The Decline and Fall of IBM: End of an American Icon?

THE DECLINE AND FALL OF IBM -- End of an American Icon?

Copyright © 2014 by Robert X. Cringely

All rights reserved.

Certain portions of this book appeared originally on www.pbs.org and are the property of the Public Broadcasting Service (PBS). Used with Permission. All Rights Reserved.

Published by NeRDTV, LLC

Library of Congress Card Catalog Number:

ISBN 9780990444411

In memory of Lois Cringely

1924-2014

CONTENTS

Preface

An 8-year-old boy tries to sell IBM on a dazzling idea, sparking a life-long interest for him in the company.

Introduction

Signs of Trouble at IBM: No one except IBMers are paying attention.

Chapter One

Good Old IBM: The heady days of The Brand.

Chapter Two

Lou Gerstner Saves IBM -- for Awhile: First outsider to become CEO, Gerstner is given carte blanche to fix the company. Does he do the job?

Chapter Three

Next CEO: Sam Palmisano, the 2015 roadmap, and the long con.

Chapter Four

Why Big Companies Can’t Change: They don’t know the right questions to ask.

Chapter Five

LEAN and Mean: IBM takes on Toyota’s manufacturing model, swings and misses.

Chapter Six

The 2015 Roadmap to $20 earnings per share: IBMers call it the Death March 2015

Chapter Seven

A Tale of Two Division Sales: IBM sells its PC division to Lenovo in 2004, and ten years later negotiates a deal to sell its server business to the same company. Big mistake?

Chapter Eight

Financial Engineering: How are all those share buybacks with borrowed money working out for ya, IBM?

Chapter Nine

An IT Labor Economics Lesson from Memphis for IBM: The company carelessly loses two big customers.

Chapter Ten

The Ginni Paradox or How to Fix IBM: CEO Ginni Rometty bets the farm that Palmisano was right to focus on shareholder earnings. Was he? And -- some thoughts on fixing IBM.

Afterword

What if Ginni doesn’t listen?

About the Author

Cringely Blog: Reader Comments

Preface

When I was growing up in Ohio, ours was the only house in the neighborhood with a laboratory. In it, the previous owner, Leonard Skeggs, had invented the automated blood analyzer, which pretty much created the present biomedical industry. Unwilling to let such a facility go to waste, I threw myself into research. It was 1961 and I was 8 years old.

I was always drawn to user interface design and quickly settled, as Gene Roddenberry did in Star Trek half a decade later, on the idea of controlling computers with voice. My father was a natural scrounger, and using all the cool crap he dragged home from who knows where, I decided to base my voice control work on the amplitude modulation optical sound track technology from 16mm film (we had a projector). If I could paint optical tracks to represent commands then all I’d need was some way of characterizing and analyzing those tracks to tell the computer what to do. But the one thing I didn’t have down in the lab in 1961 was a computer.

That’s what took me to IBM.

I wrote a letter to IBM CEO T.J. Watson, Jr., pecking it out on an old Underwood manual typewriter. My proposal was simple: a 50/50 partnership between IBM and me to develop and exploit advanced user interface technologies. In a few days I received a letter from IBM. I don’t know if it was from Watson, himself, because neither my parents nor I thought to keep the letter. The response invited me to a local IBM research facility to discuss my plan.

I wore a suit, of course, on that fateful day. My dad drove me in his 1959 Chrysler New Yorker that was foggy with blue cigarette smoke. He dropped me at the curb and told me he’d be back in a couple of hours. Inside the IBM building I met with six engineers, all dressed in dark suits with the skinny ties of that era, the tops of their socks showing when they sat down. They took me very seriously. T.J. Watson had called the meeting, himself.

Nobody said, Wait a minute, you’re 8.

I made my pitch, which they absorbed in silence. Then they introduced me to their interface of choice, the punched card.

Uh-oh.

Thirty years later, long after he retired, I got to know Homer Sarasohn, IBM’s chief engineer at the time of my meeting. When I told him the story of my experience with IBM, he almost fell off his chair laughing. My ideas were good, Homer said, they were just forty years too early. In other words, they were still 10 years in the future when Homer and I were talking a decade ago.

