The Most Interesting Thing About IBM’s Earnings

I worked for IBM for around a decade in a variety of roles, including marketing, internal audit, and competitive analysis, giving me an unusual amount of depth on how the company almost failed in the 1990s. The firm went from the most powerful technology company in the world to a joke over a short period, and I drafted one of the post mortems on where the company had gone wrong. After I left IBM, I got to know one of their board members, and we lamented together on the fall of the firm.

In a nutshell, the Watsons had built a powerful financial engine that allowed the company to be incredibly predictable with a business model so robust it could stand up to wars, economic downturns, and—competitively—the firm was untouchable. But this kind of stability ran against how CEOs and executives were compensated, and as executive salaries soared, IBM changed—destroying those elements that made the firm invulnerable and unbeatable.

Now imagine this, you have a company that is effectively a superhero; it is invulnerable to economic changes, the customers and employees are over the top loyal. You own the technology industry with market shares that rarely drift below 90% in any category, and to spike revenues, you destroy all of that. If you were doing something and you were successful at it, then changed, and the result sucked, what would you do? Wouldn’t you work to undo that?

Well, guess what? They finally did.

Let’s talk about that this week.

Rebuilding A Legend

I was into comic books as a kid, and (don’t tell anyone) I still read them from time to time. And there are standard plots where the superhero loses their powers and then struggles to come back. I’m not aware of one where the superhero loses their powers and effectively says, “Screw it, that superhero stuff sucked.”

What made IBM powerful were three things. They took care of their people, they formed deep relationships with their customers, and they operated on an annuity model. You didn’t buy from IBM; it was everything-as-a-service.

Now think about this, the current trend is everything-as-a-service. You don’t buy the big web services, you pay for them by the month, and the industry is currently pivoting to provide most everything, including hardware as a service. Fifty years ago, that was IBM’s model, and they rode it to dominate the industry.

The reason it is so difficult to pivot to this is that companies are built around selling products. This means the focus is on getting you to buy something, not on making you happy with what you buy. And as soon as you buy something, the firm wants you to buy something else because sales reps are compensated for sales, not customer satisfaction. And if you try to build customer satisfaction into the mix, it rarely works well because the financial performance metrics virtually always trump customer satisfaction. Oh, and you can’t trust customer satisfaction surveys anyway because folks cheat to get their scores up.

The result isn’t a relationship; it is two entities with opposing goals, the vendor who wants to maximize revenues in conflict with the customer that wants to minimize costs. With the old annuity model, IBM and their customers were in lockstep, IBM was successful when their customer was successful, and annuities tend to survive market downturns. With the product model, you and your customers are more like opponents where the motivation is to sell things that the customer doesn’t need or want.

For the last decade, IBM has been improving their customer loyalty scores, driving diversity and improving their employee relations, and slowly shifting from hardware and software sales, to services. With their latest financial report, they reached 60% annuity revenue. In effect, they are recreating the old IBM but with a cloud twist.

Wrapping Up

A common problem with iconic companies, whether we are talking about Apple, IBM, or even companies like Ford and Jaguar, is that they can forget what it was that made them great. I recall Thomas Watson Jr. saying that, to be successful, a firm has to be willing to change everything but who they are. IBM forgot that for a time as they tried to chase other firms Their latest financial report showcases that they now remember who they are, and that bodes well for their future and the future of their customers.

And that is the most interesting thing about IBM’s financials.