Cutting headcount rather than dividend isn’t a good look.
But this makes sense now that IBM has become a body shop. I doubt the cuts will come in what remains of research, manufacturing, or design. Likely all in “services” and its sales teams.
Contractor. You bill time and materials to the customer, rather then charging for the product. It means you're not going to grow because you're not hunting for value multipliers anymore (insert joke about the difference in cost between what IBM bill you for those people and what IBM pays them).
A consultancy company I used to work for referred to this as 'brains by the pound'. The implication was that the only way to increase revenue (assuming constant rates and expenses) was to add more staff (perhaps working for new customers).
There is one way to make it scale, sort of. Find a consultancy solution that is applicable across multiple customers. E.g where multiple customer teams have essentially the same problem. Once you have ironed the bugs out of your consultancy solution, you can template it and reuse in new situations with fewer surprises. You can still include a risk bucket in your charge-out rates, but this is more likely not to be used and thus taken as profit. In the case with which I'm familiar, a very large organisation had multiple teams writing business requirements that would be put out to tender. The central organisation had never tried to standardise this process, and multiple similar mistakes were made by multiple customer teams. Hence a good business opportunity for a small external consultancy who could spot the mistake patterns and solve them multiple times.
Whether the template approach is good for all customers is a wholly different question. You can also get badly burned (in cost and / or reputation) if you find after starting with a new customer that the template isn't applicable after all. Hence the common situation where a consultancy organisation deploys its 'A-team' to win and start the work, and then swaps them out for cheaper and less skilled staff to complete the deliverables.
> Find a consultancy solution that is applicable across multiple customers. E.g where multiple customer teams have essentially the same problem. Once you have ironed the bugs out of your consultancy solution,...
That is called product and apart from few top vendors product companies are getting hammered in similar fashion or worse.
The difference: when GM cuts a person and still ships a car their margin goes up. When IBM cuts a person from a project their revenue falls.
Having a template or cookie cutter helps because you can reduce execution risk (which can also help sales) and also assign a more junior person, at the same rate, to the later projects, which does goose profits.
> because you can reduce execution risk (which can also help sales)
Yes. This was exactly the case in the example I mentioned in my earlier comment. The specific aspiration was that once we had successfully solved the problem for one customer team, that team would act as our internal reference for the next customer team.
Huh. I always thought body shop would refer to companies who hire at scale. Indians call them MRCs - Mass Recruitment companies.
IBM/TCS/Infosys/Wipro/Cognizant are consultancy shops which are some examples of MRCs. They generally hire at scale - like 10,000 people in one go or scooping up a whole college’s batch. Thats how they have also been able to keep a freshers salary static at 3-5 LPA (~4k-6.5k USD) for 13 years now.
Local jargon. In the states a body shop* is a company where they are sending people to do work and charging a commission on hours worked. They could do some project consulting too (clearly some people cost more than others and some payments are structured around milestones or even efficacy) but essentially at the end of the day revenue is roughly proportionate to headcount.
Some firms using this model are, due to pretentious courtesy, not described this way (e.g. law firms, landscaping firms, and other such service industries).
By contrast large employers like Walmart or GM aren't considered body shops as their revenue is not proportionate to headcount, and in fact improving productivity helps their model.
* it's a joke name as "body shop"s original (and continued) meaning is a company that repairs dents in a car's "body" (the non-engine parts).
Yeah, to me this just signals IBM's customers cut all their contractors as part of their own layoffs. IBM doesn't have anything for these people to do in house, so it has to cut them.
An interesting POV. I certainly hope that's true. Is IBM reputation good in the contractor space? As in, are their services largely viewed as dependable and good value?
IBM absolutely needs the 5% dividend to survive, especially now. Without the dividend, IBM gets kicked out of all the high dividend ETFs and investors dump them on mass. Moreover, I imagine a substantial part of an employees comp is options or RSUs.
The equity value affects your access to capital, if I remember right. So, if you want to take out loans to ramp up after the virus clears, you’ll be impeded by a low stock price. Not saying this is a good move by IBM, but there may be reasons other than evil rich executives.
Because they have one job. That job is not "be the caretaker of this flock of people," and honestly, trying to socialize that risk at the firm level leads to a lot of problems (not the least of which being that the firm can fail in a crisis). The purpose of IBM is to make IBM's owners money.
