IBM posted very disappointing Q3 earnings and significantly missed Wall Street’s expectations, representing IBM’s 10th consecutive quarter of declining revenue. It was so significant that CEO Ginni Rometty participated on the earnings call for the first time in her tenure, and the questions she fielded from Wall Street analysts were very direct and challenging.
To summarize IBM’s Q3 performance, revenue declined across all market segments and geographies. IBM touted growth in its strategic imperatives of business analytics, cloud, and what they are calling engagement which encompasses mobility, social media, and security. But these strategic imperatives are too small a percentage of IBM’s overall business to offset the steep declines of the larger business units.
The good news for shareholders is IBM has abandoned its long-term goal of achieving $20 EPS by 2015, as many believe that IBM’s focus on this goal has been too consuming to the detriment of its culture, customer value, and revenue performance. IBM has been reducing headcount, taking advantage of lower tax rates and previously favorable currency exchange rates, and buying back shares to manipulate EPS for quite some time now. However, as we have reported for some time now, IBM would not be able to reach its $20 EPS goal without growing top line revenue, and the bell has finally tolled for IBM.
IBM has been in the process of transforming its business from lower margin hardware and services to higher margin and more profitable software and services. Ms. Rometty is focused on the longer term goal of where the market is going, not where it is today, and trying to get this large behemoth to accelerate this transition quickly. But during this transition IBM is suffering declines and many are questioning whether IBM’s strategy is correct, whether IBM has the leadership and capabilities to execute to this strategy, and whether there are more serious underlying issues within IBM that have been created by the actions to achieve this all-consuming $20 EPS goal.
In recent years there has been considerable turnover within IBM’s workforce that has included replacing higher paid, more experienced resources with lower cost, less experienced resources. Many believe the resulting impact has been lower quality services and value for customers, causing customers to seek other alternatives and impacting IBM’s ability to utilize its services arm to generate software and higher margin services deals. Services are the critical component for IBM. It provides IBM relationship development opportunities with senior executives, gains them access and insight into customers’ businesses and challenges, and provides a business development generation platform for IBM to sell its higher margin software and services. The failure of services to deliver value to customers negatively impacts everything, and IBM’s focus on growing EPS at all costs at the peril of delivering customer value we believe is at the root of IBM’s revenue declines.
So what does this mean for customers? It means that the IBM machine is fragile but by no means dead. IBM still has a tremendous amount of skills and capabilities that can deliver customer value. Only time will tell if IBM has the right strategy and execution capabilities. But IBM, and specifically Ginny Rometty, is under intense pressure to generate revenue in every business segment and geographic region. All hands are on deck to engage customers and sell solutions, and when properly prodded, IBM is currently demonstrating a much higher degree of flexibility to close deals. This approach is being driven from the top down and presents tremendous negotiation leverage for customers.
This environment provides customers with a unique opportunity to optimize their relationship with IBM across all business segments (hardware, software, and services). But the revenue push is driving IBM sales executives to maximize all revenue opportunities. Therefore, the ability to achieve best-in-class commercial deals with IBM is conditioned on having a well-reasoned negotiation strategy, with clearly defined goals supported by market intelligence, and a solid communication approach with executive participation. Customers armed with sound intelligence on what is achievable, coupled with strong fortitude and conviction to negotiate, will benefit most from the current environment.
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