes to software IBM is still very much in the 1970s. It sells the tools their customers need to write their own business applications. If you have a business and want to purchase finished software you can use to run your business, IBM will probably not be your first choice. While IBM’s software division has been growing nicely, its long-term potential is limited because it is not aligned to the needs of the market.

IBM’s current management approach has crushed the life from most of the software companies it has purchased. Software is not a business you can carve into pieces and scatter all over the world. Software works best when there is a short and tight communications link between the customer and a dedicated product development team. Product development needs to understand the needs and directions of the customers, it needs to be empowered to design new products and versions that will increase its value to the market, and it needs to be enabled to produce those products and versions quickly and efficiently.

IBM’s announcement last week of running SAP HANA is a step in the right direction. Though I think SAP will be making more money on the deal than IBM.

Here’s the key: every company in existence needs an accounting program, order processing, inventory management, distribution and other types of "run your business" applications. All of IBM’s big customers already have the applications they need. They’ve had them for 25 years. It is all the smaller companies that could use better and cheaper application. These organizations make up 90 percent of the IT market and are not served well -- if at all -- by IBM. This is where the big money in Cloud is.

IBM used to have a lot of "run your business" software. Since the demise of the old General Systems division in a political bloodbath a lot of this software has faded out of existence. This is a huge problem for IBM.

Oracle bought PeopleSoft and got a very good accounting system and a very good HR system. It has bought other companies who sell "run your business" software. Computer Associates (CA) has bought many of these types of businesses too. If you want to buy an accounting package, I don’t think IBM would have anything to sell you. It probably doesn’t have anything it could put in the Cloud, either. But Intuit (Quickbooks) has an accounting package and figured out it can make more money be selling it as a service. So did Salesforce.com. These companies are years ahead of IBM.

For Cloud to become a big money maker for IBM, IBM needs to buy applications -- big time. Maybe it should buy Intuit, Salesforce, etc. Could it afford to buy CA? Can it afford not to buy CA?

Software as a Service (SaaS) is critical for IBM’s Cloud to be financially successful. Unfortunately today IBM does not have software that customers want to use or need for their business. IBM needs to be a lot smarter about its software investments and completely change how it manages this business.

The Mobile Problem -- IBM invented the first smart phone (the Simon) in 1993. Today IBM is completely non-existent in the mobile market. Apple and Google are the leaders; Microsoft has been working very hard and making enormous investments to get a foothold in this market. That said, Microsoft is light-years ahead of IBM. IBM has completely missed the biggest change in Information Technology in a decade. This should speak volumes about the leadership at IBM and why it needs a large scale change in management.

IBM cannot buy its way into the mobile market. If it isn’t working for Microsoft, it won’t work for IBM. Then again IBM does not have to make big acquisitions to become a big player. IBM needs to think differently. IBM should start by looking at the App Stores of Apple and Google. There IBM will find tens of thousands of applications, most of them written by individuals and small companies. This can be an archetype for a whole new IBM behavior -- creativity. IBM needs its vast workforce to come up with ideas, act on them, and produce mobile applications. IBM should have its own App Store. This will give a way to learn how to use the new mobile platforms. It will provide a way for the application developers to interact with IBM’s customers. Over time IBM will learn and develop mobile technology that is useful to IBM’s customers. This is a market where seeing and using a live application is much better than marketing copy in a sales presentation.

IBM should be partnering with Apple, Google, and yes -- Microsoft. There should be no favorites. IBM already has a mobile deal of sorts with Apple but it is key to understand that it has so far resulted in a total head count increase in Cupertino of two workers, which shows what Apple thinks of IBM. Apple is not enough.

IBM should license development tools for every mobile platform. These tools should be made available to any employee with an interest in developing a mobile application. IBM should make it easy for employees to get mobile devices, especially tablets. IBM should provide internal infrastructure -- servers, applications, etc. with which to develop and demonstrate mobile computing. The better IBM understands mobile technology, the sooner and better IBM can support its customers. There is a place in the mobile market for IBM. It must make up for lost time and become everyone’s trusted partner.