When the stock price drops precipitously, they lose money instead. When the stock price falls so low that they fall out of indexes, it will then go even lower, as the companies which hold the stock in an attempt to mimic an index (index funds, etc) switch to getting rid of it instead, which means selling more of it to an already-skeptical public.
The purpose of a shovel is to drain water from fields? Making money for the owners are a side effect of the purpose of a company unless it is a holding company.
If IBM's owners didn't want to earn money on their investments, they'd have sent their money to charity directly, instead of buying IBM stock (and would have gotten much better charitable results).
You are confusing the means to an end with the end itself.
So we are driving company decision making based on the needs of synthetic fake financial instruments? Is there any other way to run a company that is more stupid than striving to fulfill the needs of someone else's derivative product?
I cannot imagine a worse basis on which to steer a company. It makes zero sense. Using a random number generator to pick every decision would result in better results than what we are currently doing.
An example of a company that has completely succumbed to Wall Street is Texas Instruments. They are (or used to be) a tech company. They used to have research. They used to create new products.
But in the past few years they have started committing to "returning 100% of free cash flow to investors" (quoting their own earnings release) via stock buybacks and dividends. They actually put it down in writing: we are committed to NOT reinvesting in employees, NOT doing R&D, NOT creating new products. In every earnings call about how they are still committed to getting all the cash into stock buybacks and dividends. That's it. That's the whole company now.
Wall Street loves Texas Instruments. The shiny bucket of treasure known as stock buybacks + equity based compensation is irresistible. This is going to keep happening until we make it stop happening.
It's not like IBM actually makes anything anymore, though. They've become a vampiric global services and consulting company, Cognizant or TCS with borrowed respectability from their past.
Wait, we're talking about the same company that now owns RedHat, and whose next CEO will be RedHat's CEO, right? The same RedHat that has been the number one contributor to the Linux kernel, Gnome, and many other projects for over 2 decades?
Maybe there is some hope that they can turn things around, but the last decade has all been about spinning off and selling out any real hardware or software divisions, chasing failed cloud services and overhyped AI buzzwords, and shedding every highly-paid legacy US employee they can get rid of.
I hope they do, I make a ton of money selling to them...
Wait, Redhat CEO will become IBM CEO? I was pretty certain that it would be the other way around. But that’s good news, both for us and for the company.
Ginni Rometty was simultaneously the IBM CEO, President, and Head of the Board of Directors until recently.
She stepped down as President and CEO and retains her position on the Board, while Arvind Khrishna stepped up as IBM CEO and Jim Whitehurst, former CEO of Red Hat, became IBM President.
The speculation (and it is only speculation) is that Jim will spend a year or so as President while being groomed for the CEO job when Arvind retires.
From startups to stalwarts - this is the norm. Wall Street / Investors first. Infinite and ridiculous QoQ / YoY growth expectations and a lot of really dumb approaches to achieve this. And executive pay that's way out of line. I just read "The Infinite Game" [0] and while a lot of the book rehashes many oft heard stories amidst well known companies and people as examples it makes the clear point that given our hyper focus on short term profits we pay the price in the long run. I don't disagree and I've been in roughly eight different tech companies over the last 12 years. From startups to companies that do more than a billion annually. They're all doing the same thing. The executives can't even hear themselves admit it, which is the really interesting part.
Case in point I was on a call where an executive stated: "We're moving to a subscription model in our product because, to go public, that's what Wall Street is going to want to see". Not because that's where customer demand is, or because it makes sense for the business. But this short sighted rationale to meet a short term goal inorganically. Wall Street and VCs are very much no different than the influencer marketing crowd. They just happen to pretend and purport they're good at growing business, when the real MO is lining pockets.
What can you do? Wall St has become incredibly efficient in “nudging” execs into doing what Wall St wants: by influencing the stock price, on which executive compensation is based. Only founders or execs who have more than just a financial interest in the company would buckle the trend.
I have thought about this a bit. Why doesn’t the Bay Area have it’s own stock market/index? It seems incredibly stupid to let financial control over all the innovation that’s happening in the Bay be in the hands of NYCs financial markets. To some extent VCs offer that alternative financial market that doesn’t exist but it’s only for startup funding and such.