The message that came through clearly from those IBMers back in 1961 was that they were a little embarrassed by their own lack of progress. Terminals weren’t even common at that point, but they were coming. If I could have offered IBM a more practical magic bullet, I think they might have grabbed it.

So when I write about IBM and you wonder where I am coming from, it’s at least in part from that boyhood experience. A huge company took me seriously for a morning, and quite possibly changed my life in the process.

Alas, that IBM no longer exists. So I had to write this book in an attempt to get it back.

Introduction

The story of this book began in the summer of 2007 when I was shooting a TV documentary called The Transformation Age – Surviving a Technology Revolution, at the Mayo Clinic in Rochester, Minnesota. Rochester has two main employers, Mayo and IBM, and a reporter can’t spend several days in town without hearing a lot about both. What I heard about IBM was very disturbing. Huge layoffs were coming as IBM tried to transfer much of its U.S. services business directly to lower-cost countries like India and Argentina. It felt to me like a step down in customer service, and from what I heard the IBMers weren’t being treated well either. And yet there was nothing about it even in the local press.

I’ve been a professional journalist for more than forty years and my medium of choice these days is the Internet where I am a blogger. Bloggers like me are the 21st century version of newspaper beat reporters. Only bloggers have the patience (or obsessive compulsive disorder) to follow one company every day. The traditional business press doesn’t tend to follow companies closely enough to really understand the way they work, nor do they stay long enough to see emerging trends. Today business news is all about executive personalities, mergers and acquisitions, and of course quarterly earnings. The only time a traditional reporter bothers to look—really look—inside a company is if they have a book contract, and that is rare. But I’ve been banging away at this story for seven years.

Starting in 2007, during that trip to Minnesota, I saw troubling things at IBM. I saw the company changing, and not for the better. I saw the people of IBM (they are actually called resources) beginning to lose faith in their company and starting to panic. I wrote story after story, and IBM workers called or wrote me, both to confirm my fears and to give me even more material.

I was naive. My hope was that when it became clear to the public what was happening at IBM that things would change. Apparently I was the only member of the press covering the story in any depth—sometimes the only one at all. I was sure the national press, or at least the trade press, would jump on this story as I wrote it. Politicians would notice. The grumbling of more than a million IBM retirees would bring the story more into public discourse. Shamed, IBM would reverse course and change behavior. None of that happened. This lack of deeper interest in IBM boggled my mind, and still does.

Even on the surface, IBM in early 2014 looks like a troubled company. Sales are flat to down, and earnings are too. More IBM customers are probably unhappy with Big Blue right now than are happy. After years of corporate downsizing, employee morale is at an all-time low. Bonuses and even annual raises are rare. But for all that, IBM is still an enormous multinational corporation with high profits, deep pockets, and grand ambitions for new technical initiatives in cloud computing, Big Data analytics, and artificial intelligence as embodied in the company’s Jeopardy game-show-winning Watson technology. Yet for all this, IBM seems to have lost some of its mojo, or at least that’s what Wall Street and the business analysts are starting to think.

Just starting to think? The truth is that IBM is in deep trouble and has been since before the Great Recession of 2008. The company has probably been doomed since 2010. It’s just that nobody knew it. These are harsh words, I know, and I don’t write them lightly. By doomed I mean that IBM has chosen a path that, if unchanged, can only lead to decline, corporate despair, and ultimately insignificance for what was once the mightiest of American businesses.

If I am correct about IBM, whose fault is it?

In its 100 years of existence, the International Business Machines Company has had just nine chief executive officers. Two of those CEOs, Thomas J. Watson, and his son, Thomas J. Watson Jr., served for 57 of those 100 years. Between father and son they created the first true multinational computer company, and defined what information technology meant for business in the 20th century. But the 20th century is over and with it the old IBM. In the current century, IBM has had three CEOs: Louis V. Gerstner Jr., Samuel J. Palmisano, and Virginia M. Rometty. They have redefined Big Blue, changing its personality in the process. Some of this change was very good, some of it was inevitable, but much of it was bad. This book is about that new personality and about that process.

