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IBM’s Lost Decade

By

Charles Fitzgerald

TL;DR: Down and to the right

I wasn’t going to do this post until I learned IBM PR is out browbeating reporters (one of the rare activities where the company is still world class) for being “too harsh” by including actual performance metrics in stories about IBM’s CEO transition. So I shall rally to the defense of the fourth estate (who tippytoed around the performance issue if anything) and help frame the outgoing CEO’s legacy (TL:DR missed the cloud transition).

Ginny Rometty was CEO of IBM for less than a decade, but kudos to the company for an uncharacteristic bout of out-performance by packing more than a decade’s worth of decline into just eight years. The “lost decade” of this post’s title is perhaps charitable as it implies they merely went sideways, when in fact the questions surrounding the company are now existential. I suggested IBM was not going to make the cloud computing transition in early 2013, and they have gone on to make that warning look very prescient.

Lets review Rometty’s reign:

Revenue

Down and to the right. Revenue declined 28%, a staggering sum of nearly $30 billion dollars. That is more than the combined revenues of Adobe and Salesforce (and then some).

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Net Income

Down and to the right. Net income declined 41% by almost $6.5 billion over those eight years (though it has rebounded a little).

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Free Cash Flow

Down and to the right. Free cash flow held up better than most of the financial metrics, only declining 18%.

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Market Capitalization

Down and to the right. IBM lost over $95 billion of capitalization, a decline of 44%. That sum is more than the entire capitalization of a 3M, Lowe’s, Sony, or UPS, and just shy of Starbucks.

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Relative Stock Performance

The stock price declined by over 25%, but also under-performed the S&P 500 by 18,762 basis points.

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The S&P comparison looks pretty good when you compare IBM’s stock performance to its direct cloud competitors. The company under-performed Amazon by over 100,000 basis points and Microsoft by over 59,000 basis points. Even fellow cloud also-ran Oracle outperformed IBM by over 13,000 basis points.

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Capital Expenditures

Down and to the right. CAPEX has been the signature tell in the cloud era, separating the clouds from the clowns. IBM’s annual CAPEX declined by nearly half in this period, going from $4.67 billion to $2.37 billion, with 2019 seeing a precipitous decline of 36%. IBM spent less than $30.8 billion on CAPEX during Rometty’s tenure, just barely more than what Amazon spent on CAPEX in 2019 alone ($30.6 billion), less than what Amazon spent on CAPEX in 2019 alone ($31.95 billion – I forgot to include build-to-suit leases in the original number).

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Stock Buybacks

While the IBM financial roadmap came to a screeching halt several years ago, IBM still managed to spend more on stock buybacks ($55 billion) during Rometty’s tenure than CAPEX, even as its market capitalization shrank by over $95 billion.

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Long Term Debt

Finally, one that is up and to the right! The company added over $34 billion in debt (the Red Hat acquisition required $20 billion in new debt).

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Commentary

Rometty didn’t inherit a great hand. Her predecessor Sam Palmisano hollowed IBM out and turned it into a financial engineering company as opposed to an engineering engineering company. Palmisano focused the company on an EPS roadmap instead of a product roadmap. And, as an executive who rode the rise of IBM Global Services to the CEO job, he cemented the firm’s shift from a technology company to IT services. Palmisano also started IBM’s massive offshoring that continued under Rometty (no company has moved more jobs overseas than IBM, which now has over 200,000 employees in “lower cost” offshore locations).

While Palmisano set the stage, Rometty took too long to recognize the critical issues facing the company and made her own fundamental mistakes. She stuck with the $20 EPS target despite the company’s pressing need to make the transition to cloud computing. Even Wall Street gave up on the sacred $20 EPS roadmap before Rometty did. Her consulting background and lack of product experience also looks decisive. It is easy to see how a consulting mindset would see cloud as something they already did (outsourcing customer workloads) as opposed to a new computing platform. And the big bet on a ridiculously over-hyped Watson could make sense if you saw incomplete and underperfoming products as merely the top of a consulting sales funnel. Certainly, the TV advertising claiming Watson would cure cancer had to be a CEO decision, as no doubt was the subsequent if belated recent decision to disappear the Watson brand. After years of rearranging the financial deckchairs with segment redefinitions and “strategic initiatives”, plus non-sequiturs like “blockchain”, the company has all but admitted it cannot compete with the public clouds. Instead, the company has embraced a backwards-looking, consulting-led strategy they are calling “hybrid cloud” (a.k.a. “legacy 4eva!”) in hopes of confusing the market about their relevance in the cloud era (just check out their latest TV ads). The $34 billion Hail Mary that is the Red Hat acquisition is a lot to pay for a proprietary Kubernetes distribution.

