By Bill Moran, Rich Ptak
Recently, much ado was made over IBM’s problems in
integrating its internal email system. As we understand it, the project
involved returning IBM’s email services in-house after they had been outsourced
to an India-based company. Things did not go well.
First, a little background on email systems. During an
early 2000’s acquisition binge, a major Palo Alto-based IT company set about integrating
three separate email systems. After multiple years of problems, frustration,
confusion, and communications issues, the project was successfully completed. The
results were not that surprising to us. A not-so-long ago survey had enterprise
executives identify the most critical in-house task that IT departments weren’t
addressing. Fixing corporate email problems was at the top of the list! Apparently,
that continues today. All our
information is current as of November 8, 2021.
Back to IBM, several questions came to mind: why would a leading sophisticated
technology, product, and service provider be motivated to outsource a critical
task like email to another company? Did no one consider the downside risks of
such a move? One can imagine IBM encountering and dealing with numerous email
system challenges while managing customer systems. Why not use this experience
to fix their own problem?
Any of these or a number of other issues might trip up the
company that was once the undisputed industry giant and leader. The challenges confronting
an enterprise attempting to successfully complete very large, complicated IT
projects are neither unique nor unknown. (See our Appendix – On the Failure of
Large Projects.) Current IBM challenges include identifying (and implementing) the
best strategy to enter a fiercely competitive market dominated by large
players. Or integrating a series of acquisitions, multiplying lawsuits,
employee retention, etc. Each must be viewed in proper perspective if it is to
be resolved. Isn’t there enough on IBM’s plate already? We believe further
examination is merited.
Our goal is to provide commentary and observations, not
solutions. Limiting the number of issues examined allowed us to keep to a
reasonable length. While not exhaustive, this list provides insight into the
range, timeliness, and variety of challenges facing IBM.
Potential Tripwires
Of the large
and variety number of problems IBM faces, we chose nine for
our commentary. Not in priority order, these are:
- Completing
the Red Hat integration.
- Increasing profitable growth.
- Lawsuits involving GlobalFoundries, age
discrimination, etc.
- Integrating numerous recently
acquired small companies
- Completing Kyndryl creation and
launch.
- Preparing
for and winning serious competitive battles in cloud, AI, and Quantum
- Rationalization of the management team.
- Internal
IT issues.Other internal morale issues, etc.
What could
possibly go wrong?
Item 1 – Completing
the Red Hat integration. Obviously,
integrating Red Hat (13,000 employees, market value over $26 billion) into IBM was
going to be tricky. Many Red Hat customers are direct IBM competitors e.g.,
Microsoft. A great deal of Red Hat’s value depends on its preserving “Swiss-like
neutrality[1]” in the marketplace. This makes integration
of the IBM and Red Hat sales forces very difficult, perhaps impossible. We
suspect there exist additional integration dilemmas for other functions. In
some sense integration is necessary, but operational independence must be
preserved.
Notably, IBM’s (then) President Jim Whitehurst’s reply to
a query about where he spent most of his time said it was on “Red Hat issues”.
This speaks volumes about the need for full-time executive focus on the issue.
It also implies integration is far from complete. Given Red Hat’s size, number
of people involved and the radical difference in cultures, this is no surprise.
Add-in the neutrality issues that restrict IBM’s options, the complexity of the
task is clear. We believe “neutrality” is not a short-term threat but has the
significant potential to become a long-term threat. Failure to maintain
absolute Red Hat neutrality (by favoring IBM products) would hurt IBM badly in
the marketplace.
Whitehurst’s resignation was a surprise. His past success
along with Red Hat open-source credibility could have provided a much-needed
boost to IBM’s operating culture. IBM customers have been very positive about
Red Hat sales and support staff.
Whitehurst will continue as an “advisor” (no further details
available). Our hope (and advice) is that IBM move quickly to assign an experienced
executive to focus on the integration while maintaining as much Whitehurst
involvement as possible.
