Big Blue's Big Problem IBM's Unstoppable Decline
The Big Blue is in trouble—or is it?
If you read the news and their recent press releases the answer you reach might be "no." After all, IBM is collaborating with Agrobank, a Malaysian government-owned bank, to modernise the former’s core banking system. It has also partnered with Aventis Learning Group, an award-winning corporate training provider, and is working with HSBC, a multinational universal bank and financial services holding company. It even introduced the IBM FlashSystem 5000 last year, unveiled the pioneering Telum processor and developed the world’s first 2-nanometre chip technology.
Those are outward signs of success. But the reality is they are smokescreens. They are veneers to a truth that has been painfully obvious for years and yet has rarely been talked about in-depth—that IBM, once at the mountaintop of tech, has been on a decline for over a decade now. Its annual revenue is exhibit A of this downturn, with the Big Blue’s revenue dropping precipitously since 2011 when it posted a record USD $106.9 Billion in revenue. It has been downhill after that record-setting year, as this graph shows:
To be fair, IBM is still a major player in the tech industry, even coming in as the world’s 8th largest tech company in 2021 with USD $73.6 Billion in sales and a market value of USD $119.4 Billion. The caveat is that despite such impressive numbers, the Big Blue is still way behind the top five—and down six spots from 2012, when it was a close second behind Apple as the world’s top tech company.
Largest Tech Companies in the World (2021)
Other economic metrics affirm the lost decade IBM has had, with Big Blue’s net income declining by 41% (equivalent to almost USD $6 Billion) over the years. Its free cash flow, on the other hand, decreased by 18%, while its market capitalisation fell by 44% (equivalent to almost USD $95 Billion of capitalisation).
Moving From Hardware to Software
Coinciding with this decline in revenue has been IBM’s seeming transition from hardware to software, which is now one of the company’s four business segments (along with consulting, infrastructure and financing). Over the past two years, Big Blue’s software segment has accounted for nearly a quarter of IBM’s revenue—22.94% in 2020, 24.14% in 2021—with consulting a far second, followed by infrastructure.
Such has been the trend for much of the decade, which should not come as a surprise given how IBM has been moving away from its machine-making roots. It started, ostensibly, when in 2004 the company sold its PC division to China-based Lenovo Group for a reported USD $1.75 Billion. The deal made Lenovo a PC powerhouse 10 years later—so much that Lenovo became the world’s top PC vendor (it still is today) and was able to buy Motorola and IBM’s server business in 2015.
For IBM, the sale proved prescient, with the company now focusing on its other business segments outside hardware. It was also, looking back, a classic example of what has long been an IBM modus operandi—it sells when profit starts declining, and the timing is usually just right. The IBM-Lenovo sale sure looked that way, though only Lenovo seems to have taken full advantage. But at the very least, that business decision in 2004 may have set the stage for IBM’s ongoing paradigm shift.
That same strategy was likely in play in IBM selling its Watson Unit to global investment firm Francisco Partners early this year. The Watson Unit reportedly rakes in USD $1 Billion in revenue for IBM but has largely been unable to make a profit for Big Blue. Translation: The Watson Unit is not making money, so it had to go.
A Decade in Decline, A Decade of Lay Offs
The mighty, indeed, has fallen. But, that is not even the worse part. The worse part it seems is that some of the biggest victims and most badly treated as a result of the decline have been IBM’s employees. According to Trading Platforms, the Big Blue has been laying off staff since 2011, and this workforce reduction, incidentally, is mirroring the company’s economic slowdown. On average, IBM has let go anywhere around 6,000 to 22,000 employees per year, including an estimated 60,000–70,000 from 2020 to 2021.
Source: Statista and Trading Platform
IBM, headquartered in New York, U.S.A, is moving more and more jobs overseas. In fact, the company now has 200,000 or so staff in offshore locations (think India) where labour costs are significantly lower. The Big Blue, in other words, is either offloading staff or offshoring them—all, ostensibly, in an effort to stem the tide of this now decade-long economic crunch.
Laying off employees was a business decision plain and simple, and whether it is right or wrong is in the eye of the beholder. But, it is unfortunate—unfair, even—for hundreds of thousands of employees to lose their jobs like this. It is as if they are taking the fall for IBM’s miscalculations over the past few years and its seeming insistence to stick to legacy infrastructure as its core business.
Speaking with Andrew Martin, my group publisher and Co-Founder of Asia Online Publishing Group (AOPG), he points to how recent local announcements by IBM are actually highlighting the underlying problem. Martin points out: “If you are selling legacy technology then it doesn’t matter how much you use the words ‘modernisation’ and ‘transformation’ in your press release, the business is still in a declining market. Where IBM chooses to press release legacy wins, it suggests they don't have many big modern tech wins to celebrate."
The aforementioned collaboration with Agrobank, according to Martin, is a clear example of IBM basically upgrading (modernising, even) Agrobank’s legacy system. Modernising legacy in itself is a solid business. But, this paradigm no longer has the potential to expand, in part because many are already moving away from legacy infrastructure. Crucially, it has made IBM a sort of laggard in truly transformative, high growth areas such as the cloud and distributed computing, Artificial Intelligence, Metaverse and FinTech.
