New, Leaner IBM Tries to Beat the Blues

IBM’s uncharacteristically tough stand at a recent series of sales meetings erased any lingering doubts about its resolve to reverse its mounting misfortunes.

“There has never been so much pressure to meet (sales) quotas,” said one participant, a 15-year IBM veteran, still agitated several days after the latest meeting. “The message was loud and clear: If quotas aren’t met this year, you won’t have to worry about them next year. There will be no second chances.”

In its search for relief from a hangover brought on by years of overly rapid growth and breathtakingly fast changes in the computer industry, International Business Machines Corp. is going to greater lengths than even its fiercely loyal and uncommonly flexible work force was prepared for.

After vowing as recently as last spring that it wouldn’t resort to early-retirement inducements as a cost-cutting tool, IBM last month offered employees 50 and older an early-retirement plan that is the broadest in the company’s history.

Expenses Severely Pruned

U.S. hiring essentially has been shut down. Business travel and other “discretionary expenses” have been severely pruned. Capital spending has been reined in to a steady $6 billion a year after growing at a healthy 20% annual clip in the early 1980s.

However, lest anyone think that IBM is content to hunker down until the industry pulls out of the severe sales slump that will soon enter its third year, it has refused to scale back its ambitious goals of 15% compounded annual sales and profit growth.

Rather than retreating from the hotly competitive personal computer market, as many had interpreted IBM Chief Executive John Akers to predict earlier this year, there are growing signs that the company is instead speeding up development of a new personal computer line.

Many believe that line will be so hard for imitators to copy and so aggressively priced that a huge industry shakeout will follow its introduction early next year.

And to the amazement of even its own employees--who are so accustomed to being moved around that they long ago dubbed their employer the “I’ve Been Moved” corporation--IBM is trying to stoke its suddenly stalled revenue growth by transforming an unprecedented number of managers and manufacturing personnel into salesmen.

Without hiring a single one outside, the company hopes to have some 10,000 U.S. salesmen in the field by the end of 1986, 4,000 more than it started the year with.

“Instead of crawling under a rock, there is a renewed attempt at IBM to achieve amazingly ambitious goals--far more ambitious than any other company would even dream of setting,” said Kenneth G. Bosomworth, president of International Resource Development, a Norwalk, Conn., consultant.

Its goals are all the more remarkable given the unusual paternalistic culture that dates back to the days of legendary IBM Chairman Thomas J. Watson Sr. IBM doesn’t permit employee layoffs, an important cost-cutting tool for most companies and a factor that sharply limits IBM’s flexibility.

For those reasons--as well as because IBM long has been the world’s most profitable company and one of its most admired--Akers’ actions are being watched with fascination by firms all over the world.

“An IBM that isn’t doing well is bad for the whole world economy,” said Jerry Minsky, president of Technology Finance Group, a computer-equipment leasing firm. “And because IBM’s single biggest strength is its people, the question of how it keeps employee morale up while it’s trying to find a way to get back its historic growth isn’t just an IBM issue; it’s a global issue.”

On both scores, IBM appears to be struggling.

Sharply Lower Earnings

Industry analysts, after initial optimism early this year, now consider IBM’s problems deeper than earlier believed and have sharply lowered their third-quarter and full-year earnings estimates to levels lower than those of a year ago. Net income was $6.56 billion last year, down from $6.58 billion the previous year. Analysts estimate 1986 earnings at about $6.1 billion.

A surprising number of employees and former employees--who normally are reticent on matters critical to IBM--maintain that morale is at its lowest level in years. They cite the newly high-pressure environment inside IBM, internal reorganizations occurring as frequently as every three months and a sense that management--particularly in the personal computer division--is grasping at straws.

“We just don’t seem to know what we’re doing,” said one veteran employee in IBM’s personal computer group, who is weighing several job offers outside the company. “The marketing strategy seems to change every week and nobody even knows what the product strategy is.”

Morale suffered its most serious blow, employees say, when IBM announced its “back to the field movement” last month. Although a company spokeswoman said such redeployment programs generally are voluntary at IBM, seen by employees as “one way of protecting the tradition of full employment,” many saw it as a de-facto breach of IBM’s no-layoffs policy.

“Imagine picking up the phone tomorrow and being told you’re being transferred (from New York) to Wyoming,” said an IBM engineer who is leaving the company rather than hawk IBM computers. “Wouldn’t you think they were trying to get rid of you? We keep reading that IBM isn’t going to breach its no-layoff policy, but if you ask me, this back to the field movement is an implicit layoff.”

Employees and industry analysts say defections among middle managers and salesmen are at their highest level in years.

