By Peter Cohan – Nov 21 8:34 AM
IBM has gotten smaller every quarter for the last 18. But the deeper reason that IBM is a lost cause can be found in its deviation from the culture created by its most famous leader — Thomas Watson.
That deviation spawned a massive talent exodus from IBM’s Thomas J. Watson Research Center in Yorktown Heights, N.Y. that went to work for a hedge fund, Renaissance Technologies — founded by James Simons, a mathematician who was a professor at MIT and Harvard — whose employee-owned Medallion Fund has created more profit than any other fund on the planet.
Bloomberg calculated that Medallion had generated $55 billion in profit over its 28 year life — $10 billion more than funds run by Ray Dalio and George Soros.
At the core of this superior money-making machine are 90 PhDs — including mathematicians, computer scientists, and physicists — who spend their lives looking for statistical relationships between disparate variables — for example, they found that the Paris market average rises more on sunny days than cloudy ones slightly more than 50% of the time — that they can use to make profitable trades.
Since Lou Gerstner arrived at IBM in 1993 to rescue the company from a near-death-experience, Watson has been a key source of talent for Renaissance. It was in the mid-1990s that Simons began recruiting Watson mathematicians who had applied statistical techniques to teach machines to translate from French to English.
While Gertsner is widely credited with saving IBM, its culture has not fared quite so well. Under Thomas Watson, Sr., IBM’s culture rested on three values – respect for the individual, the best customer service in the world, and excellence.
But IBM’s recent conduct raises questions about whether those values still have meaning — and its ongoing pattern of layoffs suggest that its best talent could find a happier home elsewhere.
IBM says it crafted new values in 2003 and that its investments in new businesses are paying off. IBM vice president Ian Colley said, “Through the first three quarters of this year alone, IBM invested more than $12 billion in acquisitions, R&D and CAPEX and since the beginning of 2015 IBM has hired 100,000 people. And these investments are paying off — cloud, analytics, mobile, social, and security now represent 40% of IBM revenue, growing at 16% in [the third quarter of 2016].”
Respect for the individual?
IBM’s current conduct towards employees does not appear consistent with the value of respecting the individual. For 70 years, IBM never laid off workers. If business changed, workers might be retrained and forced to adapt – possibly moving people across the country or overseas. According to D. Quinn Mills, an emeritus professor at Harvard Business School, Watson “believed people worked better when they were secure, not insecure. Watson believed people would make a full commitment to the company if they knew they could count on the company to make a full commitment to them.”
This began to change in the 1980s, thanks to IBM’s ineffective effort to stop personal computers from taking market share from mainframes. By the time former Gerstner took over as CEO in 1993, IBM was running low on cash and he announced 60,000 layoffs. IBM’s treatment of employees now features regular rounds of layoffs, slashing employee benefits, minimal raises, and ongoing efforts to shift work from the U.S. and Europe to locations such as India that pay lower salaries.
As Robert Ochoa, an IBM employee who retired in May 2016, told Marketplace — the company is not the same, “It’s no longer respect for the individual. It’s respect for the stockholders.” As IBM’s declining revenues, profits, and stock price suggest, it’s not that either.
Renaissance’s Watson-trained mathematicians are not the only IBM refugees who went on to great success. As I wrote in 2013, IBM’s culture has repelled extremely talented engineers – a case in point is Shmuel Kliger. Kliger – who earned a PhD in Computer Science from Israel’s Weizmann Institute – was employed at Watson when his IBM boss — Shaula Alexander-Yemini, Senior Manager for Distributed Systems Software Technology at T.J. Watson, “where she received an IBM Outstanding Innovation Award for Optimistic Recovery for Fault Tolerant Distributed Systems”– and her now ex-husband, Columbia University professor, Yechiam Yemini — persuaded Kliger to bolt with them to start a company.
IBM’s culture repelled a pair of superstars. As Kriger explained to me in a July 2013 interview, “I did not have the patience to do all the maneuvering up and down all the layers of IBM’s management needed to turn a patent into a new product that IBM would sell.” Since Kriger and Yemini were frustrated that their IBM research would never find its way into a product that people would use, they started a company — event automation and real-time network systems management software provider, System Management Arts (SMARTS). In 2005, EMC bought SMARTS for $260 million.
IBM declined to comment on why these talented scientists departed.
The best customer service in the world?
Customer service has also suffered at IBM. Oddly, the American Customer Satisfaction Index stopped measuring IBM’s customer satisfaction rating in 2001 – after it had declined from 78 in 1995 to 71 in 2001 – Apple topped the list in 2016 with a score of 84.
Shedding light on IBM’s relatively weak score is a story of a customer service manager whose company had been acquired by IBM. This manager stayed at IBM after the acquisition and was working closely with customers to solve their knotty technical support problems. But after IBM shifted that customer service work to India the customers became extremely frustrated by the resulting decline in service.
Customers were so desperate that they contacted him to ask if he could help – but it was no longer his job and he was thinking of retiring from IBM. While it is difficult to draw a definitive conclusion about IBM’s customer service from this example, it seems reasonable to me that there is a connection between IBM’s shift of staff to lower cost countries and a decline in the quality of its customer service.
Watson wanted IBM people to be the best in industry by doing excellent work. One form of excellence that contributes directly to growth is whether a company makes products that outperform rivals in providing benefits to customers.
And on that front, IBM’s product development process systematically impedes product development excellence. For example, IBM imposes numerous internal requirements on its product development teams – such as requiring that products can be usable by vision-impaired individuals regardless of whether there is strong demand for the feature, that software can run on mainframes – regardless of whether there is a large market of mainframe users for the product, and that the product is available in at least nine languages (again without regard to the market requirement).
These executive-imposed mandates can consume as much as half of product development teams’ budgets and time. As a result, too many IBM products become available to customers after rival vendors have introduced their products – and those late products offer customers insufficient benefits to compel them to switch from rivals’ products to IBM’s.
A case in point is IBM’s loss of market share in the $2 billion market for so-called identity management services – that keeps unauthorized employees out of different parts of a company’s computer systems — in which SailPoint, a $100 million company founded by a former IBM executive, is cleaning Big Blue’s clock.
As SailPoint CEO, Mark McClain – a veteran of IBM’s Austin, Texas-based Tivoli — explained in a February 2016 interview, IBM has trouble listening to customers and responding quickly with product improvements that help customers alleviate the real pain they are feeling.
As McClain said, “Big technology companies [including IBM] acquire companies that make point products. [IBM] product managers focus on making the acquired products compatible with other [IBM] products such as database software and middleware. Their product managers don’t spend enough time listening to customers and if a customer wants new features, they struggle to get the engineering resources to respond.”
IBM is trying to get better by adopting design thinking — but revenue growth remains elusive.
These examples indicate that a culture of growth – along the lines of Watson’s three values – no longer exists at IBM. And that helps explain why other companies like Renaissance have made better use of IBM’s talent.