With that said, TI is still doing R&D and is investing in new facilities. They announced a new 300mm fab recently which will be several billion dollars in capex.
If you look at their annual report, they are defining free cash as the cash flow from operations minus capital expenditures. This is better than "invest nothing and send it all back". In 2019, their capex / cash flow was about 12%. They certainly don't invest nearly the amount that an Intel or TSMC would invest in their lines - but the products they produce don't really require that.
I'm totally with you on stock buybacks being a big problem.
There is another way of looking at this. IBM isn't what it used to be, it is essentially a consulting company rather than an R&D powerhouse. Investors are not particularly excited about its growth prospects and do not think it should invest a bunch of money to grow. It may be more efficient for the economy as a whole for IBM to distribute its profits so that money could be allocated to companies where growth makes more sense.
What you are suggesting is that every company should prioritize growth by reinvesting in itself. It doesn't always make sense to do so though.
It didn't become so by magic though: IBM used to be a R&D giant, and they have been moving away from it for the aforementioned reasons.
You are rewriting the story backward when you say “IBM doesn't do R&D then it makes sense to reallocate the profits”, it's the reallocation which killed the R&D!
> But in the past few years they have started committing to "returning 100% of free cash flow to investors"
I was not commenting on IBM's long term history. They made short sighted decisions, I think everyone can see that. As it stands now, investors don't want to give them any more money to continue along that path.
Companies like Amazon reinvest in themselves with no dividend. Investors encourage this because they believe in what Amazon is investing in.
Just wanted to provide a different perspective on why dividends/distributions are desired by investors in certain scenarios. A common view on here is that Wall Street is ruining things, but it is often a much more nuanced situation.
Is it really? My recollection is that IBM was already not an R&D powerhouse when the IBM PC came out in 1981, hence them building it out of commodity supplies and outsourcing the OS to Microsoft. As late as 2011 (20 years after IBM's transformation into a services company), the dividend yield was 1.5%, rather than the current 5%.
You are correct it needs to happen and it is pretty simple. Just ban the C-suite, VPs and BoD from being compensated in stock. Now the only way to keep the gravy train running is to build a solid company and not spend all quarter jerking the numbers around to make the disclosures look good.
How does that work? If you pay them in cash, then there is an incentive to juice the cash flow in the short term at the expense of long term. Stock that vests at various periods over future decades would be more long term oriented.
If that were possible, it would already be happening. Determining the subjective value (or even objective) value one provides is a pretty much impossible exercise.
That was exactly how it was before. The whole equity compensation was the answer to the problem of CEOs that never grew the company. That was why all the leveraged buyouts happened in the 80s and 90s. They didn’t want CEOs who just stayed around collecting a fat paycheck so instead they gave them equity to compel them to grow the company. Rarely is there a single solution that completely solves a problem for good. Solutions often create problems of their own. People have to decide what problems they would rather have.
You make it sound like TI has disappeared and now is worthless. But it’s trading at a price higher than the 2000~ bubble. So maybe they are not taking over the world but they are doing quite well and still generating revenue.
I’m sympathetic to your criticisms (especially about making decisions based on inclusion in a financial index), but returning 100% free cash flow doesn’t mean there is $0 spending on R&D or CAPEX. It means returning the money that’s left after you do all the spending and investing. This is money that would otherwise just pile up in the bank account of the company. When money piles up, managers tend to waste it on empire building, pointless acquisitions, etc.
I think there are real problems with the combination of stock buybacks and how executives are incentivized, but the currently popular idea that companies shouldn’t return profits to investors, or that this is somehow nefarious, is misguided. This is the entire point of for-profit corporations.
Or in this case, the money could end up in the bank accounts of all the employees they are letting go instead. That doesn't sound like a bad plan to me.
I get that investors want returns for their capital, but expecting employees to take all of the heat while shielding investors from any of it seems quite cynical.
That isn't the employee's money by definition - when it was sold as equity it became the shareholders. Just giving it away would be embezzlement just as much as if the CEO decided to have it resting in their account. Thus there needs some sort of purpose for the spending. Without any sort of equity based compensation the relationship with employees is inherently transactional - only getting more money if they think there is some sort of return from it be it reduced turnover, better performance, or as a way to attract new talent.
