This is an excerpt from Robert X. Cringely’s new e-book, “The Decline and Fall of IBM,” available at Amazon.com.
“The story of this book began in the summer of 2007, when I was shooting a TV documentary called “The Transformation Age: Surviving a Technology Revolution,” at the Mayo Clinic in Rochester, Minn. Rochester has two main employers, Mayo and IBM, and a reporter can’t spend several days in town without hearing a lot about both. What I heard about IBM was very disturbing. Huge layoffs were coming as IBM tried to transfer much of its U.S. services business directly to lower-cost countries like India and Argentina. It felt to me like a step down in customer service, and from what I heard, the IBMers weren’t being treated well, either. And yet there was nothing about it even in the local press.
I’ve been a professional journalist for more than 40 years, and my medium of choice these days is the Internet, where I am a blogger. Bloggers like me are the 21st century version of newspaper beat reporters. Only bloggers have the patience (or obsessive-compulsive disorder) to follow one company every day. The traditional business press doesn’t tend to follow companies closely enough to really understand the way they work, nor do they stay long enough to see emerging trends. Today, business news is all about executive personalities, mergers and acquisitions, and of course quarterly earnings. The only time a traditional reporter bothers to look — really look — inside a company is if they have a book contract, and that is rare. But I’ve been banging away at this story for seven years.
Starting in 2007, during that trip to Minnesota, I saw troubling things at IBM. I saw the company changing, and not for the better. I saw the people of IBM (they are actually called “resources”) beginning to lose faith in their company, and starting to panic. I wrote story after story, and IBM workers called or wrote me, both to confirm my fears and to give me even more material.
I was naive. My hope was that when it became clear to the public what was happening at IBM that things would change. Apparently I was the only member of the press covering the story in any depth — sometimes the only one at all. I was sure the national press, or at least the trade press, would jump on this story as I wrote it. Politicians would notice. The grumbling of more than a million IBM retirees would bring the story more into public discourse. Shamed, IBM would reverse course and change behavior. None of that happened. This lack of deeper interest in IBM boggled my mind, and still does.
Even on the surface, IBM in early 2014 looks like a troubled company. Sales are flat to down, and earnings are, too. More IBM customers are probably unhappy with Big Blue right now than are happy. After years of corporate downsizing, employee morale is at an all-time low. Bonuses and even annual raises are rare. But for all that, IBM is still an enormous multinational corporation with high profits, deep pockets, and grand ambitions for new technical initiatives in cloud computing, Big Data analytics, and artificial intelligence, as embodied in the company’s “Jeopardy” game-show-winning Watson technology. Yet, for all this, IBM seems to have lost some of its mojo, or at least that’s what Wall Street and the business analysts are starting to think.
Just starting to think? The truth is that IBM is in deep trouble, and has been since before the Great Recession of 2008. The company has probably been doomed since 2010. It’s just that nobody knew it. These are harsh words, I know, and I don’t write them lightly. By doomed, I mean that IBM has chosen a path that, if unchanged, can only lead to decline, corporate despair, and ultimately insignificance for what was once the mightiest of American businesses.
If I am correct about IBM, whose fault is it?
In its 100 years of existence, the International Business Machines Company has had just nine chief executive officers. Two of those CEOs, Thomas J. Watson, and his son, Thomas J. Watson Jr., served for 57 of those 100 years. Between father and son, they created the first true multinational computer company, and defined what information technology meant for business in the 20th century. But the 20th century is over, and with it the old IBM. In the current century, IBM has had three CEOs: Louis V. Gerstner Jr., Samuel J. Palmisano, and Virginia M. Rometty. They have redefined Big Blue, changing its personality in the process. Some of this change was very good, some of it was inevitable, but much of it was bad.
Lou Gerstner saved IBM from a previous crisis in the 1990s, and then went on to set the company up for the crisis of today. Gerstner was a great leader who made important changes in IBM, but didn’t go far enough. Worse still, he made a few strategic errors that helped the company into its current predicament. Sam Palmisano reversed some of the good that Gerstner had done, and compounded what Gerstner did wrong. The current crisis was made inevitable on Palmisano’s watch. New CEO Ginni Rometty will probably take the fall for the mistakes of her predecessors. She simply hasn’t been on the job long enough to have been responsible for such a mess. But she’s at least partly to blame, because she also hasn’t done anything — anything — to fix it.
