IBM reported net income of more than $3 billion for 1994. After three years in the red and total net losses of nearly $16 billion, IBM’s rebound has brought new hope to the company’s shareholders, employees and customers. According to the company’s management, which has promised a further $1 billion reduction in costs, there is every prospect for IBM’s earnings to rise by a third during 1995, bringing more than $4 billion to the bottom line. IBM’s total debt, which exceeded $29 billion in 1992, has been pared down to slightly more than $22 billion; its net worth, which had fallen below $20 billion in 1993, is now $23.4 billion; its share price, which had been as low as $40.63 two years ago is now well above $80. Wall Street analysts are generally confident IBM’s earnings – and share price – will rise again in 1995. Big Blue’s revival has come at an enormous cost. IBM’s payroll is down to 219,000 from a peak of about twice that in 1985. Many of its factories have been closed and other facilities have been relocated from the advanced countries to the third world.
Firm footing
Moreover – as the company’s forthright leaders have repeatedly pointed out – IBM has not solved all its old problems nor provided satisfactory responses to the new challenges that have emerged in recent months. It is possible, even likely, that IBM will have to take additional drastic measures before it is once again on firm footing. Although IBM is in far better financial shape than it has been in years, its most recent annual report reveals that the company still has severe structural weaknesses. The trends since the installation of IBM’s current management team are generally positive, so there is indeed a basis for optimism about the company’s future. But some of IBM’s problems may force chairman Louis V Gerstner Jr to go beyond the general restructuring that has marked the past few years. The next wave of change that will wash over IBM will include a review of all the company’s product lines – both goods and services – and their priorities. Having returned to profitability, IBM could continue along its current course. But unless the company makes further radical changes in its operations, the problems that beset it in the early years of the decade will very likely recur… and this time IBM will be unable to combat them using the same cost-cutting techniques. The most severe structural problem IBM now faces lies in the group of activities it classifies as hardware manufacturing. IBM is not making money in hardware and it apparently hasn’t for some years. While IBM is believed to be bringing money to the bottom line from certain product lines – mainframe processors are probably the prime example – its losses on personal computers and some other machinery are so great that they are nonetheless dragging Big Blue into the red. Nor can IBM allow itself to continue losing money in services… or expect that its services business will automatically become profitable if the 1956 consent decree is dropped. Moreover, where IBM does make substantial profit – in software, in maintenance and, to a lesser degree, in financing – the basis of its success lies very much in the mainframe business. Mainframe software and mainframe systems maintenance seem to be fuelling IBM’s entire business. Thus any changes in IBM’s revenue from these activities will have an enormous effect on the company’s profitability. IBM cannot expect its problems in hardware manufacturing simply to disappear. Even if the company’s overall situation in hardware rises into profitability as the remaining effects of the cost-cutting campaign take hold, one fact will remain: assuming mainframes and AS/400s are successful, other portions of IBM’s broad line of computing equipment must be deeply under water. This observation should not come as a surprise. IBM’s executives have said that the company is disappointed with the perfor mance of its personal computer group. This harsh assessment is one of the reasons IBM does not break out its figures for PC revenue and profit but inst
ead lumps PCs with RS/6000 workstations and servers.
By Hesh Wiener
But IBM may not really appreciate how much it must change – and how soon – in order to survive. If IBM does not make very great progress well before the end of 1996, it may not survive the decade as an industry leader. In fact, it may not survive the decade at all. IBM’s pre-eminence in mainframes is its greatest asset; its dependence on mainframes is its greatest liability. When IBM loses a mainframe footprint to an alternative (rather than to a compatible processor) it loses not only hardware revenue but also income from software, maintenance and peripherals. Further, IBM’s future opportunities to sell goods and services are foreclosed. No company that leaves the mainframe environment will ever return. IBM may be lulling itself into a false sense of security as its mainframe business rebounds in reaction to the attractive 9672 processors and the compelling financing bundles in which it has wrapped the new computers. But IBM’s strategy is as inflexible for the vendor as it is for customers. While preserving the base that had included 3090s, 9121s, 9021s and even 4300s, the 9672 package forces customers to view an IBM mainframe as a single cost item that must additionally be burdened with personnel and physical plant expenses (plus canned software package fees). For the first time in many years, IBM is compelling information technology directors – and enabling their general and financial managers – to see precisely how much it costs to run a glass house. It presents a clear target to competitors, such as Hewlett-Packard, and it also makes it very easy to compare the costs of in-house computing with outsourcing. The result may well be an upsurge in IBM’s services business, which is only now beginning to approach profitability. It will certainly bring many user companies to the doorstep of outsourcing. It is bound to pit IBM against in-house information processing departments and it may encourage large enterprises to contemplate a strategy that IBM should fear: moving glass house operations to an outsourcing company and then creating a new computing infrastructure based on networks, open systems and competitive procurement at every level. A third of IBM’s installed mainframe base is moving in this direction already, using Unix servers with aggregate computing power that dwarfs that of their mainframe systems. If another third follows, the remainder of the base will have no practical choice: it will have to increase emphasis on open systems at the expense of the mainframe. IBM’s position is made all the more precarious by huge losses in the PC business and, we suspect, losses in the RS/6000 hardware market, too.
Razor-thin margins
IBM’s revenue from computers based on Intel and Power processor technology now exceeds that from its proprietary lines (mainframes and AS/400s). Intake from the loss-making open segments of its business is growing, while that from its profitable closed segments is not. Drag-along business in the proprietary processor group is falling, due principally to the loss of mainframe disk market share to EMC (and by the end of the year, Hitachi, too) and compounded by pressures on the tape market, the printer business and the transition from 3745 communications controllers to PC-based gateway servers. Even if IBM can bring (or has already brought) its RS/6000 business into the black, it is doubtful that it could prosper in that market without making huge improvements in its desktop computing business. The cost of servers is small (and diminishing) compared to the cost of end-user terminals they support. The companies that IBM must compete with can survive on razor-thin margins and, during less stressful periods, use the increased profits to extend their reach. IBM, by contrast, can report profits during the fat years, but does not seem able to create adequate reserves for lean times. Its situation may be better than it was one, two and three years go, but it still more closely resembles one of the bi
g auto makers than it does its thriving competitors, such as Hewlett-Packard, Compaq or even tiny EMC. Wall Street is praising IBM, and it may be right about the next year or so. IBM has brought money to the bottom line, reduced its debt, slashed its overhead and introduced a large number of improved products. But beneath the surface and beyond the horizons that limit investors’ views, IBM must surmount barriers that could prove as daunting as any faced by its prior management. As IBM struggles against competitors, against circumstances, against its own ingrained bad habits, it will be forced to make some difficult choices. IBM is no longer the protector of customers it once was; it may not even be able to protect itself. (C) 1995 Technology News Ltd.