Behind the Curtain: A Decade of Dysfunction and Mismanagement
There is more than meets the eye, though, when it comes to IBM’s lost decade: It may have likely been due to a decade of dysfunction and mismanagement, starting from the tumultuous term of then CEO Sam Palmisano. In all fairness to Palmisano, he had to steer IBM through the Great Recession of the late 2000s, and he largely did an admirable job—culminating in IBM’s record-setting 2011. Unfortunately, Palmisano’s “Roadmap 2015,” which was internally launched in 2010, all but undid the company’s gains that year and ultimately sent it into a tailspin.
Palmisano, through Roadmap 2015, promised USD $20 earnings per IBM share by 2015—even though a share of IBM back in 2010 was only around USD $11. He also promised to generate USD $100 Billion in cash flow and vowed to spend USD $20 Billion on acquisitions from 2011 to 2015. In other words, Palmisano promised the sun, the moon and the stars and added the rest of the Milky Way.
These ambitious targets, according to former IBM staff privy to the situation, led to the company resorting to “resource actions”—a euphemism for across-the-board cost-cutting. And Big Blue employees ultimately bore the brunt of these actions, with tens of thousands of staff terminated and many others given pay cuts and reduced benefits. Others were either off-shored or sold to other companies (as part of business units that IBM had to sell). One ex-IBM employee admitted to things getting so bad that even the free coffee and tea in IBM offices had to be reduced due to cost-cutting.
The case of Fiona White sums up how low IBM was willing to go to cut costs so as to meet the ambitious goals of Roadmap 2015—derisively mocked by then employees as “Roadkill 2015.” White, an IBM sales executive from 2010 to 2013, sued the company in 2013 for failure to pay her commission in full. Court records show that White had achieved a recognisable revenue of USD $9.1 Million and was due over USD $1 Million in commission. IBM, however, was able to pay White only USD $543,000. White was eventually able to recoup the remaining amount years later after an Australian court ruled in her favour.
Then, in 2020, the Big Blue took another massive hit after Australia’s Fair Work Ombudsman ordered IBM to recompense 1,600 Australian staff for being underpaid by approximately USD $12.3 Million from 2012 to 2020. This case and that of White only underscore the damage wrought by the ill-fated Roadmap 2015, as it continues to adversely impact IBM long after Ginni Rometty, Palmisano’s successor, pulled the plug on it in 2015.
While Rometty may have scrapped Roadmap 2015, her tenure was not without controversy—and missteps. Rometty, in particular, is now under intense scrutiny, having been named in a recent filing of a class action by investors against IBM, along with former CFO Martin J. Schroeter, current CFO James J. Kavanaugh and current CEO Arvind Krishna. The lawsuit alleges that Rometty and company engaged in unethical and unlawful business practices to inflate executive bonuses. Some of the claims the lawsuit levels in regard to these business practices include laying off employees arbitrarily, shifting revenues from IBM’s nonstrategic mainframe business to its strategic business segments and manipulating and capping sales commissions.
The lawsuit is not yet decided, so the claims are open to speculation. But it does seem to indicate years of mismanagement and dysfunction—and both are manifesting in IBM’s seemingly unstoppable decline.
Building Something Positive?
Indeed, the hits seem to keep coming for IBM.
But, all hope is not lost. IBM has been expanding its portfolio and creating a Big Blue presence in transformative, high growth areas of tech, including the cloud and automation. But as Syed Ahmad, Editor in Chief at AOPG, points out, competition in these areas “is really tight” right now, and IBM is competing against “a lot of really powerful newer companies.” Hence, IBM’s transition to new technologies has been bumpy, to say the least, and the financial returns—if any—are yet to fully reflect on the company’s bottom line.
At the very least, IBM has actually been showing signs of life lately, posting revenue growth in three successive quarters: 0.3% in Q3 2021, 6.5% in Q4 2021 and 8% in Q1 2022. Ironically spurring this mini-run of success has been Red Hat, whose acquisition in 2018 cost IBM USD $20 Billion in new debt. It was a gamble, the idea of which is to usher IBM into public cloud infrastructure business—but as a consultant to an independently performing entity that is Red Hat. And this time, Big Blue seems to be investing in its investment, which was something it did not do in its decade of decline.
That gamble seems to be paying off now, though it remains to be seen if IBM can build enough momentum from these gains. If the Big Blue is to do, it might need to focus even less on infrastructure—which again fell flat, raking in just USD $3.2 Billion for IBM—and more on other transformative technologies. That, of course, figures to be a hard sell given how hardware and infrastructure have been IBM’s bread and butter for nearly a century.
It is a hard decision all right. But, it is one that IBM executives ought to make. That is the least the company can do for the thousands upon thousands of employees it laid off over the years—and the thousands more it underpaid.
Then again, all these inroads could be only smokescreens. Worse, they can be undone just as quickly by a single misstep from management. It has happened before. It may happen again.