But don’t worry about Ginny. Despite the harsh realities charted above, she’s been extraordinarily well compensated, netting over $100 million in stock (not counting salary and benefits). And we have yet to learn the details of her exit package (Palmisano’s was ~$250 million).

The biggest mystery is not why it took the IBM board so long to replace Rometty (though that is certainly a mystery), but why they decided to replace her with another IBM lifer in Arvind Krishna while all but dubbing him “interim CEO”. By elevating former Red Hat CEO Jim Whitehurst to President, the company has signaled he’s up next and the clock is ticking on Krishna even before he has served a day as CEO. Why isn’t Whitehurst ready for the big job today? Does he need to improve his COBOL skills? Or does this portend IBM being split up? I’m not even remotely an Armonk Kremlinologist, but they don’t have a lot of time left to get their act together.

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21 responses

  1. The-Alchemist Avatar
    The-Alchemist

    From someone working on the ground in IT during the past 20 years, they relied too much on their brand instead of doing any actual R&D. They didn’t foresee the movement to open-source software, and since I’m downloading code off the internet already, why not run on cloud as well? (I’m sure I’m not the first to opine on the relationship between the rise of open-source software at the same time as the cloud).

    When I was a young lad in college, I _dreamed_ of working at IBM. I applied every year to their Young Blue internship program, dreaming of doing cool things I had only seen in my dreams. The TV commercials in the 90s got me. Even high school me knew that IBM was the hot shit.

  2. Wayne Manor Avatar
    Wayne Manor

    The problems started well before Rometty or even Palmisano. Their downfall started when Louis Gerstner was brought in to “save” the company. Gerstner famously called the technology-focused culture he found there “arrogant” and “insular”, not realizing that in fact that this kind of proud, focused and intensely competitive culture is *exactly* what you want in your engineering teams. Yeah OS/2 never took off, and the PC market was running on razor thin margins, but it was as obvious then as it is today that you couldn’t just walk away from it all expect to stay relevant, but that is exactly what the company did under his guidance and anyone in top management who criticized the move was shown the door. In the beginning of the 90’s IBM had the kind of talent that was the envy of the industry at the time, but because investing in consumer grade technology was seen as risky by investors, Gerstner actively undermined those groups. Most of the top developers from places like the former Boca Raton ended up forming the startups and companies that revolutionized the industry, making giants of Apple and Google and leaving IBM irrelevant. I think when the history books are written about the tech industry our age, Gerstner’s squandering of IBM’s formidable technical leadership in favor of a hyper-focus on stock price and cost cutting will go down as one of the industry’s biggest screwups.

    One can only hope that Red Hat’s technology focused culture will be strong enough to push out the last of the incompetent Gerstner-ites and bring some real technology leadership back to the company.

  3. Jay Avatar
    Jay

    Great write-up, thanks for posting.
    Sincere question. What can they do at this point?
    When Rometty took over, even then it wasn’t clear they had many avenues left. But now, Cloud Service is a crowded market (with competitors who have a LOT more financial firepower).
    What would IBM’s “Satya” need to do? Or even be able to do?

  4. Doesnotmatter Avatar
    Doesnotmatter

    Same as HP and very soon other Goliaths in the valley…

  5. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@Jay

    Rometty should have put it all down on building a viable cloud instead of sticking to Palmisano’s $20 EPS target. There was still a window in 2012, and when there is a platform shift, you best be focused on it.

    I flat out reject the “IBM’s Satya” analogy. Satya rode the success of Azure to the CEO job. IBM Cloud lost share/momentum under Arvind. Maybe he’s the least bad IBM exec for the job (never mind the Whitehurst weirdness) but hard to make case another IBM lifer is going to suddenly turn the sinking ship around.

  6. Bruce Avatar
    Bruce

    IBM punished excellence and rewarded mediocrity.

    Romettys poor performance was condoned with raise after raise, year after year, while top performers were terminated because they had the audacity to turn 54.9 years old.
    (Early retirement eligibility is 55)

  7. Woodi Avatar
    Woodi

    There is no IBM as we think about it. At the moment at least. It nearly bancrupted too many times and is not self-owned. Even for RedHat buyout some bank provided “advices and finances” – bank advised “tech giant” on buying tech firm, at least announces had such wording.

