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Memo To IBM's Board: THINK About Replacing Virginia Rometty

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Fool me once, shame on you; fool me 21 times, shame on IBM's board. (I have no financial interest in IBM securities).

This comes to mind in considering IBM's latest financial report -- which marked the 21st consecutive quarter of declining revenues at IBM under its CEO Virginia Rometty.

Of course, there is a one word remedy for IBM's board which was made famous by Thomas Watson, Sr. who joined Computing-Tabulating-Recording Company in New York City in 1914. Watson realized that this collection of three-disunited companies was not working together well.

So he tried to create a culture for the company based on the motto: THINK -- which is exactly what IBM's board should be doing about whether Rometty is the right CEO for IBM.

Watson had been a sales manager for NCR -- where he was convicted under the Sherman Antitrust Act of illegal anti-competitive sales practices, according to Bit by BI -- before joining C-T-R. One morning in 1911, he was frustrated by his managers' inability to come up with good ideas to improve the business. The THINK motto came to him after giving them a tongue-lashing: “The trouble with every one of us is that we don’t think enough. Knowledge is the result of thought, and thought is the keynote of success in this business or any business,” he told them, according to IBM100.

Watson took THINK from NCR to C-T-R which became IBM in 1924 -- and THINK found its way onto signs and walls across Big Blue.

That NCR speech was 106 years ago and were Watson alive today, he would probably be giving a similar speech to IBM's board regarding Rometty's tenure. After all, as I wrote in Disciplined Growth Strategies, IBM now violates all three of the values -- Respect for the individual, The best customer service in the world, and Excellence -- that Watson used to lead the company.

IBM's latest results were disappointing -- 21 consecutive quarters of declining revenue -- sending its shares down 2.9% in July 19 pre-market trading. In the second quarter, IBM's revenues tumbled 5% to $19.29 billion -- $170 million below analysts' expectations according to Thomson Reuters.

To be fair, IBM did beat analysts' earnings expectations thanks to a "tax gain of 18 cents per share," according to MarketWatch.

As we all know, IBM is struggling mightily to disarm critics by repeating a narrative about a turnaround that involves waiting for so-called investments in what it dubs "strategic imperatives" -- consisting of "analytics, cloud, mobile, social and security" -- to generate enough growth to offset declines in the rest of its business.

IBM is clearly hoping that investors will focus on how much of IBM's revenue is coming from these strategic imperatives as the compelling reason to own its shares. To that end IBM reported that revenue from strategic imperatives was $8.8 billion -- contributing 45% to total revenue compared to 42.8% in the first quarter.

IBM crowed that cloud revenue, including cloud delivered as a service, for the quarter was $3.9 billion, up 15% from 2016 while analytics revenue rose 4% to $5.1 billion.

But there were more revenue declines than gains, to wit:

  • IBM's Technology Services and Cloud Platforms revenue down 5.1% to $8.4 billion;
  • Cognitive Solutions revenue down 2.5% to $4.6 billion;
  • Global Business Services revenue down 3.7% to $4.1 billion in revenue; and
  • Systems revenue down 10.4% to $1.7 billion.

That story -- plus paying dividends -- seems to have been enough to get Warren Buffett to buy into IBM stock. A decision which he admitted he regrets. In May, he announced that he had sold a third of the 81 million shares he had owned at the end of 2016, citing IBM's "big strong competitors," according to CNBC.

Rometty is proud of IBM's latest results. As she said, "In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world's leading companies to the IBM Cloud. We continue to innovate, adding regtech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time.”

Watson would probably be unhappy that Rometty was using a product family named after him to tout its future. After all, IBM is a roughly $80 billion company and it won't be able to restore its growth from the tiny "$1.5 billion cognitive software market for artificial intelligence," according to a CNBC interview with Jeffries analyst James Kisner -- who expects its shares to fall 18%.

IBM's board has been too easy on Rometty -- giving her a 65% raise to $32.7 million in 2016. According to its latest proxy, "for 2016 performance, the Board approved an annual incentive payment of $4.95 million for Mrs. Rometty, which represented 99% of target. The payout level considered significant progress in the implementation of IBM’s strategy, with continued growth in Strategic Imperatives, momentum in cognitive, and the creation of new businesses in health care, Internet of Things, and financial regulatory compliance, including several sizeable acquisitions."

What's more, IBM's compensation committee was delighted by how she engaged the workforce -- even though IBM fired 14,000 according to a March 2016 estimate by Bernstein analyst Toni Sacconaghi."In addition, the Committee noted significant continued increases in employee engagement, and major steps taken to realign workforce skills and strengthen senior management," noted the Proxy.

When Watson adopted the THINK motto for what is now IBM, he "realized there would be practically limitless potential for machines that help people think—and there would be tremendous opportunities for the companies that employed the smart people who could imagine, design, manufacture and sell them. Encouraging everybody to be a thinker, from the assembly line worker and engineer, to the sales person and the secretary, was what would bind [the company] together," according to IBM100.

If Watson were alive today, he would add IBM's board to the list of people at the company who need to THINK -- more specifically about how they could continue to support Rometty as its CEO and give her a 65% raise for what is now 21 quarters of consecutive revenue decline.

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