“I can’t remember the last time it was this easy to hire away IBM people,” said Minsky. “You never heard IBM people saying, ‘We can’t take the heat.’ But they’re throwing up their hands now.”

Nor has the frustration escaped the senior executive ranks, where at least one defection is expected to be announced soon.

Solicits Employee Opinions

The company said through a spokeswoman that it routinely solicits employee opinions, and has found no decline in morale since the voluntary retirement program was announced. As of last spring, when it last conducted an employee survey, IBM said it found morale at an all-time high.

Employees, after all, are offered retraining in the case of being moved, the spokeswoman noted, or an extra five years worth of benefits in the case of early retirement--both far superior alternatives to being laid off.

(Chief Executive Akers, whose job it is to guide IBM through what many consider its most difficult transition ever, declined to be interviewed for this article.)

Analysts don’t look for IBM to scrap its sacred no-layoffs policy any time soon. But many are critical of IBM for failing to take more stringent steps than it has to reduce its work force.

“I feel like I’m committing heresy saying this, but somehow IBM got to be a very inefficient organization,” said Brian Jeffery, managing director of the International Technology Group, a Los Altos consultant. “They are overstaffed across the board, and particularly in middle management.”

Through attrition, a hiring freeze and its early retirement program, IBM hopes to cut its U.S. work force of 242,200 by 4,000 this year and by an additional 8,000 in 1987, thus trimming costs by about $600 million a year. Jeffery thinks the cutback should extend to about 20,000 more employees.

Bosomworth agrees that the “level of overstaffing is sufficiently serious to jeopardize their competitive efforts,” particularly in personal computers, where profit margins are small. Many of IBM’s PC competitors are tiny startups who can incur higher manufacturing costs and still undercut IBM’s prices because of their much lower overhead.

Controlling costs was not IBM’s concern back in the early 1970s when it committed itself to a mammoth plant remodernization project that many now consider the root of its current problems. The plan, overseen by then-Chief Executive Thomas J. Watson Jr., was to make IBM’s factories so efficient that the company could build computers in this country as cheaply as could low-cost producers overseas.

As long as the computer industry continued to grow 15% or more a year, as it did for well over a decade, the IBM plan seemed “a great triumph,” said Bosomworth.

But then economic growth slowed and the character of the computer industry changed. Demand slowed for the big, profitable mainframe computer systems that IBM excels at while cheaper personal computers, with their narrower profit margins, caught on instead.

Now, IBM’s modernization plan “is increasingly looking like a disaster financially because you have all these super-efficient facilities but layers and layers of people earning huge amounts of money,” Bosomworth said. “In retrospect, perhaps you’d have to say that all along it was a completely ridiculous” undertaking.

Bosomworth said that undertaking is perhaps the only problem IBM faces at the moment that was entirely of its own making. Many of its woes, he noted, are directly linked to the downturn in capital spending.

The company most certainly would not have moved as quickly out of the computer rental business as it did three years ago, for example, had it anticipated the slump. When it stopped renting computers to customers in favor of outright sales, IBM benefited from an immediate surge in revenue as rental customers bought computers. But income from computer rentals gave it a steady stream of revenue that IBM wishes it had now that computer sales are flat.

Others are less charitable.

“What did they think they were going to do for an encore?” Jeffery asks. “They had set overly ambitious targets. They put in decentralized planning, which really added to their problems. They were seriously overstaffed. And their traditional sources of growth--mainframes, as an example--were starting to slow. Of course, there were serious financial troubles ahead.”

Nor did IBM heed warnings from analysts and computer users to correct a serious computer-incompatibility problem that left many customers confused.

“They have six product lines and none talk to each other,” said Kimball Brown, a former IBM engineer and now an analyst at Dataquest, a market researcher in San Jose. “So if a user runs out of gas on the (system) 36 and needs a bigger system, he has to throw everything out and move up to something (from IBM) completely different or switch to Digital.”

Brown’s reference is to Digital Equipment Corp., which exploited this IBM weakness to stage a surprising comeback. DEC, itself on the ropes five years ago, said it is selling half of its computer systems--all of which are compatible with each other--to business customers, traditionally IBM’s main market.

Restoring Financial Health

For its part, IBM has recently begun merging two of its mid-line families so that within two years they will run on one set of applications software--a move that some think will go a long way toward restoring IBM’s financial health.

And IBM, which rarely discusses its strategy publicly, in recent months has identified a broad framework in an apparent attempt to clear up customer confusion and rejuvenate sales. Akers has told analysts that IBM plans to phase out some office products while concentrating instead on three areas: its personal computer, its mid-line computers known as systems 36 and 38 and extentions of its 370 line for powerful mini-computers and mainframes.