    But no worry, IBM won military contract for decade or two (and that bancrupted Sun).

    Also takeover over main Linux contributor is good for them. And MS too – no open source desktops popularity any time soon.

  8. Anon Avatar
    Anon

    I learned IBM PR is out browbeating reporters (one of the rare activities where the company is still world class) for being “too harsh” by including actual performance metrics in stories about IBM’s CEO transition. – Do you have a source for this?

  9. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@anon

    Heard it directly from a reporter.

  10. Dave Kellogg Avatar
    Dave Kellogg

    Superb post.

  11. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@dave

    Thanks!

  12. Raj Avatar
    Raj

    There are two sides to any coin. With $11B in cash, a marquee customer base, a well-known (albeit tarnished) brand name, several cash cow businesses contributing to FCF, they are flush with resources that any of the successful tech startups starting out in the last decade would have drooled over. But, do they have the guts?

  13. Charles Fitzgerald Avatar
    Charles Fitzgerald

    That has been true for 20 years — why haven’t they done anything except atrophy on all those dimensions?

  14. MB Avatar
    MB

    I don’t know, this makes sense:

    >>>
    With all the changes you have made to reposition IBM for a new era, transforming the portfolio, transforming your skills, and changing the way we work – you have never forgotten the one thing about IBM that must endure – our “character.” IBM is the global role model for what it means to be a responsible steward of technology – to be “good tech.”

    When history reflects on this era of technology, it will be an era defined by data – and those that used it for good, and those that did not. It will also be defined by those that made this era of technology an inclusive one, and those that did not.

    Together, we have conscientiously and relentlessly worked to usher all these new technologies safely into society, and in a way that people, from many diverse backgrounds and education levels, can see themselves in this digital future. Today, IBM is the industry’s leading voice in technology ethics and data stewardship. Our clients entrust us with their most sensitive data and their toughest problems, a trust we must earn and keep every day. Remember, their trust is a privilege, and a responsibility, one that we can never take for granted.
    >>>

  15. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@MB

    It is a good story but that doesn’t make it true. Part of IBM’s problem is the disconnect between how they talk about themselves and reality. They act as if they are still some colossus bestriding the industry when in fact they’re an also-ran falling further behind by the day. You don’t get to designate yourself the “industry’s leading voice in technology ethics and data stewardship”. A position like that is earned and don’t think anyone outside IBM would agree with their claim. That kind of hyperbole just undermines their credibility and/or suggests a high level of delusion in how they see the world and themselves. It is also a bit rich for the company who helped automate the Holocaust to be stressing their character as if it has always been pristine and somehow more exalted than anyone else’s. Finally, it hard to listen to IBM hype their “client trust” when they have laid off many thousands of dedicated employees who had worked with those clients for decades and shipped the jobs overseas to save money, to the detriment of both customer trust and satisfaction.

  16. MB Avatar
    MB

    more context for more thought:

    >>>
    In the workplace, we have strengthened our pipeline of talent and embraced contemporary skills, while achieving record diversity representation and employee engagement at IBM. As an industry leader, IBM in recent years has won the coveted Catalyst award for advancement of women, Grace Hopper awards for advancement of technical women, and top rankings as an attractive employer for engineering students, executive women, working mothers, multicultural women, LGBTQ and working fathers. We have created thousands of New Collar jobs and championed the reinvention of education around the world, including the explosive growth of the six-year Pathways in Technology Early College High Schools (P-TECH), which are helping prepare the workforce of the future, serving hundreds of thousands of students in 200 schools and 24 countries.

    This is a truly special place, made so by generations of IBMers.

    Arvind is the right CEO for the next era at IBM. He is a brilliant technologist who played a significant role in developing our key technologies such as artificial intelligence, cloud, quantum computing and blockchain. He is also a superb operational leader, able to win today while building the business of tomorrow. As many of you know, Arvind has an outstanding track record of bold transformations, and proven business results. As our current leader of Cloud and Cognitive Software, Arvind grew the business, laid the critical foundation for IBM to acquire Red Hat, and then led the largest acquisition in our history and a key to our future. Above all, he is an authentic leader who lives our values.
    >>>

  17. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@MB

    IBM is playing with fire positioning themselves as a job creator in the US when they are the world’s largest offshorer of jobs and premier practitioner of age discrimination.