If you want employees to gain in that situation you need a worker owned coop, there is nothing making such a thing illegal although historically it usually hasn't scaled as well for several reasons and the inaccessibility of the equity to employees and lack of guarantees means the default assessment for that value in new ventures is $0 to the employee.
I was going to go into the idea of employee-owned co-ops as a possible solution, but my post got too long. I think this is on the right track. It doesn’t have to be a binary choice between either 100% investor-owned or 100% employee-owned. You could have a for-profit corporation with profit-sharing, where employees are entitled to maybe 25% of the profits, etc.
Right so my comment was just in the context of GP’s argument against returning 100% FCF to investors, because any money given to employees as wages or severance wouldn’t be a part of FCF I’m the first place.
The real argument we should be having is whether workers are getting paid enough, which I think is what you’re getting at. I believe the answer for low- to medium-skill workers is no for a variety of reasons. I have less concern for highly-compensated, high-skill tech employees from IBM or TI.
Also, I think if we made businesses shut off all returns to investors whenever they lay people off, like some seem to be suggesting, we would have many more contractors/short-term employees, with more workers in precarious employment situations. There is some empirical evidence for this in Europe.
Instead of blocking the return of profits, I would instead argue for increased taxation of corporations and middle-/high-income earners in order to provide a stronger social safety net, in the event they are let go they are not destitute and starving. But also happy to hear arguments for other solutions, it’s obviously a complex topic with lots of interconnected pieces.
Dividends aren't fake financial instruments. Dividends are real because they represent real cash paid to the shareholders. The tax systems aren't nice to dividends which is why other companies try fake financial instruments. We need to encourage more dividend paying.
A bunch of other folks have replied to different pieces of your comment, but I just want to point out that nearly all major index/ETF providers have halted rebalancing + reconstitution.
Unless IBM plans to float some new shares (highly unlikely) they have no reason to care about what ETFs or indicies they are in. If anything, cutting the dividend and reinvesting it into research/capex and paying down debt will go a lot further in the long run to making the stock more valuable.
IBM is big, and full of inefficiencies. Plus it has a very large external risk (due to it being a contractor of many other big companies), and now that externality reached them: https://news.ycombinator.com/item?id=23271145
The world will be awashed with people wanting employment. I don't know where people get the idea that hiring will be difficult in a 20% unemployment environment.
I absolutely LOVE when i see statements like this as it is so out of touch with reality. put aside your self righteousness for a minute and realize that companies do the things they do to survive and increase share holder appeal. it's all about the bottom line. also remember that it's a job... you do it, get paid and go home. i don't care what their "priorities" are as long as they are paying me a good salary.
also believe me, if you were unemployed and IBM was knocking at your door, you would take any job they gave you if it depended on feeding your family. your "priorities" would shift very quickly.
Any time there has been any hiccup in the economy for the last 10 years, IBM has used it as an excuse to cut headcount. And they've always done so unscrupulously, as evidenced by the number of age discrimination lawsuits they've had during these layoff periods.
While you're correct that companies have to layoff when they're financially constrained, you've chosen the wrong company to try to defend with that line.
And your last sentence is apropros of nothing. "If you were starving of thirst, of course you would drink that stagnant pond water" does not mean that we should all start drinking, or praising, stagnant pond water.
Your post is the one out of touch with reality. Most developers who get a job offer from IBM also get job offers from others, so they have options. "You are jobless and only this company wants you, so you will work for them even if they are shitty" is mostly fiction. Either no one wants you or multiple companies want you.
No, your post is the one that is out of touch with reality. You're correct that if somebody is good enough to get an offer from IBM, they're good enough to get offers nearly everywhere else. Where you're wrong is thinking that most developers factor how well other developers are being treated when making employment decisions. If they cared, we would have had a professional association like the screen actor's guild decades ago that codified how developers deserve to be treated, but we don't.
yep... i'm sure if you were offered a job 2x your current pay, the first thing you would ask yourself is "I wonder what the well being of my co-workers are", don't make me laugh. also there are many people who have no choice but to work for a single company or "shitty" one as you put it, it's called people who have criminal records.
again... your comment is the pure demostration of how sick the self righteousness of this site is.
