A memo went out this week to managers in IBM’s U.S. Integrated Technology Services division requiring that future use of additional sub-contract (1099) workers must be approved in advance by a director or vice president. This includes coverage for sick days and vacations, not to mention inevitable customer emergencies. The memo further required that the renewal of any ongoing 1099 contracts include an across-the-board 10 percent reduction in labor rates to IBM. While this may not sound like news, inside ITS it has great meaning since the company has already been cut to the bone. There are, for example, reportedly two remaining IBM experts on HP-UX, HP’s version of Unix. Yet IBM supports customer running HP-UX. What happens when those systems go down? Nothing without first getting an IBM VP out of bed.
But wait, there’s more! Last week IBM reported earnings. Sales were down but profits were up and the stock rose as a result, but why? Quarter after quarter with the exception of one over the last two years, IBM’s sales go down yet profits go up taking the stock with it. This can’t go on forever. Efficiency is a wonderful thing, but continually dropping sales is a deadly trend. Yet still the stock goes up. That’s what former Federal Reserve chairman Alan Greenspan back in the 1990s called “irrational exuberance.” I say it is Wall Street happily accepting the idea that IBM is eating itself and has decided to eventually die.
Funny, we didn’t used to reward decisions like that.
Expressions like “conventional wisdom,” the “wisdom of crowds” and even “the market has already factored that news into the price” refer to our ability as a society to accept and even embrace bad news without necessarily even knowing it is bad. IBM’s sales being down quarter after quarter is bad news no matter what happens with profits.
The real story of what’s going on here is easy to understand if you just read the comments from any of my recent IBM columns. IBM is cutting costs to maintain profits in declining markets at the expense of customer service. Throw-in regular repurchases of shares and IBM management can keep playing this game of earnings-per-share for another decade against a dwindling pot of shares. Wall Street has to know this, but the important news here is that Wall Street doesn’t care.
This news — in this case the news behind the news — is already factored into Wall Street’s expectations. Alas, it isn’t factored into the expectations of IBM’s own employees, however, who have been deliberately kept in the dark by management.
A good friend of mine keeps telling me about a seminal moment in the history of his company when they decided to make a strategic move into a new industry, deliberately sacrificing much of the old company to make that happen. The new business required capital — capital that could only come from milking horribly the old business. And so that’s what they did, but only after months of meetings to explain the plan and help employees working in parts of the business that were due to be sacrificed to understand why things were happening the way they were. Those sacrificed were also reassured that they’d do well with new owners as various business units were profitably divested. Management cared enough to make that happen.
IBM is doing the same thing — in this case I think sacrificing its hardware business for software and software services — but IBM isn’t asking for buy-in from anyone: the rank and file aren’t being told what’s happening or why.
IBM management either can’t be bothered to explain the truth to its employees or maybe they feel the overall company would be hurt by a dose of corporate honesty. But honesty is the best corporate policy, so I can only conclude IBM simply doesn’t give a damn about its people.
If there’s a secret to what’s happening here, a key bit of information that helps make sense of it all, it’s this: It used to be that almost nobody got rich working at IBM, but that has recently changed — for some. IBM salaries were always good and perks were great, but unless your name was Watson you didn’t retire from IBM big rich. But that was then. Sam Palmisano, who pretty much created this current debacle as IBM CEO, retired with a reported $160 million. You can bet current IBM CEO Ginni Rometty aims to do the same or better.
Vampires have taken control of IBM and Wall Street not only doesn’t care, it is rewarding such behavior by bidding-up the stock. What’s happened here is the rise of trading at the expense of investing. Traders care about the price, not the company. They may not even know what the company does, simply because management decisions and policies won’t likely have any direct effect over the seconds, minutes, or hours these traders are holding the stock.
In one sense it would be stupid for IBM management not to recognize this and behave exactly as they are doing. They’ve been dealt a crappy hand by cascading bad decisions from executives now long gone. I get that. What I don’t get is IBM management’s determination to lie to employees or at least keep them in the dark about the Big Picture.
These are no longer employees, just food.