Dear friend, Deep Throat here again. Some time has passed since my last correspondence (https://www.thelayoff.com/t/17rD5xvj) so I thought I would deliver some new insights. This time to focus on; Products remain/go. People, RA’s, Band AA churn, and Predictions. Also, I want to introduce the phrase, “What choice do we have?”
Before we reach the 3P’s though, a brief history lesson. As you know, IBM announced the creation of SpinCo as a vehicle to dump 90,000 people, primarily from GTS. Plus as I explained last time, all the prerequisite back office people to make it work; Finance, Marketing, Legal, etc.
I’m not sure if you were on the Q3 announcement call, but I found it interesting that Krishna called NewCo SpinCo. You could tell it was a slip of the tongue. This is interesting as Spin is a Bain term, and like the workforce reinvention (upskilling/reskilling) from BCG, Bain is deep into this. Their own materials:
“In today’s disruptive environment, divestitures are instrumental to accelerate the transition to a future portfolio; they release the time, talent, energy and capital tied up in nonstrategic businesses. In practice, many companies delay and under prepare for divestitures, resulting in value leakage”
I have no idea what they mean by “value leakage,” but perhaps they mean the company needs a Bain Depends Undergarment or something. Regardless, I can assure you Bain and BCG have been riding rampant inside IBM for some time now. Bain believes that spinning off a division or so will release value. The real world says otherwise.
Not long ago, HP was simply HP. Then Meg Whitman caught the BCG/Bain bug. In 2014, the old HP had a market cap of ~74b. In November of 2015 HP spun off HPQ which is all the personal printer stuff, PC’s etc, and HP became HPE. Then, follow me here, HPE spun off its services arm (sound familiar), and merged it with CSC to become DXC. (Don’t ask).
Today? HPE’s market cap is ~$12b. HPQ’s market cap is ~$25b, and DXC is ~$5b. Grand total ~$42b. In other words, all that effort, employee pain, and spin-offs resulted in not only far less revenue, but it destroyed corporate wealth at the same time. Quite an achievement.
As I mentioned last time, IBM simply doesn’t have the financial firepower to to buy its way into the market. IBM currently spends ~6b a year on dividends, and ~6b a year on RD&E. However we are loaded with debt. IBM can’t pay off debt, invest in RD&E and pay shareholders on this scale. This is the reason for SpinCo. On the call both Krishna and Kavanaugh went out of their way to say they will INCREASE the dividend over time. This is wishful thinking. To see how dire the situation is, IBM made it known that six directors invested in IBM stock. When you look at the accounts and wealth of these people, it is peanuts. And reeks of desperation.
Finally I want to put to bed that SpinCo is a way to get IBM ready to be sold. This is categorically false.
Products, People and Predictions.
Products
IBM’s focus is to be Hybrid Cloud and AI. Clearly anything with “Cloud” or “Hybrid Cloud” in its name should be safe. And generally this is so, but with some caveats. Blockchain, Red Hat, mainframe, are not going anywhere. Re mainframe, and those who think IBM will use this for growth, have not been paying attention to mainframe revenue over the years. Yes, its highly important, but NOT a growth engine. Software that is key such as WebSphere will also stay. And even DB2. That leaves hundreds of smaller products that could be shut down, as IBM attempts to focus its limited RD&E budget. This is not an easy task, so I don’t know how long all this will take. As for AI, I will believe this will drive revenue growth when we invest enough to make the damn thing work.
People
There are many moving parts here, so I thought I would start at the top, and work my way down. SVP’s (Band AA), are clearly in the mix. Whether or not Krishna gets his arms around several AA’s who have failed remains to be seen, but (and maybe this is wishful thinking), I hope he will start with Finance, Strategy and Marketing.
