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IBM Should Buy Some Damn Revenue

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This article is more than 6 years old.

Is 20 the charm?  20 straight quarters of revenue decline should mean something, don’t you think?

I wrote about what IBM should do a couple of years ago, but they never called. I outlined a detailed strategy, but no one reached out to me. I wrote about IBM again after watching the CEO discussing AI with Fareed Zakaria – all good – sort of, but it’s time for another round of “strategery” (remember that word?). I lived through one turnaround; it’s obviously time for another. I was CTO at Cigna when IBM profitably sold an array of 20th century products and services to us. It was during the Gerstner turnaround when we noticed that IBM salespersons were no longer Stepford-like:  they listened.  They really tried to be consultative. (They also flew us to Florida to play golf at TPC Sawgrass.) We were happy with IBM. The company satisfied us – then. But something happened when Lou left.  IBM retreated and retrenched, almost like a revenge binge, like IBM’s DNA was re-asserting itself in response to Gerstner’s medicine (which kept the company healthy for over a decade). How in the world did IBM miss the world?

Which takes us to now.

Despite market trends, competition, the financial performance of the company and leadership, IBM still has some great strategic options, some of which are already underway. But it also has timing problems. Big timing problems. The board must be going crazy.  How much patience are directors expected to have?

It’s not that the strategic concept is wrong, because it’s not. It’s not that investments in future business models, products and services are wrong, because they’re not. The problem is the timing between execution and outcomes, and how strategies only work when they well-timed and well-executed.

Let’s look at what IBM told us on April 18 (the italics are mine):

“Cloud revenue of $14.6 billion over the last 12 months: cloud as-a-service annual exit run rate of $8.6 billion in the quarter, up 59 percent year to year (up 61 percent adjusting for currency)

"In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives … in addition, we are developing and bringing to market emerging technologies such as blockchain and quantum

“First-quarter cloud revenues increased 33 percent (up 35 percent adjusting for currency) to $3.5 billion.

“Revenues from analytics increased 6 percent (up 7 percent adjusting for currency). 

“Revenues from mobile increased 20 percent (up 22 percent adjusting for currency) and revenues from security increased 9 percent (up 10 percent adjusting for currency).”

Does anyone need any more evidence about what IBM should be doing? The list is obvious – and consistent with industry trends around emerging technology and digital transformation: AI, cloud computing, mobility, analytics, security and appropriate investments in enabling technologies like blockchain and quantum. While I might add augmented reality and IOT to the list, IBM’s list is solid. So far, so good.

What’s not working?

“Global Business Services (includes Consulting, Global Process Services and Application Management) – revenues of $4.0 billion, down 3.0 percent.

“Technology Services & Cloud Platforms (includes Infrastructure Services, Technical Support Services and Integration Software) – revenues of $8.2 billion, down 2.5 percent.

“Systems (includes Systems Hardware and Operating Systems Software) – revenues of $1.4 billion, down 16.8 percent.

“Global Financing (includes financing and used equipment sales) – revenues of $405 million, down 1.2 percent.”

Strategically, IBM is doing the right things at least conceptually. Any respectable, high-brow consultancy would tell IBM to sell more stuff in the areas where revenue is increasing and less in areas where revenue is declining. But what about timing? What if it takes too long to adjust the good/bad ratios? How long can the good subsidize the bad – when the bad still generates most of the revenue? (“Strategic imperatives revenue of $33.6 billion over the last 12 months represents 42 percent of IBM revenue.”) Markets are less patient  and less forgiving  than directors. Markets and customers never wait.

What are the risks around slow-rolling the product/service transition? (Yes, IBM is slow-rolling it, as 20 straight quarters of declining revenue demonstrates.) The risks are serious and accelerating. While some investors may have patience, others are anything but anxious to see 25 straight quarters of declining revenue. The only way for IBM to succeed, therefore, is to immediately buy large chunks revenue in the strategic areas it believes are aligned with market and competitive trends: organic growth is not getting the job done. I argued this approach two years ago, but now there’s an undeniable urgency to acquire as many companies as possible with the greatest profitable revenue as quickly as possible: the largest corporate team at IBM today should be M&A. Not sales, not audit, not even R&D – but M&A.

The next CEO should be an outsider, like Gerstner was when he took the helm in 1993. The businesses losing money should be sold. The addition and integration – and I’m not underestimating how hard it is to integrate post-acquisition – should intentionally change the culture, which needs another transplant. The major competitors in each of the strategic areas should be identified, due diligence should begin and a not-so-short list of revenue-rich acquisition targets should be identified. IBM has obviously already done much of this. But the tradeoff between R&D (AKA, the "not invented here syndrome") and acquisition is always challenging, especially in highly competitive markets. Put another way, IBM should adopt the Cisco playbook, which for decades has acquired companies (IP and talent) to enhance their market position. But IBM needs to develop the skills and competencies around the rapid acquisition and quick integration of large, successful companies with very different corporate cultures. It therefore needs lots of new leaders – not just a new CEO – from outside the company.

IBM has $10B in cash and a market cap of around $150B (as of April 21, 2017). It could split its stock and with some even modest gains (and the $10B), finance a buying spree. It can also use the proceeds from the sale of declining businesses. There are many companies in the AI, cloud, mobility, analytics, security, blockchain, quantum computing, augmented reality and IOT spaces that would fulfill IBM’s long-term strategy (in the short-term) and fix its revenue problem. If they call me, I’ll tell them who to buy.  But the clock is ticking.