Lou Gerstner saved IBM from a previous crisis in the 1990s, and then went on to set the company up for the crisis of today. Gerstner was a great leader who made important changes in IBM, but didn’t go far enough. Worse still, he made a few strategic errors that helped the company into its current predicament. Sam Palmisano reversed some of the good that Gerstner had done and compounded what Gerstner did wrong. The current crisis was made inevitable on Palmisano’s watch. New CEO Ginni Rometty will probably take the fall for the mistakes of her predecessors. She simply hasn’t been on the job long enough to have been responsible for such a mess. But she’s at least partly to blame because she also hasn’t done anything—anything—to fix it.

We’ll get to the details in a moment, but first here is an e-mail I received this January from a complete stranger at IBM. I have since confirmed the identity of this person. He or she is exactly as described. Some of the terminology may go over your head, but by the end of the book you’ll understand it all. Read it here and then tell me there’s nothing wrong at IBM.

"Please keep this confidential as to who I am, because I’m going to tell you the inside scoop you cannot get. I am rated as a #1. That’s as high as you go, so calling me a disgruntled employee won't work.

"Right now the pipeline is dry—the number of services folks on the bench is staggering and the next layoff is coming. The problem now is that the frequent rebalancing has destroyed morale, and so worried troops don't perform well. Having taken punitive rather than thoughtful actions, Ginni has gutted the resources required to secure new business. Every B-School graduate learns not to do that. The result is a dry pipeline, and while you can try to blame the cloud for flagging sales, that doesn’t work. Those cloud data centers are growing. The demand for hardware didn’t shrink—it simply moved. Having eliminated what did not seem necessary, the brains and strategy behind the revenue are now gone, leaving only ‘do now’ perform people who cannot sell. Sales reps have no technical resources and so they cannot be effective. Right now we cannot sell. There is no one to provide technical support. The good people are finding jobs elsewhere. The [job] market outside IBM is improving. I am interviewing at a dozen companies now. Soon as I find something perfect for me, I'm gone. They don’t expect people like me to leave.

"Ever work anywhere where you were afraid to make a large purchase like a car because you don’t know that you will have a job in a month? That’s how everyone feels at IBM. Now we are doing badly on engagements. I cannot think of a single engagement where we are not in trouble. We lay off key people in the middle of major commitments. I cannot tell you how many times I’ve managed to get involved in an engagement and cannot lay my hands on the staff required to perform.

"The whole idea that people in different time zones, all over the world can deliver on an engagement in Chicago is absurd.

"Lastly, using the comparative scheme for employee evaluations is simply stupid. No matter how great the entire staff is, a stack ranking will result in someone at the top and someone at the bottom. It ignores that the dead wood is gone.

Ginni has made one horrible mistake. Sam, and now, Ginni, have forgotten that IBM was made by its people. They have failed to understand their strongest assets, and shortly will pay for that. IBM just hit the tipping point. I do not think there is any way back.

Years ago IBM could sell an idea. They'd come in, manage a project, develop an application, and it would make a big difference to the customer. IBM would generally deliver on their promises, and those benefits more than paid for the high cost of the project and the computers. IBM transformed banks by getting them off ledger books. Remember the term bankers’ hours? Banks were only open to the public for part of the day. The rest of the time was spent with the doors closed, reconciling the transactions.

But that was then and this is now. IBM's performance on its accounts over the last 10 years has damaged the company’s reputation. Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised. IBM is now hard pressed to properly support what they sell. Those ten years have traumatized IBM. Its existing businesses are under performing, and its new businesses are at risk of not succeeding because the teams that will do the work are damaged.

Let’s look to the top of IBM to understand how this happened.

The importance of managers being aligned with shareholders—not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company—became a critical part of the management philosophy I brought to IBM, claims former CEO Lou Gerstner in his book, Who Says Elephants Can’t Dance?

Defying (or perhaps learning from) Gerstner, IBM's leaders today are fully isolated and immune from the long-term consequences of their decisions. People who own companies manage them to be viable for the long term. IBM's leaders do not.

I am not going to explain in this introduction what is wrong with IBM. I have the whole book to do that. But I do want to use this space to explain why a book even needs to be written and how I came up with that provocative title.