Kavanaugh (CFO), has failed. I don’t see anyway to sugar coat it. If the plan was to add more debt, less revenue, and less profit, then he succeeded. Something tells me that wasn’t part of his Checkpoint. Krishna needs to clean house in Finance, AA and some A’s. The same is true for Strategy. Or it was, until very recently, then I made the unfortunate observation that it’s going to get worse. Ken Keverian, who reported to Whitehurst has left the company. Again, if Strategy’s objective was to take on debt, lose profit, and k–l moral, I’d like to see that slide. Keverian was from BCG. The bad news is Keverian has been replaced by Roger Premo (Band A) who is also BCG alumni. As I said, Bain/BCG are now deep within the IBM mindset. And as BCG is the go-to team for “reskilling/upskilling” this tells me this strategy is NOT going anywhere.
I wait with interest if someone can explain to me IBM’s marketing messages. Michelle Peluso is a favorite of Rometty’s. Once Rometty leaves, will Krishna do what is needed to clean house? I am beginning to have serious doubts.
Lets talk sales, which IBM call's GTM (Go to Market). IBM has long gone against AWS, GOOG and MSFT by insisting that 50% of sales can come from direct sales. In other words, customers will use self-service. This has led to a culling of the sales teams. I don’t see this ending. IBM has a complicated GTM structure, this is not a criticism, all large companies do, but many sales teams overlap. Some sell Cloud, some Hybrid Cloud. However, given CHQ’s total lack of appreciation of sales teams (Rometty), the embedding of Bain/BCG, I expect more layoffs here.
Which leads us quite naturally to other layoffs. Will there be more? Of course. IBM is so indebted, (and cannot dump too much onto SpinCo), that it feels it has no choice but to reduce headcount quite dramatically.
Predictions
SpinCo: As I pointed out last time, SpinCo/NewCo will take a major amount of energy from senior execs. There is no magic wand here. This is NOT a sophisticated process. I remember one time walking into a Band A’s office as he was trying to lay out a major reorg of Sales. He quite literally had a whiteboard covered with PostIt Notes with the names of Band B’s and C’s, the names of the dept they covered, as he attempted to move people around to the new format. When I asked him what the hell he was doing, he then proceeded to show how he would move one PostIt Note to another location on the board trying to get the reorg set. Don’t expect SpinCo to be any more sophisticated.
IBM has about 350,000 employees. IBM’s objective is to move to closer to 200,000 WW. 90,000 to SpinCo, leaves ~260,000. Then with the Hybrid Cloud/AI focus and the continued focus on Digital Sales, the fact that GTS is over-manned, some product teams going away, you end up with many more gone over the next 24 months. If IBM does this, with revenue of ~59b, then they are in the realm of ORCL on sales per employee. Nowhere near MSFT of course, but this is a baseline.
Band A and AA changes. When Krishna came on board, I was quite hopeful. He is a quiet, thoughtful man, who cares about his employees. Now with Premo in Strategy, the same faces in AA, unless Krishna cleans house in Finance which has hindered investment, and some other changes, I worry that nothing will happen.
Dividend. It’s simple. It’s untenable.
M&A activity: IBM will focus on companies in bite size form.
Outside odds predictions: IBM will end up like GE and Boeing. Still in businesses, independent etc, but a shrunken company bought low by management hubris. With a weakened stock price, falling revenue, (many Q4 deals are already being pushed out), and falling profit, don’t be surprised if activist shareholder start to sniff around. And, this is a long shot, while IBM won’t sell itself, I wouldn’t be surprised if we merge with someone.
Conclusions
The phrase; “What choice do we have?” More than once I have had A or AA tell me this in some form:
“We need to sell Thinkpad, there’s no future. What choice do we have?”
“We don’t have the right skills. Of course we need to upskill. What choice do we have?”
“Ginni wants a big deal. We need to buy (Any Name). What choice do we have?”
“No one likes RA’s. What choice do we have?”
“We are behind on Cloud. What choice do we have?”
The problem is that these are all reactive strategies. My worry is that we are so indebted that unless we bite the bullet and refocus on delivering customer solutions they actually want, IBM’s malaise is bound to continue. An AWS exec JUST told me it will have $50b THIS YEAR. Think about that. AWS alone will be almost as large as the new IBM next year ($59b). And AWS is NOT standing still.
I wish I had better news.
Your friend
Deep Throat