The primary job of a leader is to constantly assess the situation, develop an impactful plan that will make a significant difference, and then implement with excellence. Being a leader is not about simply managing a bunch of activities that enable you to participate in some manner in what’s going on in your industry. Unfortunately, that’s what the IBM CEO, who has been in the job five years now, seems to be doing.
The 20 straight quarterly revenue declines have left IBM very weak on many dimensions. Over that five year period, revenue has dropped from $105 billion to $79 billion, net income has declined from $16.5 billion to $11.9 billion, and operating margin dropped from 20.5% to 16.4%. Over the five years, total shareholder return for IBM is -7.8% while it was +69.6% for the S&P 500.
What is amazing is how much money IBM has plowed into share buybacks in order to generate decent dividends for shareholders. Specifically, since 2008, a total of $97 billion has been spent on share buyback. This has enabled dividends to move from a payment level of 2% up to 3.5%. While that makes shareholders like Warren Buffet happy, although he recently started selling off his holdings, that kind of financial engineering is totally short term and has nothing to do with building the IBM franchise for the future.
The current leadership of IBM constantly points to the importance long term of IBM’s “strategic imperatives.” The reference here is to their artificial intelligence activity, mostly centered on the AI tool called Watson, and their push into the cloud business. Concerning AI, everyone and their brother is getting into that business, and Watson is not all that unique in what it offers. Regarding cloud services, they are a weak #3 versus the leader Amazon Web Services and #2 Microsoft. Stepping back, although IBM bullishly promotes their “strategic initiatives,” it is not generating anything distinctive and wildly successful. They are basically a “me too” player in these areas.
To demonstrate this, let’s look at the recent performance of IBM’s five business units. Cognitive Solutions supposedly contains the AI activity, but its revenue grew only 2.1% versus year ago. The cloud services activity is supposedly in the division called Technology Services and Cloud Platforms and it was actually down 2.5%. Naturally their systems division, which has hardware, was down the most; -16.7%. The two remaining divisions are Global Services which was down -3.0%, and Global Financing, which is down -1.2%. Net, an extremely weak picture on all dimensions.
The current leadership of IBM is flunking the test of what every good leader is responsible for doing. Specifically, what’s the big idea that’s going to generate significant revenue and profit in the future?