For example, there are persistent rumors that IBM is four to seven months away from introducing a new family of computers that will replace the IBM personal computer line first introduced in 1981. Many consider the PC to be IBM’s last innovation.

Although IBM won’t, of course, discuss any such development, industry observers say the new PC is likely to contain a built-in graphics board as a convenience to customers. It is also expected to be faster than IBM clones now on the market and will almost certainly contain “lots of bells and whistles,” in the words of one analyst, to make it more difficult for imitators to copy.

“From everything we hear, it will be even more proprietary (to IBM) than rumors have it,” one analyst said.

If IBM does introduce a proprietary PC instead of the generic computer many users and analysts were hoping for, it would give analysts further grist for their main criticism of IBM: It clings to old solutions for new problems and keeps resorting to Band-Aid remedies when, many say, only structural changes will do.

“They must examine their business from top to bottom and do some fairly significant revamping of policies and pricing,” asserted William Zachmann, a vice president at International Data Corp. in Framingham, Mass. “This is a fundamental transition we’re talking about for IBM, a prolonged period of hardship, and they have to come out and say that.”

That IBM continues to rely on old solutions is best exemplified, Jeffery believes, by the managers the company has appointed to key positions over the past two or three years. “The company continues to be run by ex-mainframe marketing people and their products show it. But the industry isn’t a mainframe industry anymore. It’s becoming an information processing industry and that’s something quite different.”

Instead of relying on old technologies and old management practices, added Minsky, IBM should be looking for innovations to beef up revenue. “The smartest thing IBM could do is announce 2.9% financing,” he said, referring to the recent incentive that General Motors invented to push car sales.

Through vigorous cost cutting, controlled hiring, restructured marketing divisions and consolidated manufacturing operations, IBM intends to make itself “as lean and vigorous as possible” to keep growing in step with the industry, Akers told shareholders at the company’s last annual meeting.

IBM said through a spokeswoman last week that it remains confident the industry will continue to “enjoy growth not dissimilar” to its historic growth patterns after adjustments for inflation.

Many analysts no longer share that optimism. The most widely held view seems to be that the industry will never return to periods of 15% annual growth and that IBM will continue to report earnings declines at least through 1987 and more likely through mid-1988. A minority even predict at least one quarter of losses for IBM before the turnaround.

For 1987, even IBM executives are cautious.

“Basically, we’ve yet to see a turnaround in U.S. capital spending and we still have as many economic uncertainties as we have seen in the last several years,” the company said through a spokeswoman. “Without any clear evidence of an improving trend in business profits and investments, it is still too early to judge how 1987 might unfold.”

Others are not so uncertain.

No Rebound Expected

“Anyone looking for a rebound in 1987 will be disappointed,” predicted Stephen P. Cohen, a former IBM employee and now a vice president at Gartner Securities Corp., a Stamford, Conn., consulting firm that follows IBM. Cohen’s pessimism derives from discussions with 200 computer users over a two-week period a month ago. Those who do plan to buy computers next year, he said, “say they will buy regardless of price in 1987.”

Hence, his advice to IBM: “Raise prices.”

IBM, characteristically, won’t discuss future pricing strategies. But a growing number of industry analysts--many of whom are former employees with extensive networks of informants inside the company--now predict that IBM will reverse the industry price-slashing trend and raise prices--particularly on its top-of-the-line mainframes.

Sales of IBM’s new-generation mainframe, model 3090, have recovered from a rocky start, according to IBM. But they still fall short of many analysts’ and consultants’ expectations, in large part because users aren’t sure they pack enough punch for their cost and have been waiting for IBM to drop the price.

But, for Cohen, “the probability of price cuts now (is) very, very slim and for a very simple reason: They haven’t worked.”

All but the biggest skeptics expect IBM to be back on its feet by late 1988. And former IBM engineer Brown is more optimistic still.

IBM, he predicts, “is two years away from being a killer.”

For all their criticism, industry analysts are undivided in their praise for Akers.

“It takes extraordinary perception and courage to respond” correctly in a business that is innovating at the pace the computer industry is, said Zachmann. “Akers is finally biting the bullet and taking steps toward production line integration and he’s making some tough decisions.”

“Akers clearly was the best man for the job within IBM,” said Jeffery. “But he’s dealing with unprecedented problems and he would earn himself a lot of good will if he would admit to the world that IBM does have some serious problems. These aren’t just hiccups, as many on Wall Street still think. They have some far more deep-rooted structural problems. And Akers needs to admit that.”