    Arvind may be a brilliant technologist, but making that claim based on IBM’s AI and cloud businesses refutes the claim given their performance in the market. Blockchain is advertising (like Watson and Cloud were before they lost credibility there with the actual offerings) and quantum is a perfect IBM technology to tout because it is very much in the future and no one knows how it will play out.

    Again, IBM’s problem is what they claim is at odds with cold, hard reality. They may be killing it in their fantasy world, but none of those superlatives seem to show up in their business results in the 21st century. You have to wonder if they really believe what they say or do they just think we’re all so stupid we might believe it?

  18. MB Avatar
    MB

    Let’s start with the assumptions that the future of all IT initiatives servicing a business function is the cloud. This is of course an oversimplification of marketing complexities, but let’s assume that any potential buzz-word could be instantiated as a service in the cloud.

    Let’s also assume that two types of business extremes exist, one that, by virtue of its organization, has always been for implementing thorough frameworks of governance, the ones that IBM has been traditionally selling to, and at the other extreme, companies that leverage technology in novel ways supported by the ease with which something can be achieved when dismissing control to some degree and making use of advanced, feature full cloud providers, not IBM.

    Call me partisan, but there’s value in a hybrid proposition. Technology notwithstanding, the issue could be that the two extremes are slow to converge through IBM, or through Google or AWS, as things stand.

    Big Blue’s top line is an oscillator between those two company-types monetary forces, and it could end up serving both inadequately, However the problem it currently faces is an effect of global social and economic changes to technology advances, that is driving the divergence observed at higher levels, and as you mentioned, their perspective might be misaligned to what their role should be.

  19. Charles Fitzgerald Avatar
    Charles Fitzgerald

    ‘@MB

    First, don’t think you’ve seen me argue everything goes to cloud. But I do think there is a trillion dollars of IT spend on its way to the cloud from the traditional model (and there will be price compression in that move). Hard to be an IT company that doesn’t get a piece of that even as it eats away at the existing business, which of course is what has happened to IBM this century.

    “Thorough frameworks of governance” – is that what IBM sells these days? I’m not sure what that means but whatever it is, how is IBM differentiated at that end of the continuum? The IBM of today is very different than the IBM of the 20th century. When Costco’s web site goes down on Black Friday due to IBM, what kind of governance did they buy? Even if there is an axis as you suggest, the technology base line goes up along the entire continuum and IBM isn’t keeping up. They’re a mediocre consulting company with a legacy mainframe franchise.

    I am a big believer in hybrid, but what IBM means by hybrid (“legacy 4eva”) is very different from a forward looking hybrid which is what the cloud vendors are pushing (extending the cloud architecture out to the premises). IBM is selling what? Kubernetes and busloads of consultants? I get into this more in this post https://www.platformonomics.com/2019/07/a-very-cold-take-on-ibm-red-hat-and-their-hybrid-cloud-hyperbole/

    IBM’s problem is they aren’t a technology company any more and aren’t the client safety blanket they once were. The “you don’t get fired for buying IBM” customers have been burned they no longer get the level of white glove client service they used to expect from IBM and they’re not keeping up on the marketplace with tech-led competitors. Worst of both worlds.

    IBM can service a declining legacy footprint for a long time (as they have shown with the mainframe), but that’s different than rejuvenating the company and reigniting growth.

    But tell what I’m missing about IBM and hybrid?

  20. Woodi Avatar
    Woodi

    ‘@Charles Fitzgerald:

    You missing one thing: non technical adventage IBM have 🙂 BIIIIIG customers (enterprices/gov) relationships. Not many places to go when your infrastructure becomes huge. Like IRS (?) in Australia or EU “cloud”.

    But you are damn right: IBM is not well known cutting-edge-tech anymore.

    However that’s deeper topic and what’s in labs is not publicly known.

  21. Charles Fitzgerald Avatar
    Charles Fitzgerald

    I will argue IBM has eroded those relationships by offshoring their employee base and a long string of failed projects (Australian government projects especially).

    If IBM is helping build/operate an EU cloud, that is a match made in heaven. I look forward to watching them blame the other for its failure.

    And hard to bet after twenty plus years of nothing, there is some magic waiting on the labs. Just not a product company any more.

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