To start out this article, IBM just reported the smallest earnings growth since late 2009. IBM should be scouring the land for the next Lou Gerstner. I know there are a few internal executives getting in line for the next changing of the guard, but they are a mediocre crop at best. My experience is that they are bunch of screamers and schemers with large ego’s (except around Steve). I don’t know how they are going to make the 2015 earnings commitment, but I will project pain for employees getting there. They will also have to buy back a shedload of shares (which just happened after I wrote this) to make the numbers or kill employee morale as noted in the turnover rate getting there
WHO IS REALLY RUNNING THE PLACE?
While Ginni Rometty is the new President it still seems like she is a front (wo)man while the person that holds the keys to the company’s operations is Steve Mills. He of fame for building the software business, the part of the company that keeps it profitable. If she can just keep the company from getting in trouble circa the Akers years, she’ll stay out her welcome. Any hiccups won’t allow her to finish at 60. One of the hiccups is that it will be hard to do it without Mills. She fit the diversity model (which really isn’t that great at IBM when you consider how many who abuse the system) and she is polished and was fit. The internal grapevine mentions her name in triviality that never was even thought of in the Gerstner/SJP years with her name being thrown around in vain to get something done.
I have witnessed Mills at work personally, watching him dust off General Manager’s who thought they were important, address Wall Street, IT analysts, reporters and various other constituencies, it was clear who is holding things together. It appears he lost out in the age game for the President position, but he was the right guy.
He runs both the most profitable division and is now trying to save the dinosaur businesses for IBM, those being Software Group and Systems Group (servers mostly, and mainframes mostly).
SERVICES
First, let’s take Services out of the equation. Not to mention that IBM is blowing it by firing the wrong employees.
Services is low margin/high volume was essentially flat in first quarter so while it is important to IBM (if you include Global Financing and you have a much worse number), it is almost a legacy now and is not the growth engine it once was. It provides a needed pipeline of business to service (sorry) HW and SW sales, options competitors don’t have or try to copy with varying degrees of success…. too bad that ship sailed years ago. It is neither the mainframe model nor future for the company as the industry changes, but it does provide top line numbers crucial to financial statements.
SOFTWARE AND HARDWARE
Software was up as usual as that is the model and umbrella for the future. It is a high margin business as long as you remember a caveat. Let’s be clear that upwards of 80% of the IBM software is sold for the System Z or “The mainframe”. Conversely, the mainframe business (let’s quit messing around with the Systems Group moniker here) is down a lot. Guess who is going to catch hell and budget cuts this quarter. Because the economy is down around the world, these numbers are down. I’ve got news for the industry, it will not turn around next quarter or next year. Growth is 5-10 years away and who knows which company will be in the drivers seat for that timeframe.
As stated earlier, Mills is approaching 60 which as far as I can see was the deal breaker for him becoming the next president. No one other than Palmisano understood the company as well and as long as Mills does. He also knows where the company should be. He’ll get to go out on his terms, but IBM should make him stay on for another 5 years to keep things going until the world economy and job market turn around. He is the glue that keeps things together and would be a bigger loss to IBM than even Palmisano was, because that one was so orchestrated.
EARNINGS
IBM has laid out a plan for investors which makes it a top IT company. Much of this based in belief of the endless story of Big Data (and cloud, but who cares about software delivery, we’ve been doing that in different ways and will continue this trend by calling it something new soon). It has much upside, but will not save a company by itself (diversifying is something IBM has done better since almost committing hari kari in the 80′s-90′s). However, there is always a bigger fish in the IT sea. Will Watson be the next big thing? Name me any huge sales of a Watson unit. It is an ingenious marketing plan that shows IBM can do something others can’t. In reality, only the top Data consumers can afford a real Watson and the army of IBMers to keep it running as it is already a product with the name System P and fancy software (see an Analyst Group who defines IBM Here).
MAKING MONEY
You make money by increasing sales and/or reducing expenses. Guess what, revenue was just discussed and sales are going to be tough for a while. 300-400K employees are tough to keep employed in this situation. This means new rounds of layoffs, travel restrictions, expense cuts and other austerity measures are on the way before 2015. Keeping them happy will be next to impossible without turnover. It appears that the employees are mocking the new system too with the 2015 projections internally code named Road Kill 2015.
These are tough times and even if you’ve cornered a portion of the market such as Apple right now, you are just another fish in the sea, and never the biggest.
The man who has been tested for these tough times is Mills. Underneath, I think he’s running most of the company which for their benefit he should be doing rather than planning his retirement.
Bottom Line: There will be a big hole to plug when he leaves and life is going to be a lot harder for Rometty as the Mills replacements are OK at best.