The book had to be written because writing the same story over and over for seven years hasn’t changed anything. The only possible way to still accomplish that, I figured, was to put all I know about IBM in one place, lead readers through the story, and at the end take a shot at explaining how to actually fix IBM. The last chapter goes into some detail on how to get IBM back on course. It isn’t too late for that, though time is growing short.

The title is based on Edward Gibbon’s The History of the Decline and Fall of the Roman Empire, published in six volumes beginning in 1776. Decline and Fall was the first modern book on Roman history. It was relatively objective and drawn from primary sources. And it recounted the fall of an empire some thought would last forever. In industrial terms many people thought the same about IBM.

Gibbon’s thesis was that the Roman Empire fell prey to barbarian invasions because of a loss of virtue. The Romans became weak over time, outsourcing the defense of their empire to barbarian mercenaries who eventually took over. Gibbon saw this Praetorian Guard as the cause of decay, abusing their power through imperial assassinations and incessant demands for more pay.

The Praetorian Guard appears to be in charge these days at IBM, as you’ll see.

Even a self-published book with one author is the product of many minds. Katy Gurley and Michael McCarthy were my editors. Kara Westerman copy-edited the book. Lars Foster designed the cover. Many loyal IBMers gave me both information and the benefit of their wisdom to make the book possible. Out of necessity, because quoting them directly would imperil their jobs, these heroes must go unnamed.

We can all hope their assistance will not have been in vain.

Chapter ONE

Good Old IBM

Few of us actually live in the present. Our minds are often in the recent past where judgments are formed and go for long periods of time unchallenged. That’s why the IBM nearly everyone thinks of is the IBM of the Watsons, father and son. That IBM—of the 1960s and 1970s—was less a company than it was a country. In some ways it still is. IBM has a greater gross national product than most countries. It has some 430,000 workers. Throw in spouses and their kids and we’re looking at well over a million citizens of IBM.

Twenty years ago, IBM was demographically most like Kuwait, but temperamentally IBM was like Switzerland. Like Switzerland, IBM traditionally had been conservative, a little dull, and slow to change, yet prosperous. Both countries were in the habit of taking in more money than they gave out. Both countries learned slowly and adapted at their own pace. Switzerland and IBM could survive anything, or at least thought they could. They may have been slow, but you didn’t mess with them, because they fought to keep what was theirs. And if pushed, they’d fight dirty.

Like Switzerland, IBM was landlocked, though Big Blue’s barriers were regulation and internal rivalries, not geography. IBM was surrounded by US antitrust laws and by a now-defunct 1956 consent decree that somewhat limited its ability to wreak havoc upon the land. Even more limiting was the rivalry between IBM’s different computer divisions, each protecting its turf from incursions by the others. There was no law or consent decree limiting the amount of infighting that went on within the company.

The citizens of IBM didn’t invent the computer. They never made the most powerful computers either. Back then, the citizens of IBM just made more computers than anybody else. So, just as Levi’s defined blue jeans to a world that somehow survived Gloria Vanderbilt, IBM defined computers.

IBM computers didn’t stand apart, but IBM people did. Of all the companies I’ve dealt with, the only two whose people consistently presented a common front, a kind of unique company style, were those from IBM and Procter & Gamble. I believe this came from their hiring practices, and the way they indoctrinated their workers—both companies had official songbooks! There must be something very unifying about getting together with a thousand other folks at a sales meeting in New York or Cincinnati and singing your guts out in praise of the Old Man.

The men and women of IBM had their own language. A minicomputer was a mid-range system. A monitor was a display. A hard disk drive had one or several magnetic platters that spun continuously, yet for some reason was called a fixed disk although it wasn’t fixed at all. Sticking to these terms preserved the illusion that IBM’s $600 dollar display was somehow different from Samsung’s $249 monitor; or that IBM’s fixed disk drive, made under contract by Seagate, was somehow superior to the exact same drive sold for half that price under the Seagate brand.

Like Rolex or Gucci, IBM knew that they were not really selling computers at all, but the IBM brand. IBM people in those days were a little smug and rarely in a hurry for anything. Most IBMers were hired straight out of college and had never worked for another company. They were folks who drove Buick Regals and took them