What IBM’s Path to EPS Performance Means for Customers

Coming off IBM’s sixth straight quarter of negative revenue growth and seventh straight quarter of missing consensus revenue expectations, Wall Street analysts have heightened scrutiny and openly questioned how IBM will be able to achieve its long stated $20 EPS goal by 2015. In response to these questions, IBM shared its strategy at a high level.

1.      Stabilize the STG (hardware) business to relatively flat profitability on an annual basis

To achieve this requires China to resolve and announce its broad-based economic reform plan, as this indecision substantially impacted IBM’s hardware performance this past quarter. Of course, over the past decade, IBM has been evolving away from hardware to more profitable software and services, with a plan to gradually wean itself off of its hardware business through divestiture. In the meantime, IBM must stop the bleeding in STG to relieve the pressure being placed on its other business units having to make up for STG’s short fallings.

2.      Return Growth Markets back to low-level profitability

This was the first time in IBM’s history that growth market performance trailed that of major markets. IBM claimed the poor hardware performance in China contributed substantially to the Growth Market performance differential. In conjunction with the above, IBM will be looking to bring new STG products to market and thereby return its Growth Market segment to mid-single digit growth.

3.      Continue to improve momentum in the Services business

IBM has been steadily improving overall performance in its Services business, with consistent backlog growth in both its transactional and outsourcing businesses, including growth in system implementation services for packaged applications. Services is a key driver for IBM, especially system implementation, as these services provide a strong entry point for IBM to sell long-term outsourcing services and IBM’s middleware software applications. These additional sales opportunities represent the higher-margin software and services that IBM has been evolving towards over the past decade, and will be a key driver for improved profitability and EPS performance.

4.      Return Software business to a more consistent profile

IBM had a small 2% growth Q3 Software performance. Considering Software now represents IBM’s second largest business unit, has demonstrated growth at much higher rates in previous quarters and represents the highest profit margin market for IBM, consistent and predictable growth is critical. IBM blamed historically weak Q3 sales in the software industry and, once again, stated a familiar refrain of a strong Software sales pipeline and that Q4 tends to be a very strong Software quarter. Underlying these statements is the fact that IBM admittedly did not execute well yet again. This has been an issue for many quarters and certainly top of mind for IBM and Wall Street analysts. IBM’s EPS model is built on consistent growth and profitability from Software, and therefore it is imperative that IBM addresses its performance issues, earn some wins, and build consistent growth momentum similar to its Services business.

These four areas represent the high-level roadmap over the next 9 quarters for IBM achieving its 2015 $20 EPS goal. Even though IBM has historically operated in business unit silos, each business unit’s performance will impact the pressure on the other business units as 2015 approaches. Executive management will be held accountable and judged on its ability to meet the EPS performance goal, regardless of how it is achieved. IBM’s CEO, Ginny Rometty, has already publicly expressed her frustrations regarding performance and the need for IBM to evolve faster to become more responsive to customer needs and execute at a higher level.

What this means for customers is an IBM that is more flexible and willing to explore creative ways to deliver greater value and improve commercial deal constructs across all business units. The potential opportunity for an optimized holistic IBM relationship across all business units exists for customers who are armed with accurate market intelligence and take a disciplined approach to negotiation preparation and execution.

If you would like to learn more about how UpperEdge has helped companies source, gain leverage, and negotiate highly competitive contracts with IBM, or if you have any questions or comments, please do not hesitate to contact jlazarto@upperedge.com.