June 7, 2014 | In: Technology

IBM Is No Longer an Attractive Stock

If you own IBM stocks (NYSE:IBM), you must have noticed that the stock is down so far 1.23% this year, while the aggregate index of technology stocks went up 1.1% during the same period. You might not think that this is huge, but it is, since IBM has been one of the most consistent and profitable stocks for a long time. I’ve even recommended it here and claimed it’s one of those stocks that you should hold forever (well, until you need the money anyway). Not anymore.

Here’s what I think are 2 major problems with IBM:

  1. Its services are becoming increasingly costly to the client. I will explain later why.
  2. Its full time staff mostly consists of incompetent backstabbing employees whose major focus is to protect their jobs by playing vicious politics games, while its consultant staff consists of costly mercenaries who’d sell their souls to another company the second they are offered a few dollars more on top of their hourly rate with IBM.

Let me first discuss the first point. I know quite a few IBM employees (full time and consultants), and all of them tell me how stupid the whole IBM consultancy business has become. For example, one of the projects a friend of mine worked on was to move a few hundred PCs from one building to another (just so you know, the buildings were almost connected to each other). My friend told me that IBM charged the client a ridicilous amount of money (think $100k+) just so that they can produce a project plan to move those computers. I then asked my friend, isn’t the whole thing about calling a moving company and asking them to to move the computers from one building to the next, while ensuring that the new building has full Internet coverage? The answer was yes.

Another reason why IBM is so expensive is because it constantly hires incompetent costly mercenaries consultants to execute some of its tasks. They also do the hiring through a recruitment agency, and, as I have explained before, recruitment agencies are nothing more than parasites that add an unnecessary overhead to the resource cost of any project. I’ll give you a not-so-fictitious example where IBM charges the client about $160 for a certain consultant:

  • The resource’s basic rate is $100/hour.

  • The consultant invoices the recruiter $100 + taxes (about $115/hour).

  • The recruitment agency invoices IBM about $120 – $130 + taxes (about $138 – $150/hour)

  • IBM charges the client $160 + taxes (about $184/hour).

So, you see, IBM made a raw profit of $30/hour for that particular resource even after billing the client in the near of $200/hour for that consultant for creating a stupid plan to move PCs from one building to another. In other words, they overcharged the client but they didn’t make some serious money, which means, sooner or later, they’ll raise the prices and bill the client even more money! If you have a very faint idea of what IBM is, you will know that $30/hour as a raw profit will not even cover its bills.

The question is, when will those companies that deal with IBM notice that they are paying a lot more for services that should cost much less.

Let me now move to the next point…

IBM has become, unfortunately, one of the worst large companies in the world when it comes to resource competence. The thing is, IBM makes the most of its revenue from services rendered to other companies (and not from products), and that’s why resource competence is not that important. In fact, the less competent the resource is, the better he is for the company because a task that would otherwise take 100 hours will take 500 hours (and the client, of course, will be billed for 500 hours). Now, since IBM’s staff is not that competent, then, it is very normal that office politics become a major game that everyone plays to protect his job. Every single resource at IBM is aware that he or she is replaceable (because he or she is incompetent), and that’s why they fight so hard any attempt by a workmate to step into their territory. This politics game is very stressful, and leads to significant loss in productivity.

All the above applies for the consultants as well, except, of course, that consultants couldn’t care less about IBM’s future, and have no problem biting the hands that feeds them the moment they get paid enough to do it. The strategy that IBM follows by hiring many super-expensive and incompetent consultants is very questionable: it hurts IBM and it hurts its clients. I have no idea why they do this.

The reason why IBM is kept afloat is because of its reputation, and because there is no alternative for many companies already using IBM (large companies do not want to take the risk of changing their major vendors, plus, executive at large companies have usually close relationships with IBM’s executives).

There is too much cleaning that needs to be done at IBM before it regains a sustainable business status, and all that cleaning should start, in my opinion, with the staff and those who are overseeing the staff. If that’s not done, I’m not sure if IBM will still be there 10 years from now. Until IBM proves that it’s on the right track again, maybe you should reconsider your decision to keep those IBM stocks that you bought 10 years ago.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

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