One reader of this column in particular has been urging me to abandon for a moment my obsession with IBM and look, instead, at his employer — Hewlett Packard. HP, he tells me, suffers from all the same problems as IBM while lacking IBM’s depth and resources. And he’s correct: HP is a shadow of its former self and probably doomed if it continues to follow its current course. I’ve explained some of this before in an earlier column, and another, and another you might want to re-read. More of HP’s problems are covered in a very fine presentation you can read here. Were I to follow a familiar path at this point I’d be laying out a long list of HP mistakes. And while I may well do exactly that later in the week, right here and now I am inspired to do what they call in the movies “cutting to the chase,” which in this case means pushing through bad tactics to find a good strategy. I want to lay out in a structural sense what’s really happening at both HP and IBM (and at a lot of other companies, too) so we can understand how to fix them, if indeed they can be fixed at all.
So I’ll turn to the works of Autodesk founder John Walker, specifically his Final Days of Autodesk memo, also called Information Letter 14, written in 1991. You can find this 30 page memo and a whole lot more at Walker’s web site. He has for most of this century lived in Switzerland where the server resides in a fortress today. We may even hear from Walker, himself, if word gets back that I’ve too brazenly stolen his ideas. Having never met the man, I’d like that.
What follows is an incredibly stripped-down version of Information Letter 14, nixing most of the Autodesk-specific bits and applying the underlying ideas to lumbering outfits like HP and IBM. I’m just one of many people to be inspired by this memo, by the way. It was the basis of Bill Gates’s The Coming Internet Tidal Wave memo from the mid-1990s that led to Microsoft reforming itself to take on Netscape.
When major shifts occur in user expectations, dominant hardware and software platforms, and channels of distribution, companies which fail to anticipate these changes and/or react to them once they are underway are supplanted by competitors with more foresight and willingness to act…
This of course describes both HP and IBM — generally trying to use their corporate mass to lead from behind, which even they know doesn’t work.
Today (Autodesk, HP, IBM — you name a successful company) is king of the mountain, but it is poised precariously, waiting to be pushed off by any company that seizes the opportunity and acts decisively. One of the largest unappreciated factors in Autodesk’s success has been the poor strategy and half-hearted, incompetent execution that characterized most of our competitors in the past. But betting the future of our company on this continuing for another decade is foolish, a needless prescription for disaster…
You cannot lead an industry by studying the actions of your competitors. To lead, you must understand the mission of your company and take the steps which, in time, will be studied by other, less successful companies seeking to emulate your success…
Autodesk is proud of its open door policy, and counts on it to bring the information before senior management that they need to set the course for the company. Such a policy can work only as long as people believe they are listened to, and that decisions are being made on grounds that make sense for the long-term health of the company. Rightly or wrongly, there is a widely-held belief which I’m articulating because I share it, that management isn’t hearing or doesn’t believe what deeply worries people throughout the company, and isn’t communicating to them the reasons for the course it is setting. This is how bad decisions are made…
NOBODY in the executive suites at either HP nor IBM is listening to the troops. No good ideas are welcome in either company at this point, which is stupid.
Now Walker takes us to the crux of the corporate problem faced by both HP and IBM, explaining it in terms of Wall Street’s obsession with profit margins.
Investors and analysts have learned to watch a company’s margins closely. Changes in margin are often among the earliest signs of changes in the fortunes of a company, for good or for ill. When sales, earnings, and margins are rising all together, it usually means the market for the company’s products is growing even faster than the company anticipated; the future seems bright. When margins begin to decline, however, it can indicate the company has let spending outpace sales. When competition begins to affect the company, or even when a company fears future competition, it may spend more on promotion, accelerate product development, and offer incentives to dealers and retail customers–all reflected in falling margins.
But high margins aren’t necessarily a good thing, particularly in the long term. One way to post high margins is by neglecting investment in the company’s future. Any profitable company can increase its earnings and margin in the short run by curtailing development of new products and improvements to existing products, by slashing marketing and promotional expenses, and by scaling back the infrastructure that supports further growth. Since there’s a pipeline anywhere from six months to several years between current spending and visible effects in the market, sales aren’t affected right away. So, with sales constant or rising slowly and expenses down, earnings and margin soar and everybody is happy.