There's been no layoffs and I don't expect any. RH managed to avoid layoffs in 2008 as well. A hiring freeze is in place for most departments but there are still some positions which are actively hiring.
I can't say I'm surprised that IBM is having layoffs, though.
Clearly coronavirus is a great excuse to let workers go. I doubt there’s going to be much hiring going on once this plays out, at least not with current wagee
Yeah you can copy and paste this story and these comments at least once a quarter. Same story “IBM lays off thousands” same comment “IBM isn’t even a company and this will surely be the death of them”. Literally ever since I first heard the letters IBM I’ve heard these same headlines and comments.
And yet my clients keep buying IBM products and hiring IBM consultants. There is a huge enterprise world outside of Silicon Valley that HN is completely unaware of.
I second that. And every time the sentiment of most commentators is pure vitriolic. I really don't get it. Unless it's coming from laid-off workers - which I can understand and empathize. But I highly doubt it. My understanding is that people here just hate IBM because it's old and out of fashion mostly mirroring the same valley sentiment towards anything and anyone on the older side of the road.
The amount of misconceptions that are passing in a lot of these comments for facts is astounding. Many pretend that they don't know that IBM is one of the major PaaS and IaaS cloud providers. Others pretend that they ignore all the R&D done in IBM. Others still ignore the fact that IBM is one of the most open source friendly companies out there. And others still forget that it is probably the oldest IT company around that has reinvented itself more times than Elon has begged for public attention.
Anyway. Each with his own opinion. Luckily business out there has it's own as well and places its money on it.
With that I'm not trying to absolve C-suite from their responsibilities or their shitty management that will leave thousands of good workers high and dry. This is a different issue altogether but like I said the hate in these comments have nothing to do with it.
Outside of big iron mainframe contracts for governments and banks who buys IBM these days? Excluding Red Hat, I would say they are largely managing themselves into obsolescence.
Watson is just a brand prefix at this point - it goes in front of a number of products like Watson Studio, Watson Machine Learning, Watson Assistant and so on.
> governments and banks
A look at this (probably somewhat outdated) list (http://ibmmainframes.com/references/a41.html) seems to imply lots of companies with any kind of legacy software still do.
Outside of mainframes, from my own experience, their Spectrum Scale/GPFS (parallel filesystem) is still the default buy in HPC. Not necc the _best_ choice, but still the one you wouldn't get fired for buying.
My university’s cluster was running off of Spectrum Scale/GPFS with two sets of hardware: one from IBM the other DDN. Our half-PB expansion was purchased through DDN as their gear is more performant and not as expensive.
One of the other admins was investigating the Lustre filesystem when I left.
"who buys IBM these days" is answered by your question and it's a money printing machine which due to the contracts and how they position themselves, hardly ever jams. I've been in quite some government agencies over the world and you would be surprised with how many services and consulting they are hard-wired in organizations. IBM MQ, JBOSS, DB2, iSeries and so forth - if you let IBM run its course, it's like cancer spreading and at some time there's a point of no return (and this happened years ago mostly). Over time the sales people get so ingrained into the organization, it's just commonly accepted IBM has tentacles all around the org. and internal architects who try to reform quickly learn it is near impossible, even though there are cheaper alternatives available because of how slow and multi layered these bureaucracies are. Good luck trying to get all stakeholders around the table in time and in a justly manner without IBM sitting at the table grinning at their contracts. Once they are in, they won't let loose and maybe the glory days are over, they will continue to print money from this for years to come.
Almost nobody and it does not matter. IBM core business is not hardware anymore, they are consulting company like Accenture, McKinsey, Deloitte, etc [1]. The software & hardware company from the '80 and '90 died and filled for bankruptcy in 1999.
I would caution comparing IBM to McKinsey. Very different DNA. Also, vs Accenture\Deloitte there is a big difference in that the two don't have their own products to push into boxes in component diagrams - IBM does and execs know it. This puts it very much at a disadvantage.
Accenture, Deloitte & IBM are considered Tier 2. The BMW, Mercedes, Audi if you will.