Item 2 – Increasing profitable growth. This is a serious long-term issue totally
belonging to IBM CEO Arvind Krishna. He must build and drive the infrastructure
to accomplish this. IBM Storage has been a bright spot (not so much in the
latest results), but it can’t do it alone. For instance, IBM’s Cloud-based
business continues to grow, but at a slower rate from a smaller base than competitors,
AWS, Microsoft, and Google. More on this later.
Item 3 – Addressing Lawsuits involving GlobalFoundries,
age discrimination, etc. Lawyers have day-to-day responsibility for legal issues. Serious issues
may require Board-level decisions and significant CEO involvement. Without case
details, we simply identify the broad risks for IBM. Any litigation can
potentially lead to a problem negatively impacting success. Close monitoring by
an executive will help to avoid surprises.
Item 4 – Integrating numerous recently acquired small companies. Companies important enough to buy
typically need exceptional staff to achieve maximum benefit. IBM’s track record
of both successes and failures at integration raises concerns. Today’s stream
of small acquisitions (BoxBoat Technologies, Bluetab Solutions Group, etc.) magnifies
the issue. To us, an ongoing flow of acquisitions appears risky and unnecessary.
Not simply because failure is costly in itself; but because it means missed opportunities.
It consumes resources (time, funds) that could have been invested/utilized more
profitably. An issue although not typically an existential threat,
Item 5 – Completing Kyndryl creation and launch. CEO involvement should continue until
the Kyndryl spin-off is complete and fully functioning independent of IBM. We believe
the risk to IBM is minor. Of more
concern are inflated expectations of large benefits to IBM from an independent Kyndryl. Time will tell whether Kyndryl’s
board and management will see their best interest lies in supporting IBM’s
cooperative vision. Similar ideas of a bright future with GlobalFoundries fell
flat. In addition to lawsuits, there is GlobalFoundries’ potential links with
an IBM competitor. (See the Quantum market discussion.)
Item 6 – Preparing for serious competitive battles in Cloud, AI,
and Quantum. Very fierce
competitive battles will be fought for each of these markets. Every major
vendor, as well as many emerging ones are engaged here. CEO Krishna cited
statistics asserting that the company “providing the platform” will get 90% of
the value. AWS, Microsoft, and Google agree. All are competing to claim that
position. All have significantly larger market penetration, and annual growth
rates surpassing IBM. Red Hat’s open-source positioning and technology are key
IBM advantages. But Swiss-like neutrality may very well prove a double-edged
sword in this competition.
CEO Arvind Krishna further seeks to avoid “useless”
competition through partnerships and alliances. That strategy may initially
deliver successes. However, historically, particularly when involving large
competitors, the payoff is usually disappointing. Initial willingness to share
succumbs to pressures of converging products and services as technology
advances. As these overlap, conflicts increase and margins shrink. The fiercest
battle for market share is and will be fought at the point-of-sales. Especially
as rapidly evolving user interfaces make the underlying technology increasingly
opaque.
To illustrate this point, let’s take a deeper look at
Quantum. IBM provides an impressive technology and popular development platform
to a wide variety, quality, and number of quantum computing users. They
dominate the absolute volume and variety of circuits run on quantum platforms. They
offer a sophisticated, open implementation environment with Qiskit. They have made
numerous contributions and advances to quantum computing. However, some
competitors have a track record of success at gaining market share even without
the best technology. Quantum is evolving more rapidly than expected, with
surprising results as the parameters change. Error correction/rate reduction
provides us an example.
Inherently large error rates remain a major challenge for
quantum hardware driving furious competition among competing architectures. IBM
and Google both forecast a million-qubit error-corrected system by the end of
the decade. On the other hand, M12-funded
PsiQuantum (in partnership with GlobalFoundries) projects mid-decade delivery
of a fully error-corrected quantum computer. PsiQuantum has sufficient Wall
Street/Investor credibility for a recent cash infusion to boost total funding
to $665M and a valuation exceeding $3.1B. But market success requires more than
impressive technology and massive funding. It requires strong marketing to
attract customers, and sales expertise to persuade customers to buy. China’s delivery
of quantum supremacy with an optically based quantum device adds pressures.