For a while, anyway. Eventually momentum runs out and it’s obvious the company can’t sustain its growth without new products, adequate promotion, and all the other things that constitute investment in the future of the business. It’s at that point the company becomes vulnerable to competitors who took a longer view of the market.
One of the most difficult and important decisions the management of a company makes is choosing the level of investment in the future of the business. Spend too little, and you’re a hero in the short term but your company doesn’t last long. Spend too much, and the company and its stock falls from favor because it can’t match the earnings of comparable companies…
This is the pit into which HP and IBM have fallen. They want to maintain margins to keep Wall Street happy, but the easiest way to do that is by cutting costs. Eventually this will be visible in declining sales, which IBM has now experienced for three straight years. Yet with a combination of clever accounting and bad judgement even declining sales can be masked… for awhile.
Let’s turn now to what happens to the money that remains after all the bills and taxes have been paid. A small amount is paid back to the shareholders as dividends, but the overwhelming percentage goes into the corporate treasury–the bank account–the money bin. When a company runs the kind of margins Autodesk does for all the years we have, that adds up to a tidy sum: in Autodesk’s case (in 1991) more than $140 million. When thinking about the future of the company, what can and can’t be done with that cash is vital to understand.
At the simplest level, the money belongs to the company and management can do anything it wishes within the law: give some back to the stockholders as a special dividend…, buy other companies…, buy real estate or other capital goods for the company…, or just invest the money, collect the income, and add it to earnings…
But here’s the essential point. When you spend a dollar, whether to hire a programmer, buy a truck, run an ad, or take over Chrysler, it it doesn’t matter whether it came from the bank account or from current sales… Regardless of how prudent you’ve been piling up money over the years, the moment you spend any of it in your business, it’s just as if you increased your day to day operating budget. That means rising expenses without an increase in sales, and that translates into… falling margins.
About the only thing you can do with the money that doesn’t cause margins to fall, other than giving it back in dividends, is investing it in other companies. When you make an investment, that’s carried on the books as capital. As long as you don’t have to write the investment off, it doesn’t affect your operating results…
The accounting for money in the bank, then, can create a situation where pressing company needs remain unmet because the expenditures required would cause margins to fall, yet at the same time, the company is actively investing its cash hoard outside the company, in other businesses, because those investments do not show up as current operating expenses. Thus, the accumulated earnings of a company, the ultimate result of its success, can benefit any venture except the one that made the money in the first place…
This explains why IBM is always buying little companies then squeezing them, often to death, for profits. Buying these companies is an investment and therefore not a charge against earnings. But having bought the companies, spending any more money on them is not an investment and hurts earnings. IBM could develop the same products internally but that would appear to cost money. So instead they try to buy new products then deliberately starve to death the companies that created them. In accounting terms this makes perfect sense. To rational humans it is insane. Welcome to IBM.
Management strives, quarter by quarter, to meet the sales and earnings expectations of the Wall Street analysts and to avoid erosion in the margin which would be seen (rightly) as an early warning, presaging problems in the company. In the absence of other priorities this is foremost, as the consequences of a stumble can be dire…
But management has a more serious responsibility to the shareholders; to provide for the future of the company and its products. Focusing exclusively on this quarter’s or this year’s margins to the extent that industry averages dictate departmental budgets for our company is confusing the scoreboard with the game…
I attended a meeting in early 1989, where I heard a discussion of how, over the coming year, it would be necessary for Autodesk to reduce its sales and marketing budget to lower and lower levels. Walking in from the outside, I found this more than a little puzzling. After all, weren’t we in the midst of a still-unbroken series of sales and earnings records? Wasn’t this year expected to be the best ever? Weren’t we finally achieving substantial sales of AutoCAD to the large companies and government?
True, but there was this little matter of accounting, you see. From time immemorial, most copies of AutoCAD had been sold by dealers. To simplify the numbers, assume the retail price of AutoCAD is $1000, the dealer pays $500 for it, and all sales by dealers are at the full list price. So, for every copy of AutoCAD that ends up in a customer’s hands, Autodesk gets $500 and the dealer gets $500. Autodesk reports the $500 as Sales, deducts expenses, pays taxes, and ends up with earnings, say $125, corresponding to a margin of 25%.
