Hello everyone, your old pal Deep Throat here. I thought I’d go over a few topics, including; Q2 results (beyond the bu-----t), IBM’s competitive nature, where the real power resides, and of course layoffs. I will also touch on something that seems to strike a nerve, “Executives.” Yes, the catch all phrase for all the ills of IBM. “Those fu-----d execs, with their perks, RSU’s, and oily skin. They’re to blame.” I’ll get to that in a moment.
But first, layoffs. I know, I know. Where are they and what the he-l happened? I have said for months that post Kyndrell IBM would need to be ~225,000 strong. Given we’re at ~345,000 (after recent RA’s, add in ~14,000 from Red Hat) move 90,000 to SpinCo and we’re still ~40,000 over weight.
So a quick refresher. IBM doesn’t “do” layoffs like it used to. As we know, many many moons ago, IOW eight years, those laid off would receive a profile by age and location of those fired. No more. Now IBM slices and dices lay offs into teeny tiny pieces in order to avoid releasing this data. This is why layoffs in GTS, GBS, Marketing, OM barely make a ripple.
REMEMBER they’re designed NOT to draw attention to themselves. They are designed in particular NOT to hit the press. That’s the whole point. The 225,000 number is WW, but it wouldn’t shock me if IBM post SpinCo went lower. The recent EEOC ruling against IBM may affect some of IBM’s disclosures in the US, I can’t say, but the EEOC said they would monitor IBM’s behavior. Time will tell.
Finally, all the comments of people claiming to know numbers for each individual layoff is nonsense. The layoffs are not designed to be hidden just for external consumption, but for INTERNAL consumption too. Managers do not know totals outside of their immediate areas. (HR Band B’s, Finance B’s, GMs know. This is strictly on a need to know basis).
So, am I surprised the layoff machine hasn’t been more aggressive. Yes, I am. Is this still the rough target post Id--tic Named SpinCo? Yup. Allow me to explain that part.
Recently I had a long conversation with a Finance Buddy of mine, someone who was at IBM during the Gerstner/York era. (FB recently retired, but has great insight into the loopy mind that is IBM Finance under mob boss Tony Soprano. Sorry, Jim Kavanaugh).
In order to survive and keep paying the insane increasing dividend, my Finance Buddy pointed out that as revenue, which we all know is not growing fast enough, and to maintain margin, you have to focus on one thing, what FB reminded me is called “burden.” IOW, the fixed costs of the business. FB corrected me when I said this includes dividends, FB said the dividend is NOT considered “burden.” Shows how much I know about this stuff.
Anyway, FB pointed out that IBM has ki---d the competencies, (FB’s word), of excellence. So there is nothing left to cut without hitting bone, and as we’re there NOW, all that’s left is headcount, facilities, benefits etc. The largest cost of which is headcount. Reducing this has an immediate benefit within a rolling six month period. As revenue growth is slow, in order to spin up the P&L, we’re forced into this never ending spiral.
FB also said something else interesting. Harking back to the dark days of the mid-nineties, FB said that while IBM isn’t in that dire a situation, FB DOES see IBM having trouble with CASH. Cash on hand has dimmed for Q2 2021 to ~8b, a 42% decline YTY. Now while IBM has had similar amounts in cash, even as recently as 2016, it has never had such a large percentage DECLINE.
FB sums it up as; no revenue growth, no profit growth (in fact a decline despite the bu-----t propaganda, see below), and the dividend focus, is going to lead to a cash crunch without some cost cutting. FB also echoed my view that major acquisitions are off the table.
Lest you think I’m exaggerating or FB doesn’t know P&L from R&D, FB mentioned a few interesting items. As a Finance exec at the height of the extreme chaos when Gerstner came on board, FB told me an interesting story. IBM was in such desperate straights that York and his team (including FB), were even wondering if they could make payroll. Can you imagine? I’ve talked about York before, but those meetings where senior execs were told to make cuts, were imposed in order to stop the company from going under. I had no idea.
