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By | Billy MacInnes 23rd June 2016 18:56

From Watson Jr to Watson AI: IBM's changed, and Papa Watson wouldn't approve

The customer and staff company is no more

Completed in 1983, IBM's prestigious South Bank office in London, on the banks of the River Thames, owes a lot to the Brutalist style of architecture, popular in the 1960s and 1970s. It makes heavy use of concrete: a solid building for a solid company.

The IBM logo has been outside that building for more than 30 years, an enduring sign of the company's longevity, permanence and stability.

IBM doesn't own its South Bank office – it hasn't since 1999 – it's a tenant. Today, South Bank is owned by UAE-based Al Gurg Group, having once been a possession of Sir Alan Sugar. He sold it to Al Gurg in 2013 for £120m, close to doubling in value since IBM flogged it off 14 years earlier.

There's no outward indication of that shifting ownership; to all intents and purposes this is IBM. Throughout, that logo has endured on the outside of the building.

Today's uncertainties at IBM are not over who owns its London office, but over the IBM business.

A number of businesses and technologies have been sold off. Others have been scaled back or denuded of funding and staff. Operations are being outsourced and staff are being made redundant, to be replaced with cheaper workers in offshore locations.

And while the logo still remains, IBM has become a very different place from what it was. The values that logo embodied and represented have changed too.

Thomas Watson Jr was IBM chairman and chief executive during its explosive post-war expansion period. IBM went from 72,500 staff and $892m income in 1956 when Watson became CEO to 270,000 staff and $8.3bn in 1971 when he stepped down.

Watson Jr enabled this by overhauling IBM during its first era of crisis – coming out of the 1950s with fragmented product lines and facing a rising tide of competitors. The actions of Watson Jr allowed the overhaul of IBM's manufacturing and products to deliver the S/360 in 1964, a mainframe computer that revolutionized business computing.

"It was the biggest, riskiest decision I ever made," Watson recorded of the S/360, epitomizing an era of big thinking and big risk-taking by the IBM management. The solid products and solid services that followed meant it was during this era that the legend took root and grew: "Nobody got fired for buying IBM."

In April of 1969, it was Watson who distilled the essence of IBM into three basic beliefs: respect for the individual, customer service and excellence.

In a speech at Columbia University, Watson Jr said that an organization "must have a sound set of beliefs on which it premises all its policies and actions" to survive and achieve success. He added: "If an organization is to meet the challenges of a changing world, it must be prepared to change everything about itself except those beliefs as it moves through corporate life."

It's clear that IBM is changing and that the process of change has been painful, with 16 quarters of continuous decline, but has it done so while retaining its core beliefs?

Respect for the individual

In keeping with IBM's belief in respect for the individual and his or her rights and dignity, Thomas Watson Jr said the company should help each employee develop their potential and make the best use of their abilities, and pay and promote on merit.

That ethos survived until the appointment of outsider Lou Gerstner as CEO in 1993, the second time of great turmoil for the company, when IBM made the first layoffs in its history. The first of Watson's basic beliefs was starting to unravel.

Fast forward to 2016 and that belief has become diminished to the point of irrelevance. In the latest round of layoffs, IBM employees who have fallen victim to Resource Action (being RA'd, as they call it) have been given 90 days notice and, in the US, the bare minimum of one month's redundancy pay, irrespective of how long they have worked at the company.

Comments from ex-IBM employees on the Watching IBM Facebook page underscore the break in the IBM of Watson Jr and the IBM of today.

Who would have thought that this once-great Company (no. 1 in just about every business measurement, including personnel) would sink so low. I am glad that Tom Watson, Jr did not live to see this tragedy.

Also:

The only thing I will miss at IBM is the pay check ... What a miserable company.

IBM counters suggestions that it is defenestrating its operations by claiming workforce numbers are relatively unchanged, despite the redundancies, because it is recruiting at the same time as it is firing. But the replacements for staff with in-depth knowledge of the company's products, technology, customers and culture are frequently less-experienced and cheaper offshore workers.