But suppose, instead, we sell the copy of AutoCAD to a Fortune 500 account — Spacely Sprockets, perhaps? In that case, the numbers look like this (again simplified for clarity). Autodesk ships the copy of AutoCAD directly to the customer and invoices Spacely Sprockets for the full list price, $1000. However, the sale was not made directly by Autodesk; the order was taken by one of our major account representatives, the equivalent of dealers for large accounts. When we get the check, we pay a commission to this representative. Assume the commission is $500.
Regardless of who bought the copy of AutoCAD, the financial result, the fabled “bottom line,” is the same. There’s one fewer copy of AutoCAD on our shelf, and one more installed on a customer’s premises. Autodesk receives $500, and our dealer or representative gets $500. But oh what a difference it makes in the accounting! In the first case, where Autodesk sold the copy of AutoCAD to the dealer, that was the whole transaction; whatever happened to the copy of AutoCAD after the dealer paid for it has no effect on Autodesk’s books. Autodesk sells, dealer pays, end of story. But in the second case, when Autodesk sells to Spacely Sprockets, that appears on Autodesk’s ledger as a sale of AutoCAD for $1000. The instant the $1000 shows up, however, we immediately cut a check for the commission, $500, and mail it to the representative, leaving the same $500 we’d get from the dealer. Same difference, right?
Not if you’re an accountant! In the first case, Autodesk made a sale for $500 and ended up, after expenses and taxes, with $125, and therefore is operating with a 25% margin (125/500). In the Spacely sale, however, the books show we sold the product for $1000, yet wound up only with the same $125. So now our margins are a mere 12.5% (125/1000). And if we only kept $125 out of the $1000 sale, why that must mean our expenses were 1000-125=875 dollars! Of that $875, $375 represent the same expenses as in the dealer sale, and the extra $500 is the representative’s commission which, under the rules of accounting, goes under “Cost of sales.”
Or, in other words, (the money) comes out of Autodesk’s marketing and sales budget.
That’s why the marketing budget had to be cut. To the very extent the major account program succeeded, it would bankrupt the department that was promoting it. If we were wildly successful in selling AutoCAD into the big companies, Autodesk would make more sales, earn more profits, then be forced to cancel marketing program after marketing program as the price of success! All because the rules of accounting would otherwise show falling margins or a rising percentage of revenue spent on “cost of sales.”
The purpose of this discussion is not to complain about the rules of accounting. You have to keep score somehow… Instead, what disturbed me so much about this incident was the way management seemed to be taking their marching orders from the accounting rules rather than the real world. Budgets were actually being prepared on the assumption that marketing and sales efforts would have to be curtailed to offset the increased “cost of sales” from the major account sales anticipated over the year. Think about it: here we were planning for what was anticipated to be and eventually became the best year in Autodesk’s history, and yet were forced to cut our marketing and sales as a direct consequence of its very success. Carried to the absurd, if the major account program astounded us and began to dwarf dealer sales, we would have to lay off the entire marketing and sales department to meet the budget!
This is another reason why HP and IBM have taken to ruthlessly cutting expenses, which is to say people. These aren’t huge one-time layoffs to lay the groundwork for true corporate re-orgs, they are exactly as John Walker feared: labor reductions driven purely by accounting rules. For the people of HP and IBM they are death by a thousand cuts.
The only way to use retained earnings without directly increasing expenses is by investing it… Unfortunately, unless the goals and priorities of Autodesk’s current Business Development effort have been seriously miscommunicated, it seems to me embarked on a quixotic search for something which in all probability does not exist: “The Next AutoCAD…’’ In other words, we’re betting the future growth of our company on our ability to consistently identify products which sell for more than any other widely-distributed software and will be sold exclusively by a distribution channel which has demonstrated itself incapable of selling anything other than AutoCAD.
What’s wrong with this picture?
When you adopt unrealistic selection criteria, you find unattractive alternatives. The desiderata that Autodesk is seeking in the products on which the company’s future will be bet would have excluded every single successful product introduced since 1982 by Microsoft, Lotus, Ashton-Tate, Word Perfect, and Borland. What are the odds Autodesk will find not one, but several products that these companies have missed?
