That’s a pretty dramatic headline, don’t you think? It’s also the title of an eBook about IBM I will put on sale here about six weeks from now. IBM is in trouble, you see, serious trouble caused primarily by executive corrosion from within. Not only did Big Blue miss its earnings target last quarter for the first time in years, if the rumors I am hearing are correct the company’s primary response will be to screw U.S. employees even more than they have already.
The rumor I’ve heard is that IBM, which not long ago changed its 401K contribution policy to push what had been a biweekly payment into an annual one right at the end of the year, may have decided this year (and in the future?) not to make any 401K contribution at all. Since IBM’s U.S. employees can divert up to eight percent of their gross compensation into the 401K and IBM has traditionally made a comparable matching payment, this possible change in compensation policy could save the company close to $1 billion.
In one sense one might ask what’s wrong with that? Companies have to do what they have to do in this economy and workers sometimes suffer. But for IBM it indicates the company is getting near the bottom of its bag of tricks for maintaining earnings growth toward that ambitious 2015 goal of $20 per share. Management seem to be down to three ideas to improve the numbers: 1) savage the 401K plan; 2) sell the low-end server business to Lenovo for a reported $2.5 billion, and; 3) expect a miracle called PureSystems.
Change is inevitable in any business, but at IBM the policies and policy changes are particularly opaque. They are handed down from on-high by a management generally out of touch with reality, yet simultaneously determined to share as little information as possible with employees. At least that’s the way it appears to me.
IBM management plans are secret. The majority of the company does not know the plan and is not actively involved in helping the company achieve it. So there is probably no inside feeling at IBM about the sale of the low-end server business because very few know it’s even being considered. Fewer still know why it is being considered.
Internally IBM’s culture is a lot like USA society in the 1950’s and early 1960’s. There was an implicit trust in the government back then and we accepted the answers we got from Washington. Most of the IBM community has been conditioned not to think and to accept whatever they are told by management. If the server business is sold most will naively accept whatever explanation is offered. They won’t know this is just one of many businesses that could be sold for the corporation to make its numbers.
The more interesting problem for IBM is the high-end server business called PureSystems. IBM has high hopes for it. This is where magical thinking comes into play and magical thinking has been at the heart of IBM’s troubles for the last three decades, starting back in the John Opel years.
PureSystems is very expensive and I expect the profit margins are high. If you look at IBM, HP, or Dell’s low end server business you can calculate an average price per processor. Pure is made of many, many servers. Pure is also completely unproven. Its average cost per processor is a lot higher. Pure has a network switch and a storage area network built in. If you add up all the components Pure costs a lot more than if someone built their own system from parts. It is not going to be easy selling, or — more important — providing a financial justification for buying Pure. What if IBM does not sign the amount of PureSystems business it expects?
Then more IBM divisions will be put on the block to prop up earnings while the company waits for the next miracle.