The Quality Problem -- The best definition of quality is "delighting the customer". Quality means being able to do the same thing tomorrow, better, faster, and cheaper. Quality is continuous improvement. It is possible to improve quality and at the same time reduce labor and costs. Companies that have mastered this skill went on to dominate their markets. Quality is a culture, an obsession. It must start from the top and involve everyone -- IBM’s executives, all levels of management, employees, suppliers, even customers.

Sometime soon one of IBM’s competitors will implement a serious Continuous Quality Improvement program. When that happens, IBM will be toast. History has shown that when a company trashes its quality, neglects its customers, and makes earnings its only priority -- bad things happen. Over the last 50 years, the USA has lost many industries this way. If IBM does not get serious about quality its survival will be at risk.

The Respect Problem -- Today in IBM "Respect for the individual" is dead. So is "Superlative customer service". Every decision made by IBM for the last 10 years has been to find ways to spend nothing, do as little as possible, and get to $20 EPS. IBM’s workforce is operating in survival mode. They have no voice, no means to make IBM better, and they are certainly not going to stick their necks out. IBM is squandering its greatest resource and most of its best minds. Most of IBM’s businesses are declining. As business declines IBM cuts staff. Quality and services get worse and business declines even more. Execution gets worse. Every day customers trust and respect IBM less. They buy less. IBM needs to break this cycle of insanity. It needs to start treating their employees better and mobilize them to save the company.

The Leadership Problem -- IBM has no vision, none, nada, zip. CEO Ginni Rometty and her cadre have no clue how to fix what’s wrong with IBM. And even if they did, they are too tainted by the current state of the company -- a state they created. IBM executives are for the most part in a state of paralysis. They don’t know what to do. They know their business has serious problems. Even if they knew what to do they’re afraid to act. Ginni and the $20 EPS target had most of the senior executives frozen from doing anything. This type of management style can be fatal for business. The CEO should be helping each division become more successful. Because $20 EPS has been the only goal, IBM’s senior leaders have become unable to manage their businesses.

Here’s why current management can’t do the job. If the current VP-level managers at IBM (the only level, by the way, that’s allowed to even see the budget) take action to spend some of the profit to fix their businesses, they’ll be in hot water with Ginni Rometty and IBM’s culture of blame simply for trying to do something. Just watch: Ginni’s plan to save the company will involve further cuts. You can’t cut your way to prosperity. If they take action and the fix doesn’t work, then they’ll be punished for trying. So the only obvious option current management seems to have is stand by and watch Ginni and the finance department kill their divisions.

IBM has been here before, back in 1993 under CEO John Akers the company cratered, booking an $8 billion loss on $40 billion in sales. That’s when, for the first time in its history, IBM turned to an outsider to be CEO. They should do this again -- find another Gerstner, ideally a better Gerstner, because he had a share in creating the current crisis, too.

Ginni Rometty has to go and with her much of IBM’s board.

The Bottom Line -- IBM has never been the low cost provider of anything, yet a company of IBM’s size and talent should be able to be the undisputed lowest cost, highest volume supplier in the industry. IBM’s leaders are mostly from the sales organizations. Those with expert operational and leadership skills don’t go far in IBM. A new way of thinking is needed in every corner of IBM. Every line of business should be asking itself "how can we become the best, cheapest, and biggest supplier?" Every line of business should have well reasoned plans, funding to act on those plans, and a green light to proceed.

Thankfully IBM gave up on its 2015 goal of $20 EPS. Unfortunately IBM still plans to continue cutting staff to reach prosperity, which is insane. By now it should be painfully obvious this is destructive to the company. IBM needs to step back and be honest with itself and its shareholders. It needs to set reasonable budgets and financial expectations. It needs to spend more on its people and on improvements. IBM needs to regroup and repair the company. For the next three to five years IBM should plan on turning in lower, but still good profits. If it does this by 2020 it could again be a business juggernaut.