We’ll get to the details in a moment, but first, here is an email I received this January from a complete stranger at IBM. I have since confirmed the identity of this person. He or she is exactly as described. Some of the terminology may go over your head, but by the end of the book you’ll understand it all. Read it here, and then tell me there’s nothing wrong at IBM.
“Please keep this confidential as to who I am, because I’m going to tell you the inside scoop you cannot get. I am rated as a #1. That’s as high as you go, so calling me a disgruntled employee won’t work.
“Right now the pipeline is dry — the number of services folks on the bench is staggering and the next layoff is coming. The problem now is that the frequent rebalancing has destroyed morale, and so worried troops don’t perform well. Having taken punitive rather than thoughtful actions, Ginni has gutted the resources required to secure new business. Every B-School graduate learns not to do that. The result is a dry pipeline, and while you can try to blame the cloud for flagging sales, that doesn’t work. Those cloud data centers are growing. The demand for hardware didn’t shrink — it simply moved. Having eliminated what did not seem necessary, the brains and strategy behind the revenue are now gone, leaving only ‘do now’ perform people who cannot sell. Sales reps have no technical resources and so they cannot be effective. Right now we cannot sell. There is no one to provide technical support. The good people are finding jobs elsewhere. The [job] market outside IBM is improving. I am interviewing at a dozen companies now. Soon as I find something perfect for me, I’m gone. They don’t expect people like me to leave …
“Ginni has made one horrible mistake. Sam, and now, Ginni, has forgotten that IBM was made by its people. They have failed to understand their strongest assets, and shortly will pay for that. IBM just hit the tipping point. I do not think there is any way back.”
Years ago, IBM could sell an idea. They’d come in, manage a project, develop an application, and it would make a big difference to the customer. IBM would generally deliver on their promises, and those benefits more than paid for the high cost of the project and the computers. IBM transformed banks by getting them off ledger books. Remember the term “bankers’ hours”? Banks were only open to the public for part of the day. The rest of the time was spent with the doors closed, reconciling the transactions.
But that was then, and this is now. IBM’s performance on its accounts over the last 10 years has damaged the company’s reputation. Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised. IBM is now hard-pressed to properly support what they sell. Those 10 years have traumatized IBM. Its existing businesses are underperforming, and its new businesses are at risk of not succeeding because the teams that will do the work are damaged.
Let’s look to the top of IBM to understand how this happened.
“The importance of managers being aligned with shareholders — not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company — became a critical part of the management philosophy I brought to IBM,” claims former CEO Lou Gerstner in his book, “Who Says Elephants Can’t Dance?”
Defying (or perhaps learning from) Gerstner, IBM’s leaders today are fully isolated and immune from the long-term consequences of their decisions. People who own companies manage them to be viable for the long term. IBM’s leaders do not.
This book had to be written because writing the same story over and over for seven years hasn’t changed anything. The only possible way to still accomplish that, I figured, was to put all I know about IBM in one place, lead readers through the story, and at the end take a shot at explaining how to actually fix IBM. The last chapter goes into some detail on how to get IBM back on course. It isn’t too late for that, though time is growing short.
The title is based on Edward Gibbon’s “The History of the Decline and Fall of the Roman Empire,” published in six volumes beginning in 1776. “Decline and Fall” was the first modern book on Roman history. It was relatively objective, and drawn from primary sources. And it recounted the fall of an empire some thought would last forever. In industrial terms, many people thought the same about IBM.
Gibbon’s thesis was that the Roman Empire fell prey to barbarian invasions because of a loss of virtue. The Romans became weak over time, outsourcing the defense of their empire to barbarian mercenaries, who eventually took over. Gibbon saw this Praetorian Guard as the cause of decay, abusing their power through imperial assassinations and incessant demands for more pay.
The Praetorian Guard appears to be in charge these days at IBM, as you’ll see.
Robert X. Cringely is the author of “Accidental Empires: How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date.” Most recently, he was the host and writer of the Maryland Public Television documentary “The Tranformation Age: Surviving a Technology Revolution with Robert X. Cringely.” He blogs at I, Cringely; reach him @cringely.
This article originally appeared on Recode.net.