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Twilight of the idols: The only philosophy HPE and IBM do these days is with an axe

This is the art of disaster capitalism

Opinion The cloud has not been kind to legacy tech vendors like IBM and Hewlett Packard Enterprise. With their enterprise software and hardware businesses ravaged by cloud alternatives, and their efforts to get into cloud stumbling, it's not surprising that these erstwhile bellwethers would shed employees as they seek out profitable pastures.

Unfortunately, it's also not surprising that their executives aren’t feeling the same pinch. IBM CEO Ginni Rometty, for example, collects at least $33m each year, or roughly $181m during the five-and-a-half years she has overseen ever-dwindling revenue and a shareholder return of less than 0.1 per cent. Former HPE CEO Meg Whitman, for her part, had a nominal salary of $1 yet made tens of millions each year that she ran HPE, even as HPE haemorrhaged tens of thousands of jobs.

Apparently, this is the price the market pays for crisis capitalism, wherein tech CEOs throw outsourcing arrangements and dubious acquisitions at the wall to see what sticks. It's a price paid not by management or hedge funds, however: only the laid-off employees seem to be feeling the sting.

We're so happy we can hardly count

And sting it has.

HPE has been on a mission to move 60 per cent of its employee base to low-wage countries, all part of its HPE Next programme. There is, of course, great talent outside Western Europe and North America. Given HPE's recent history, however, it's hard to think that goal is anything more than an attempt to cut costs (and, in the process, line the executive team's pockets). As Shaun Nichols summarised in an earlier Register article: "The board gave the green light for mass redundancies and other slashing to save $1.5bn between now and 2020. Some $700m of those savings will be plowed back into the biz."

That must be very comforting to the 10 per cent of HPE's workforce that lost their jobs in the first wave of bloodletting. Nor did the news get any better for the 1,000 sysadmins employed by HPE-owned CSC, which a jury found had refused to cover mandatory overtime pay. Nor for the thousands of employees in underperforming business units who received no 2017 bonus pay.

IBM retained management consulting firm Bain to crunch the numbers on which heads should roll, and which to simply allow to attrit. IBM, like HPE, is trying to push more of its workforce to lower-wage countries, initially hoping to offshore 80 per cent of its services unit but ultimately settling on 60 per cent after an internal backlash. None of this has really worked, as the company registered 22 consecutive quarters of declining revenue, only recently notching the most tepid of growth.

A charitable view on all this is simply that change is hard. It would be easier to embrace this view but for a few pesky facts.

We call it 'Riding The Gravy Train'

In IBM's case, there's the inconvenient truth, exposed by Wall Street analyst Tony Sacconaghi of Bernstein, that: "The company generated $92bn in cash but chose to return 80 per cent of this cash to shareholders in dividends and buybacks." Those $50bn in buybacks aimed to make IBM's stock more valuable (it didn't work), and were a way of suggesting to the market: "Trust us." Employees may have found it hard to trust their ebullient CEO as she flew helicopters around the UK to visit office sites, all while cashing in tens of millions in flatlining IBM stock. HPE's dissonance between executive pay and employee pain is no better.

It doesn't help that the boards of HPE and IBM implement the exact wrong incentives to motivate anything more than endless bloodletting. Some companies like Apple reward executives based on their ability to increase revenues and profitability. Not so IBM or HPE. Both companies skew management incentives toward cutting costs, not increasing revenues. For HPE it's a 50/50 pairing of stock performance and profitability. For IBM, it's 70 per cent based on profitability and 30 per cent based on cash flow.

Small wonder, then, that both companies have been quick to retool at the expense (literally) of their employees.

Nor is such "retooling" likely to work. HPE, with a marketing message more appropriate to 1918 than 2018, says on its website: "The experts at HPE Pointnext [HPE's rebranded consulting unit] provide a blueprint for achieving consumption-based IT with on-premises infrastructure." This is basically a myth-making exercise in which HPE tries to convince earthbound CIOs that they can function like cloud companies without actually investing in any cloud.

IBM, which regularly touts itself as "the leading enterprise cloud vendor", actually generates a rounding-error market share and no real innovation. As we've pointed out before: "IBM's cloud offering is mostly SoftLayer with a feature set Gartner says 'has not improved significantly since the IBM acquisition in mid-2013; it is SMB-centric, hosting-oriented and missing many cloud IaaS capabilities required by midmarket and enterprise customers'."

It could be made into a monster

We're left with two moribund enterprise vendors that have little hope for the future, with a track record of doubling down on the past (IBM buying PwC to grow its consulting business right before it starts to cut it back down, IBM buying SoftLayer even as the market goes full cloud and so on). It's easy to see these were bad decisions in hindsight, but it's just as easy to see with foresight that neither company is betting big enough on the future. They're making incremental steps, coupled with more than incremental headcount cuts.

Again, this could be generously excused but for the fact that each company still manages to shovel copious quantities of dosh into the pockets of their executives and shareholders. Meanwhile, their employees, the ones who actually would be on the hook for generating real change, are left on the cutting room floor. Karl Marx couldn't have written the script better himself.

The question is whether these disaster capitalists will ever feel close enough to the pain of their employees to do something real to staunch the bleeding.

Based on their last six years of operations, the answer appears to be: "No." That's a shame, as their employees deserve better, and so do the storied brands that are being sullied by short-term profit-seeking, rather than long-term efforts to generate real revenue growth. ®

Matt Asay is Head of Developer Ecosystem at Adobe.


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