You can always find an investment that meets your criteria, but if your criteria are out of whack with reality, you might as well blow your money at the track where at least you get to smell the horses…
“The next AutoCAD” here could just as easily mean the next IBM 360, the next DB2, the next LaserJet printer, except those kind of opportunities don’t come along very often and as companies get bigger and bigger their successes are supposed to get bigger, too, which usually isn’t even possible, leading to the very corporate decline we are seeing in both companies. “The next AutoCAD” could mean Ginni Rometty’s favorites — cloud, analytics, mobile, social, and security, except with IBM a lesser player in every one of those new markets, what are the chances of being successful with all of them? Zero. With one of them and a Manhattan Project (or IBM 360) effort? Pretty good, but not one of these segments by itself can be a $100 billion business.
Whether it’s Meg Whitman or Ginni Rometty, the problems these executives face are the same and are almost equally impossible. Neither woman can pull a Steve Jobs turnaround because Steve’s task was easier, his company was already on its knees and vastly smaller than either HP or IBM. So stop comparing these behemoths to Apple circa 1997. A better comparison would be to Dell.
By taking his company private Michael Dell changed the game, eliminated completely Wall Street pressure and influence, and dramatically increased his chances of saving his company. Why haven’t Meg and Ginni thought of doing the same? Why aren’t they? There’s plenty of hedge fund money to enable the privatization of both companies. But the hedge funds would immediately fire the current CEOs, which is probably why this doesn’t happen.
Ginni Rometty and Meg Whitman appear to be more interested in keeping their jobs than in saving their companies.
See also, Ed Zander, Greg Brown, and Sanjay Jha at Motorola – cutting the throat of company innovation to service the lusts of Wall Street, resulting in the death of the company.
Sure, the company dies, but look at the big bonus you get for saving all that money!
This is why things are so askew in the world. Wall Street was supposed to be investment in companies in the long term. This constant short sighted view of “what have you done for me today” is killing off business. Instead of looking at the needed investments to improve products, you get cuts, outsourcing of jobs, lower customer support, etc and still end up going of the bankruptcy cliff. Why won’t business leaders suck it up and tell Wall Street to stick it? Oh, right. They aren’t in it for the company, only themselves. The idea of bringing in a high priced CEO from ‘someplace else’ has also been a disaster.
A change is needed…
The two of you make some good points – a common misconception of the American business model is that the customers are the people who buy the products – this is wrong, in America the customers are the Wall Street Banks and these are – as you show – the people who American companies must keep happy.
Look at the airline industry if you want another example – their basic business plan appears to be to make the majority of the “customers”, the passengers, as miserable as possible offering the chance to “upgrade” their experience slightly by paying more money to something that just slightly not as bad … logically this is crazy but not when you realize the the passengers can simple buckets for Wall Streets money to travel back to the banks.
This will not end well for anyone.
The airline industry has never been profitable, back to the days of the Wright brothers.
airlines have spurts of profitability. when that happens, they build headquarters, establish routes, and buy planes.
curiously, when airlines are deep in the doo, they hedge fuel supplies, find new ways to gouge… and buy planes. where a route needs a boost, they put the newest plane that uses less fuel and needs fewer crew on that route.
mostly capital investments.
Good stuff Bob, really enjoyed this article. As a CIO, this puts me in a pickle as I choose who to buy from. Take Cognos as an example, great product and company when they were Cognos. IBM bought them and people are laid off, innovation slows down, pricing increases, and market share decreases. Recently Hitachi purchased Pentaho and Microsoft Revolution Analytics. Two open source businesses gobbled up by large companies with extra cash to spend. It’s getting hard to find solid products that are stable.
Which is the meaning of Walker’s memo. There are no stable products.
That also tells me that the only dependable software is Free (Libre) Software. All other software is a temporary service.
Web APIs are a ridiculously short-lived service, and almost all of them are just different ways of pursuing the same bad idea in the fashion that best caters to its progenitor. The same can be said for most any form of complexity — see IETF RFC 1925, published only three years after IL 14.
http://en.wikipedia.org/wiki/April_Fools'_Day_Request_for_Comments (1996)
Take a look at Information Builders. Celebrating 40 years of BI and analytics innovation and still privately held.
Good posting, Bob.
I guess it’s better to have been an employee serf under a tyrant like Denis Koslowski or “Chain Saw Al” Dunlap than to waste away in a declining company led by someone like Ginni Rometty or Meg Whitman.
Finance is parasitic on production.