Time and again it’s been proven that the BEST technology
can, and frequently will lose to a BETTER sales/marketing team. IBM will have
to avoid repeating go-to-market and sales missteps that squandered past advantages
of best in-class, and first-to-market products. Remember Microsoft’s Windows
was (and for many remains) a kludgy, inelegant, not-so-wonderful user interface.
But it permits non-IT, non-programming staff to leverage the power of the
computer with relative ease. Smart sales and marketing facilitated its market
domination until Apple computers and eventually the iPhone
arrived on the scene.
We think IBM’s competitiveness in the cloud, quantum and,
and AI marketplace is a very serious risk for the company. Efforts attempting
to finesse marketplace competition does not appear a particularly wise
long-term strategy.
Item 7 – Rationalizing the management team IBM has multiple areas in need of
exceptional leadership. Today, apparently overlapping, and confusing role
definition makes it difficult to determine where responsibility for success
resides. Cloud and Sales roles appear especially impacted. IBM must win significant
sales contracts. Once IBM had the sales and marketing talent
that was world-class, the envy of competitors. We’ve had IBM customers bemoan
the lack of talented sales reps. To succeed, world-class sales and marketing
expertise and field experience is mandatory. It is not there today.
As smart and experienced as the current CEO is, he has no
experience in direct sales or marketing. We could not identify any field sales
rep experience for any of the 21
members of IBM’s executive team. Some have sales management experience. Unfortunately,
such management is no substitute for real in-field experience.
As mentioned, Red Hat requires senior management
attention. This need extends to the integration of acquired companies. Also, IBM’s
culture is very strong. Mainframers live in their own world; managing it would
be a significant challenge for any newcomers to that world. Good judgement is
needed when assigning new hires to senior executive roles.
Item 8 – Internal IT issues. Clearly the email fiasco requires a response; it is
neither the greatest nor least of IBM’s current IT challenges. CEO Krishna can
go hands-on or initiate a major internal IT overhaul with a trusted CIO. We recommend
the CIO route.
Item 9 – Other internal morale issues, etc. Finally, our instincts, experience, and research hint at troubling
undercurrents in IBM today. Employees are concerned about past mismanagement and
poor decisions. Trust in the company has weakened; morale needs attention. Industry
surveys indicate many employees are looking to change jobs/employers as pandemic
lock-downs ease. Combined with low morale, the situation can become critical. Managers
need to recognize the signs, and act quickly to resolve underlying issues.
Final
Observations and Comments
We started by asking which
challenge facing IBM would trip them up. We examined a subset of possible
issues. All are significant to some degree, most are confronted and dealt with
in any significantly large company. Some are recurring; as such they will require
continuing consistent managerial time and attention. A few are self-inflicted
and are relatively straightforward to resolve. The chart below summarizes our thoughts. Further elaboration of our
conclusions resumes after the chart.
Potential IBM
tripwires
|
Issue
|
LT Int Term
Short Term
|
Comments
|
1 Red Hat
Integration
|
## --- #
|
A manageable problem with short term spikes. Long term
risk.
|
2 Profitable
Growth
|
## ##
#
|
Major issue both intermediate & long term, not as
critical in short term.
|
3 Legal Issues
|
?