McKinsey, Bain, BCG are Tier 1. The Lamborghini, Ferrari, Aston Martin, etc.
Tier 2 do their darndest to get into Tier 1 but the nature of the work is very different and the chasm between tiers is hard to cross just like in the car industry. Source: I've done extensive work in both tiers.
Nope. McKinsey, Bain, and BCG are the tier 1 everywhere. McKinsey is by far the biggest and best-known, but it's like MIT and Caltech. One is bigger, and one is smaller. The smaller is less well-known, but it's no worse.
In this case, the smaller companies are, if anything, slightly higher-end (more boutique).
I'm not actually sure the Tier 2 are trying to become Tier 1. It's like comparing Walmart to Tiffany & Co. They're very different business models, but upscale doesn't necessarily beat mass market.
I would say the model has changed from selling your own software explicitly to writing most of the software (glueing systems+customizations) for Client 1, and reusing most of it when Client 2 roughly asks for the same thing.
I don't know how this whole buyback thing works really, but could they not just do a "sellback" of some of the shares they still own if they now need the cash? (Of course they might have to do so at a bit of a loss.)
As I understand a proportion of buybacks generally (maybe not at IBM) were financed by debt. If this was the case they would have to sell enough to cover the debt and interest first.
Agreed, but then it seems to me that the buybacks are kind of besides the point, and the real underlying issue is that they don't care about their workers (and/or aren't incentivized to), no? In terms of future flexibility / robustness to unforeseen emergencies, sitting on a big pile of your own stock doesn't seem that different to me from sitting on a big pile of cash, except in terms of the risk profile. (In contrast to paying a dividend, where they really can't recoup the cash if they need it.) I could easily be missing something though...
They’re not ‘sitting on’ a pile of stock; it gets bought back and cancelled. A company can issue more stock any time it likes, so in that sense every company is ‘sitting on’ an infinite pile of its own stock all the time.
Yes. When you see articles about companies raising money through the secondary market or by issuing stock, that is exactly what is happening. An IPO is just the initial offering of stock onto the secondary market. After that the company can continue to raise money by creating and offering more shares for sale. You will also see companies offer other instruments such as bonds and preferred shares which have different legal implications for investors.
Of course they could but dumping all those shares on the market to be sold would lower the stock price. The C-suite isn't interested in their compensation going down, easier to cut costs which may additionally make their compensation go up. It isn't about building a good solid company, it is about getting while the getting is good.
From my understanding it was a great marketing tool that never found it's footing due to complexity and cost. All of the real world applications for it just didn't justify the price IBM would be charging with the lock in.
Can you provide some actual evidence to back your inflammatory, dismissive claims?
There is zero mention of sed or awk at [0]. And looking at one of the references [1], it's pretty clearly more involved than sh+sed+awk. Is Apache UIMA [2] 90% sh+sed+awk? At a glance, it doesn't appear to be.
Last time I worked with IBM folks I was shocked at how high on the expense hog those folks lived. Sure they got a $$$ contract from their client but the amount of money they were giving to the IBM folks in expense claims was criminal.
IBM is notorious for both offshoring jobs to places like India and also heavily abusing the H1B visa, both themselves and through body-shops like Wipro and Infosys. They have more employees in India than in the US.
IBM once told its laid off US employees that if they wanted to keep their jobs, they should move to India and take the prevailing wage there:
"It's more of a vehicle for people who want to expand their life experience by working somewhere else..."
This is when their CEO made $20M last year.
I think any company that is currently laying off US employees should immediately have all their H1B, L1, etc. visas revoked and use banned for the next decade. This would be trivial to implement, especially in states like California where the company is required to notify the state before layoffs.
I also have absolutely no faith that Redhat won't turn into a shell of itself eventually - all the US and EU R&D moved to India, replaced by sales and lawyers using Oracle's business model.
The previous CEO did a horrible job. The workforce morale, not good for quite some time, fell further. Rather than try to leverage the deep and unqiue assets/IP of IBM, she sold off many, then made a poor attempt to chase the same type of "cloud" stuff as Amazon, Microsoft and Google.
But this makes sense now that IBM has become a body shop. I doubt the cuts will come in what remains of research, manufacturing, or design. Likely all in “services” and its sales teams.
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