Customer service

For years, IBM customers have gained reassurance from dealing with a long-established, stable and solid supplier that sells and supports its technology with knowledgeable and experienced staff.

In the words of Thomas Watson Jr: "We are dedicated to giving our customers the best possible service. Our products and services bring profits only to the degree that they serve the customer and satisfy his needs."

But the upheaval at IBM Global Technology Services shows how far the company is shifting from that model.

As The Reg recently revealed, 63 per cent of IBM's UK work is completed by employees in offshore locations, and IBM's blueprint is to have only 20 per cent completed by UK-based workers by the end of 2017.

How does IBM propose to improve customer service by moving support from workers with specific expertise in its technologies to offshore workers with generic skills in a different geographic area? How does IBM expect to differentiate its services and support if the company is providing the same offshored service and support as cheaper, more commoditized rivals? What difference will there be between IBM and an Indian outsourcing company such as Wipro?

Is IBM effectively throwing in the towel and accepting that services have become a commodity item? If so, where is the value?

Excellence

In 1969, Watson Jr wrote: "We want IBM to be known for its excellence. Therefore, we believe that every task, in every part of the business, should be performed in a superior manner and to the best of our ability. Nothing should be left to chance in our pursuit of excellence."

IBM's reputation is built upon the quality and durability of its technology, the strength of its sales and support network, and the knowledge and expertise of its workforce. All of these constituent parts go towards defining its "excellence" as an organization. All of them are facing profound upheaval and change.

From a technology perspective, IBM has restructured to focus on analytics, cloud, commerce, MobileFirst, security, and IT infrastructure, but with the possible exception of analytics, it is struggling to gain a leadership position in any of these categories. So far, it has failed to make enough revenue from these emerging sectors to offset the decline in its more established technology categories. It's reflected in the financials, with IBM announcing the company's worst quarterly results in 14 years for the first quarter of 2016.

The other difficulty for IBM is that, as Dan Ridsdale, global head of technology media and communications at Edison, puts it, unlike Microsoft with Office and Oracle with its database, while the "legacy business is under pressure, it doesn't have an entrenched cash cow" to fall back on during its transition.

Wall Street is not the customer

IBM has also been accused of placing less emphasis on its technology in favor of financial engineering over the last 10 years. The company spent $125bn on share buybacks from 2005 to 2015, compared to $111bn on capital spending and R&D. That's an extraordinary situation for a company undergoing a significant technology transition. In April of 2014, analyst David Stockman described IBM as "a buy-back machine on steroids that has been a huge stock market winner by virtue of massaging, medicating and manipulating its EPS."

It is no coincidence that IBM placed so much emphasis on achieving a target of $20 earnings per share by the end of 2015, an ambition quietly abandoned by CEO Ginni Rometty in October of 2014.

IBM is accused of putting the interests of Wall Street and shareholders ahead of those of its customers. Commenting on IBM's Q1 results, Robert X Cringeley wrote: "The lesson in all this – a lesson certainly lost on Ginni Rometty and on Sam Palmisano before her – is that companies exist for customers, not Wall Street. The customer buys products and services, not Wall Street. Customers produce revenue, profit, dividends, etc., not Wall Street. IBM has alienated its customers and the earnings statements are showing it."

What next? From Watson to Watson?

It's 102 years since Thomas Watson Sr took over at Computing-Tabulating-Recording Company, the business which was to officially become IBM in 1924. For nearly 50 years, until his son retired in 1971, IBM was headed by a Watson; but as an institution it was never overshadowed by the Watson name. The IBM brand was always bigger than Watson.

Things look slightly different today. IBM is making a big play with data analytics and a very public part of that is its Watson AI platform, which has enjoyed a starring role in adverts with Bob Dylan, director Ridley Scott, actress Carrie Fisher and golfer Tom Watson.

Watson is being promoted heavily by IBM, but it's a big play for a technology that is still some years away from being in a position to deliver solid revenues.

Many of those employees discarded by the company along the way might find it ironic that the company's association with the Watson name is growing stronger at a time when it has so comprehensively moved away from the core beliefs articulated so publicly by the CEO who held that name in 1969. ®

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