At UpperEdge, clients often ask us, “When is the best time to negotiate with a particular vendor?” Clients will inquire about quarter-end, year-end, earlier renewal, new large strategic purchase, etc. The answer is that it depends on a number of factors and is typically unique to the specific circumstances of the client and vendor at that particular point in time. However, there are certain vendor specific situations that arise that make for an ideal time to negotiate with a particular vendor. For 2016, that vendor would be IBM.
The Perfect Storm
IBM recently reported its 15th straight quarter of revenue decline and is in the middle of transforming its business to a cognitive solutions and cloud platform company. While it is understandable that transformations do take time to take hold, IBM’s transformation has been particularly painful as evidenced by its steady revenue and stock price decline. In particular, IBM’s growth in its strategic imperatives (which include cloud, analytics, social, security, and mobility) cannot keep pace with the steep revenue decline in its traditional hardware and services businesses.
It is worth noting that this decline has existed over the entire tenure of Ginni Rometty as CEO, including IBM’s abandonment of its prior strategic goal of reaching $20 EPS by the end of 2015. IBM’s EPS was $14.94 for fiscal 2015. As the first female CEO in one of the most iconic blue chip companies in the world, do not underestimate the importance, drive, and pressure for Ms. Rometty to succeed, both personally and as a pioneer and role model for young women.
IBM also just recently executed on a significantly large round of layoffs, with big cuts in its GTS business unit. IBM does not publicly report layoffs as they call it workforce restructuring, which is their way of hiring lower cost offshore resources to replace its more expensive US resources. But in various online forums IBM staffers have been commenting that the layoff is significant, with some claiming as much as 1/3 of the workforce, although IBM has refuted that number. Additionally, IBM’s severance packages have been slashed to 1 months’ pay, regardless of tenure; whereas severance was previously reported to be 6 months’ pay.
All of the above are casting IBM in a very negative light, from the way they have treated long tenured employees, to their poor revenue and stock performance, to Wall Street’s skepticism regarding IBM’s strategic direction and the leadership to execute against it.
IBM’s weakened position provides significant customer negotiation leverage
This is about as weakened as we have seen IBM in many years. Therefore, customers have their greatest negotiation leverage as IBM must close new deals and expand current relationships, and can ill afford to lose current customers or have customers scale back their IBM spend.
With IBM’s substantial workforce rebalancing and strategic business transformation ongoing, it is a perfect time to meet with IBM to conduct a personal assessment of their transformation and strategic direction by having them explain how these developments can benefit your organization. This inquiry meeting can serve as the platform for a subsequent meeting to re-negotiate your current relationship across all of IBM’s business units (Hardware, Software, and Services), including any new spend initiatives.
We recommend IBM customer’s employ the following approach:
- Meet with your IBM executive sponsor (or request an executive sponsor if you do not currently have one) to understand IBM’s strategic direction in greater detail
- Determine if and where your demand requirements map to IBM’s strategic direction
- Identify pain points in your current IBM relationship
- Conduct a mark-to-market assessment of key financial and commercial terms
- Define your desired relationship structure with IBM, including financial and commercial terms
- Identify potential alternatives for gradually displacing IBM in discrete areas where possible
- Re-engage with your IBM executive sponsor to discuss your redefined relationship expectations, positioning this as a requirement for continued and expanded investment in IBM
IBM should welcome the opportunity to engage in this dialogue. Remember, IBM is experiencing heightened pressure unlike what we have seen for at least the past decade and can ill afford to lose customers or have customers downsize their annual IBM investments. Market circumstances are forcing IBM’s hand to be more customer friendly and accommodating, including agreeing to non-standard financial and commercial concessions and other relationship investments if necessary. Customers that make re-negotiating with IBM in 2016 a priority, and take the time to gather information and intelligence to approach IBM from a position of strength, have an unprecedented opportunity to transform their IBM relationship. It is truly a rare opportunity for customers to significantly redefine and establish a new relationship foundation for investment over the next 5 years.
We at UpperEdge would love to receive your feedback and thoughts regarding IBM’s strategic direction and approach to customers, so please do not hesitate to post a comment.
In addition, after going to press, it has been recently reported that IBM is under pressure to reduce margins in order to secure a $1B renewal of its expiring outsourcing deal with Vodafone India.