FB surprised me when they said, unprompted by me, that “IBM doesn’t know how to compete.” I was genuinely surprised, so I pushed FB on this. FB’s point was that as a company, IBM has always had a major product that ruled the market, and at high margins. It’s a birth right IOW. I pointed out that while Krishna is a lifer, he joined IBM just as the Gerstner/York period started, so surely he knew how bad it could get. FB’s response was that for IBM lifers, unlike Gerstner/York, the system that trains IBMers is based on this market privilege. FB said, “IBM just isn’t used to competing. It’s not part of the DNA.”
Now I’ll admit, I’m not sure if I agree, but as far as senior decision makers (band AA) seem to go, the current crop could fit FB’s profile. After all, action speaks louder than words.
Which leads me neatly to the “blame all the execs, and line ‘em up against the nearest wall,” mantra. I was going to explain in gory detail the differences from a D to an AA, in order to show where the real responsibility lies, but that would be way too boring. Example; “D is nothing more than a glorified 10 but with a nicer desk,” and so on. So be thankful I decided not to do that. However, the point of what I was going to type is still valid. Band AA’s, while seemingly all powerful, and clearly have control, to a point, for their businesses, the real power resides in a Triumvirate; CEO, CFO, and HR.
I have covered this before, but it’s worth repeating. When IBM decides on a major strategy, for example; headcount, investments, costs, etc. IOW, big ticket items, the SVP in charge of Systems doesn’t get to go, “Sure sounds great, but it’s not for me. Oh and can I still have an extra 500m for RD&E please?” So while whatever “it” is, is discussed, at the end of the day, the “it” is rammed through by the CEO.
Why include the CFO and HR then? Well currently, Kavanaugh controls the purse. He distributes costs, profit targets etc. He’s also a huge fan of increasing the dividend. The dividend that has become IBM’s lodestone.
As for HR, all the cockeyed ideas about new collar, closing locations, came from the demented minds in HR. Obviously, they had help from Strategy, but it is HR who push ideas and targets. Heavy input from Bain/BCG as I have explained. Clearly the CFO sets COSTS for headcount etc, but HR doesn’t simply go “OK.” They have their own agendas and ideas.
Any blame (or kudos), belong at this level. Clearly investing in a niche product or maintaining share and succeeding in growth can come from any level, or SVP. However, overall direction, strategy, comes directly from the Triumvirate, even to fellow SVP’s. Naturally this applies all the way down the line.
Now I’m not suggesting IBM start having a, “Hug an executive” week, or an, “Execs are human too” jingle. What I am saying is that the blame for failure, or congrats for success for the OVERALL company resides in three key areas.
I know I’m excluding the absolutely useless BoD, but they just sanction what they’re told as I have explained before. So would you if you had to sit through a day and a half of mind numbing PowerPoints that are steeped in IBM lingo. Interestingly, several of the them are reasonably new, less than five years, but few have a tech background, although IBM claims they ALL have “SIGNIFICANT Cybersecurity, Technology or Digital experience.” Sure sure. My mother has all three of these, as she does her own online banking, knows how to use Facebook, and has a smart phone. Does that count? What they DO NOT HAVE is tech industry experience. So how can they see through IBM’s bu-----t? They cannot. Michael Eskew is the Independent Lead Director. He has been here since 2005! Not to diminish all their individual accomplishments, just don’t expect any form of activism based on results.
As for Q2? Well what can I say really? As usual the analysts on the call ask probing questions as if they were an interviewer from Fox News interviewing Lindsey Graham. In other words, lets all be friends. The results? Well really, profit flat from 2020 but DOWN 45% since 2016 (Q2 2016 compared to Q2 2021). Yeah, that’s NOT good. Let that sink in, profit DOWN 45% in five years!!! So much for Red Hat. It’s such a small piece of the pie it doesn’t turn the ship around. (I know, I mixed my metaphors). I still disagree with a colleague who worked on the RH deal and tells me give it time. I will. What choice do we have?
Until next time.
DT