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America is under siege. Do we blame IBM or Cringely?

150,000 staff fired. -20,000 left ...

The letter, obtained by Cringely, reads in part:

We said when we released 1Q results we would be putting in place a series of actions to address cost issues in our U.S. strategic outsourcing business. We have undertaken efforts toward that, and recently implemented a focused resource reduction in the U.S. While any such reduction is difficult for those employees affected, these actions are well within the scope of our ongoing workforce rebalancing efforts.

The blog also completely misinterpreted our efforts around Lean. To fully understand Lean, you have to view it in a strategic context - a key part of what we're doing to reinvent service delivery to provide more value to clients and make IBM more competitive. We are using Lean, which is a commonly used methodology to conduct process design and development, to make informed decisions about how to improve and streamline processes. We are going about that in a disciplined and rigorous way, and the intent, as it has always been, is to improve our speed, quality and responsiveness to clients.

IBM faces three major near-term issues - all of which revolve around its services business.

Graph showing the rising services revenue of all the major hardware makers

Hard Services. (Slide borrowed from MIT professor Mike Cusumano)

Big Blue committed whole hog to the services game well before its major hardware rivals HP, Dell, Sun Microsystems, and EMC. That proved a pretty smart strategy with IBM able to gobble up lots of easy cash.

The rivals, lacking competitive muscle, mocked IBM's services play. Sun's then CEO Scott McNealy took the criticism lead, saying things such as "IBM Global Services doesn't want to solve the problem with the car, they want to customize the jalopy. They have to find a way to keep the hundreds of thousands, the hordes dutifully working and completely billable."

As the chart above shows, IBM now faces plenty of services competition from its main rivals. This has made the services market painfully competitive, leaving IBM with tons of services revenue but thin margins. To illustrate this point, I turn to another slide (below) - this time from IBM's own services researcher Paul Maglio.

Maglio spends most of his time these days trying to create more efficient relationships between IBM and its customers on the services front. He argues that the US will be driven by a services economy in the years to come and that vendors along with the government need to invest money into proper services studies.

Such a response from IBM seems only natural given the fresh competitive pressure it faces and the falling services margins. These factors only compound IBM's third problem, which is that its financial results over the past few years are made to look much better than they really are, thanks to a weak dollar.

Chart showing that IBM's services business brings in the most revenue for IBM but only 33 per cent of profits

Is the Services Biz doing its part?

The IBM I'm experiencing does not seem like a company ready to collapse its US workforce. Rather, it seems like a company making gradual cuts to deal with a changing business while at the same time researching ways to pursue services in a more sophisticated fashion. No major vendor can afford the reputation of being a cash cancer on its clients. IBM seems to know this and appears to be trying to fix its past ways.

Cringely argues that IBM's public face is all show. He urges readers to delve into the 1,000+ comments left in response to his first story as proof of IBM's woes.

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