What about giving CEOs stock bonuses that would vest only after 20 years, and letting them take that to the bank? (All those sharp-eyed bankers would get something useful to do, too).
Nah, too easy.
In the beginning of your book you tell a story about your first experience with IBM and why you want to SAVE it as a company. For those who haven’t read your book they may be surprised to know you dedicate quite a number of pages on many good and solid recommendations for improvements.
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The loss of a great company is a terrible thing. I am glad someone is trying to wake them up and coax them to save themselves.
great article, shows the kind of thinking that affects the software / hardware industry and others
This kind of explains amazons philosophy. They don’t seem to give a damn about margin as long as their revenue keeps going up.
I don’t understand Amazon. I guess cash flow is what keeps Wail Street mesmerized. the cash flow just goes up and up, so something has to be going right. but it’s all going into skunk works stuff that doesn’t pan out. shiny, buzzword, impractical stuff. it’s always special charges here and writeoffs there for Amazon.
As an accountant I have seen dysfunctional behaviour driven by the reported financial results. As an accountant in management I never want to let that happen.
Some companies on Wall Street have decided to no longer provide earnings guidance to avoid this kind of short termism.
Private equity buys businesses and fixes them up, grows them etc. over a period of 3-5 years based on the internal rate of return they expect to generate. In other words they play for the long game.
I wouldn’t define “3 to 5 years” as “long term”. Also long term plans could have negative connotations, as dying multinational corporations thrash about in their well funded long term death throes, damaging the markets, and perhaps whole industries in the process.
Went to school with John 15 years before this unfolded. I had a lot of respect for John back then and after reading the Autodesk letters around the time they came out, I had even more. Now my respect for Bob has gone up a notch for giving John this amount of space. My take away early on was to stay with small private companies. I know everyone, they know me, the social contract of the organization is not battered by Wall Street, and on the adopter-curve, we serve the great middle section.
“Buying [companies] is an investment and therefore not a charge against earnings. But having bought the companies, spending any more money on them is not an investment and hurts earnings. IBM could develop the same products internally but that would appear to cost money. So instead they try to buy new products then deliberately starve to death the companies that created them. In accounting terms this makes perfect sense. To rational humans it is insane. Welcome to IBM.”
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Someone has finally explained Compaq, DEC, Palm, Flip, etc.
[…] Autodesk’s John Walker explained HP and IBM in 1991 – I, Cringely – One reader of this column in particular has been urging me to abandon for a moment my obsession with IBM and look, instead, at his employer — Hewlett Packard.… […]
Love your articles. Well researched and articulated. Looking forward to the next one. I think it’s time to say bye bye to these old companies and let startups do the innovation. Vc’s and Angel investors are running better and bigger portfolios of companies than these age old companies winging profits from substandard products.
Mary lu,
Salarytalk.org
If the accounting rules allowed large companies to invest in the future, could they make a success of it? Or would bureaucracy and internal politics sabotage any major new development? What if IBM circa 1990 hadn’t become a services company under Gerstner, and had somehow been able to bring forth a new range of market leading hardware and software products? Maybe their dominance would have stifled the first wave of internet innovation in the mid to late 90s. It could be a good thing that the accounting rules stop large organisations investing in innovation, because that job is better done by startups.
Bob,
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If accounting rules are causing big corporations to focus on the wrong activities, then the accounting rules need to be changed. I believe that my method of preparing an income statement, as shown below, would minimize the problems resulting from using present methods to prepare income statements. My method would also produce a more meaningful set of performance indicators for users of financial statements.
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As an old retired CPA, I don’t agree with the way that certain items are shown on some income statements. To my way of thinking, commissions should be shown as an adjustment to sales, not as part of the cost of products sold. The latter method produces misleading amounts and percentages for sales.
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Commissions and other costs of producing sales are very different from the costs of producing the products being sold. I believe these two types of costs should be shown in two different categories on the income statement.
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So I would show commissions (plus any other costs of producing sales) as an adjustment to total sales, leaving net sales. In this case, the basis for determining the percentages for the various margins (margins being gross profit, income before taxes, and net income) would be net sales, not total sales. I believe that net sales is a more important indicator of performance than total sales.
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For example, I have seen some companies in which the costs of producing sales exceeds total sales. This loss on producing sales is obviously a more important indicator than total sales.