? ?
|
Potentially large problem. IBM lawyers handle and keep executive
management informed.
|
4 Integrate acquisitions
|
--- --- ---
|
Careful management needed to realize the expected
benefits and avoid loss of opportunistic benefits.
|
5 Kyndryl Launch
|
# --- ---
|
Long term could be troublesome, may not match IBM
expectations.
|
6 Competitive
battles
|
## ##
#
|
Very difficult to resolve, requiring long term solution.
|
7 Rationalize
Mgmt. Team
|
--- --- #
|
Short term that CEO must solve e.g., who is in overall
charge of Cloud activities?
|
8 Internal IT
issues
|
--- --- #
|
An able, empowered CIO can solve the problems.
|
9 Staff morale,
turnover
|
#
# #
|
An ongoing problem but should be manageable.
|
Definitions:
·
Long
term is more than 5 years.
·
Intermediate
is 18 months to 5 years.
·
Short
term is now (Sept 2021) to the next 18 months.
·
# - a significant issue that is bad,
troublesome, and difficult to handle.
·
## - a major issue with potential to do
real damage to the corporation.
·
--- a real but not fatal issue that should be dealt with by management with
minimal fuss.
Assumptions:
·
Issues
of serious interest to the financial community may impact ratings. See Motley
Fool discussion of IBM positives and risks from an investor’s viewpoint.
·
Economic
recovery will be allowed to continue without another massive lockdown.
·
Also,
in any discussion of the future are Nassim Taleb’s “black swans, i.e., Events (good or bad) unpredicted and/or even unpredictable which may
necessitate radical alterations in strategy, tactics, plans, etc.
To us, the competitive
market battles and the need for profitable growth loom large. The most unsettling
issue is the lack of field sales expertise on the management team. IBM’s anemic
market share poses a serious problem, compounded by sales force weaknesses as
relayed to us by customers. IBM market growth needs to exceed that of
well-positioned, sales and market powerhouse rivals in AI and Cloud markets.
The emerging Quantum market will require exceptional marketing plans and sales
effort. IBM cannot repeat earlier new technology product market entry missteps.
We see no evidence that IBM recognizes the problem’s size or seriousness today.
Acquiring Red Hat was a wise move and
very helpful to IBM. However, we believe that the “Swiss Neutrality” policy
severely limits IBM’s ability to leverage Red Hat technology to directly
benefit sales of other IBM products. Overt attempts to do so would seriously
damage both companies’ reputations and business. So far, IBM and Red Hat both
appear to be successfully avoiding any such attempts. The risk and temptation
remain. A serious potential tripwire.
IBM CEO Krishna’s proven background,
intelligence, and expertise in technology demonstrate he has the strengths and
experience for managerial success. As CEO, he must choose where to focus his
efforts, what to delegate and to whom. So far, except as noted above, his
decisions have been encouraging.
Some
believe IBM is irrelevant in today’s technology world. Our opinion is that with
insightful, proactive management it can be a very serious contender and
contributor. Success requires correctly choosing where to focus efforts along with
clearly assigned responsibility and accountability. We think CEO Krishna can
succeed. We wish he and IBM the best in their efforts.
Appendix - On the Failure of Large Projects
When large IT projects fail, it normally involves one or more
of these results:
•
The project is extremely late.
•
The project is vastly over budget.
•
Key functions do not work, and/or they do
not deliver expected benefits.
•
The project never completes and is
abandoned.
Numerous examples can be found in
government, e.g., in the US there is the Obamacare website rollout fiasco. The
UK Postal IT experienced a system foul-up which led to prosecution of some 700
innocent people. Poul-Henning Kamp’s discussion of that event appeared in the Communications
of the ACM, November 2021 entitled: “What went wrong? “ (public
access to the article is available here: https://tinyurl.com/ydtvwty3). In the
private sector, failures can be and often are discretely concealed, thus
avoiding negative publicity and potential legal liabilities.
For a multi-level service vendor like
IBM, another factor comes into play. IBM does not use its best talent for
internal projects. The best will be assigned to revenue-producing customer
projects. No vendor can afford to do otherwise.
That said, it is important to not
overrate the importance of internal project failure. While such events are
embarrassing, any customer survey would reveal most, if not all prefer to have
the best of the vendor’s talent working on their problems, not the vendor’s.