Several months into his new job as managing director of IBM Japan, Martin Jetter fired dozens of employees for underperforming. In a country where work loyalty is treasured and employees tend to serve a company for a lifetime, the bold move by Jetter, the first foreigner to lead IBM Japan in almost 60 years, came as a shock.
“As leaders, we must break from the past and take, very often, very bold steps to move to the next step of evolution of our organizations,” the unsmiling Jetter, a 28-year IBM veteran, said at a conference in Tokyo in late 2012, months after he took over IBM Japan.
The fired employees and their unions responded with lawsuits accusing International Business Machines (IBM) of wrongful termination. But Jetter’s push for productivity and focus on high-end businesses, including cloud computing and big data, brought a change to IBM Japan. The company has reversed the downward trend in revenue, with sales growing 3.6 percent last year, versus a 4.6 percent decline in IBM’s global revenue. The Japanese market accounts for around 10 percent of IBM’s overall sales.
Jetter’s “remarkable transformation of IBM Japan, returning it to growth,” as applauded by Chief Executive Officer Ginni Rometty, paved the way for his further promotion and gave IBM executives, who are under mounting pressure, some hope.
This month, IBM named Jetter, who is German, senior vice president and head of its global technology services unit starting in January. In the new position, he will oversee the businesses that generate almost 40 percent of IBM’s revenue globally, ranging from fast-growing cloud computing and project-based services to troublesome outsourcing and technical support services. Global technology services have dragged down IBM’s overall revenue, with sales falling 1.7 percent in 2012 and 4.2 percent last year, according to its reports.
“The company has consistently restructured its operation just about every year,” said Peter Wahlstrom, an analyst at the consulting firm Morningstar in Chicago.
“It has struggled in the services business, so they take somebody new in, who can hopefully help change the trajectory of the business.”
With the appointment of Jetter, whose signature policy involves pushing for productivity and cutting jobs, IBM is expected to step up trimming its businesses and laying off employees. Emails to IBM seeking comments were not replied.
IBM, the world’s largest technology services firm, is facing its most troubled situation in 20 years, since its successful transformation in the 1990s to the personal computer business from the traditional corporate one. Once a leader in technology innovation, the company, based in Armonk, N.Y., now finds itself lagging in the computer industry’s swiftly changing landscape.
IBM’s report of 4 percent decline in revenue in the third quarter, the 10th consecutive quarterly drop, hit its reputation and stock hard. It helped reveal the ugly reality of IBM’s declining business, which had been covered up by its massive share buy-back schemes.
The disappointing results sent IBM shares falling almost 13 percent in October alone, erasing the gains yielded by buybacks. The company had spent $19.3 billion in share repurchases in the 12 months ending in September, according to the company’s latest report. IBM stock has fallen 14 percent so far this year, closing at $160.9 a share on Nov. 21.
In the face of a declining business, IBM has tried to “reinvent” itself, as CEO Rometty has put it. Executives have adopted a number of strategies at the same time. The tech giant trimmed its size and divested itself from traditional low-end businesses including servers and chip production while focusing on artificial intelligence and big data, which have growth potential.
However, redirecting a mammoth operation with nearly half a million employees worldwide proved tough. Having invested almost $4 billion in cloud computing in the past two years, IBM is still trying to find its footing, while its peers Amazon and Microsoft have already dominated the market.
As a result of the strategy its executives call “simplifying the business” and the sale of several units, IBM’s workforce is expected to shrink further. IBM said earlier this year it would sell the server business to Beijing-based Lenovo. It will also pay GlobalFoundries $1.5 billion to take over its loss-making chip production business. In return, GlobalFoundries will supply it with chip processors in 10 years to come.
“The overall head count is coming down,” said Martin Schroeter, IBM’s chief financial officer, who is in charge of finance and enterprise transformation, in a conference call.
“Reduction in overall headcount allows us to think about how we simplify our business.”
IBM aggressively cut its payroll in the United States in the 2000s, outsourcing jobs to India and other developing countries to bring down costs. By 2012 it had reduced its U.S. workforce to over 80,000 from more than 150,000 in the 1990s. In February, IBM resumed firing workers in the U.S. after trimming its global workforce for the first time in a decade in 2013.
“What Jetter has done in Japan, we expect that he will certainly do it here in the U.S.,” said Lee Conrad, a former IBM test specialist who is now the coordinator of Alliance@IBM, an advocacy group for employees. “Sadly, IBM was never like this before.” There have been talks among employees about thousands of jobs to be cut in the U.S., but IBM has not confirmed of any specific layoff plan.
While the productivity push and layoffs have yet to help IBM’s performance, the pressures they put on employees have proved counterproductive. Employees, frustrated and worried about their future, cannot concentrate on their work, Conrad said, and a battle is going on between management and workers.
“The stress level is very high, and the work environment is terrible,” he said.
Conrad and several longtime workers say IBM’s problem is is its failure to continue the cooperative, cozy working environment that IBM had been known for. Working with colleagues across borders now proves stressful for its employees, they say.
The company’s pursue of Roadmap 2015 — a plan to give investors $20 earnings per share by 2015, which prompted it to cut costs by any means — has eroded employees’ confidence in management. IBM’s October report shocked some analysts and the market, but employees were not surprised. In online discussions and forums, IBM staff members refer to Roadmap 2015 as “Roadkill 2015” and joke that “IBM” now stands for “Idiots Become Managers.” The CEO finally abandonned the roadmap in October as a result of its burden on the firm’s performance.
Stretching over 170 countries, IBM is notorious for its many layers of management, which its critics say has effectively prevented the top executives from having a real picture of the business. As executives aim to tie workers’ performance to their job security, employees have criticized managers for poor accountability in decision-making, the latest being the $20 EPS plan.
“If they can cut out some of the layers in decision-making and push down the decision-making to actual managers, it should be a good thing,” said Wahlstrom. “But it will take time to implement.”
Analysts widely see the century-old company as having strong fundamentals thanks to its large investment in technology research. However, IBM’s newly developed businesses such as cloud computing and artificial intelligence have not grown fast enough to offset the decline in traditional segments. Its revenue dropped 4 percent in the third quarter, despite a 50 percent jump in cloud computing this year.
“I’m not really optimistic about its prospects,” said Ivan Feinseth, an analyst at Tigress Financial Partners Co. in New York. Twenty-two analysts polled by Yahoo Finance this month said they expected IBM revenue to continue declining in the fourth quarter this year and in 2015.
Addressing potential clients to whom IBM was trying to sell management solutions at the Tokyo conference in 2012, Jetter stressed corporate leaders’ need to be prepared for bad scenarios.
“Maintaining a sense of urgency even during moments of success is required of leaders, particularly in times of uncertainty,” he said.
He did not say if IBM’s executives had had such a sense of urgency during its moments of success. Now, as the company rushes to catch up with its peers and revive its revenue, it clearly needs that urgency.