Another important margin is operating income. This amount is gross profit less operating expenses. Operating income is shown on the income statement before other income, other expenses, and extraordinary items.
This is just sad.
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At the turn of the last century we had terrible abuses and neglect being caused by greedy corporations. It took countless terrible incidents to shock the public and government into action. Kids stopped working in factories. Jobs became safer. Worker gained bargaining rights.
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Then a couple decades later greed reared its ugly head again. The excesses triggered the start of the great depression. It took 25 years and a world war to recover from it.
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Through the middle part of the last century we had a good balance of business value and social responsibility in most of our big companies. It served society well and the whole economy grew.
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Now greed is back and social responsibility has been thrown out with the trash. Will it take an economic disaster to bring back values and balance?
You have things backwards. Government didn’t put an end to child labor. It was a trailing indicator. Child labor was dropping as the country became wealthier, and only at the end was it banned, when it was only the poorest doing so.
Same with air quality as well.
Best example of this is a chart of birth rates in China. They were dropping substantially before they implemented their family planning law.
Wealth didn’t kill child labor in the U.S. The Great Depression did. Adults were competing for child wages
According to this, it ended in the 19th century: “1876 Labor movement urges minimum age law – Working Men’s Party proposes banning the employment of children under the age of 14.” https://www.continuetolearn.uiowa.edu/laborctr/child_labor/about/us_history.html But since my dad claimed he was working at the age of 12 in 1926, I guess the GD may have had something to do with it.
While I think IBM is a completely lost cause, I do still hold out some hope for HP as a company.
I hope their memristor technology can make it into mass production in the not-too-distant future and provide them with something they haven’t seen in a while–cutting edge technology from HP!
One thing struck me about HP a week or so ago: they announced that they were going to spin off something or other cuz it was the only way to save the company.
Strange?
Scott, HP is splitting into two very large (Fortune 50?) companies, HP Ink and Hewlett Packard Enterprise. Announced it late last year and should conclude late this year.
HP printers still strike me as a very good deal, with the ink lasting much much longer than with other companies’ products.
…”more interested in keeping their job”…
I think it would be more like: keeping their job long enough to reach the points in their contracts where the enormous number of shares they own vest and they become eligible for their golden parachutes. Both of these are probably shorter than the period required to ensure the long-term health of these companies or to enable an actual turn-around.
Meg Whitman doesn’t need the money, having already made a fortune from eBay, so she’s not stretching toward some vesting target. In Meg’s case I’d say it’s ego: she knows better than anyone else how to fix HP. She’s wrong of course. As for Ginni you are probably correct that she’s trying to follow in the footsteps of her predecessor, Sam Palmisano, who scored one of the richest retirement packages in corporate history at over $200 million.
I think Meg has only been interested in deferring disaster at HP until she’s had her “run”. Until then it’s her plaything. Afterwards she can shift her attention once again to pursuing some political office.
Right on!
Nice article Bob, I watch CNBC from time to time and continue to be amazed when I see a successful start-up CEO talking gleefully about their impending IPO. Why on earth, other than a big one-time pay day, would they want to feed their company to the Wall St. wolves? I guess I answered the question myself, for that big one-time pay day. Amazing!
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I can’t help myself from adding to the last sentence in your 12:17pm post:
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“…her predecessor, Sam Palmisano, who scored one of the richest retirement packages in corporate history at over $200 million, and left a trail of wreckage behind him as he waltzed his fat ass off to the bank with a big sh1t-eating grin.”
I believe you have made a good point of what i have believed for a while – the stock market has worn out it’s usefulness – do these companies really need investors telling a profitable company how to run their business to make them happy?
If you need money – float a bond – what benefit is there in allowing the world to bet on the price of your stock – even crushing it on the slightest bit of bad news? i think many companies should escape the casino and go private, especially if they are profitable and unlikely to grow any huge amount.
The analytics movement in sports is about trying to find new measures that accurately measure and provide insight into the value of the players. Too bad accountants are so brain dead that they don’t understand the weaknesses of their own measures, and therefore develop no new ones.
I think Meg has only been interested in deferring disaster at HP until she’s had her “run”, and can shift her attention once again to pursuing some political office.
Re: “The purpose of this discussion is not to complain about the rules of accounting. You have to keep score somehow…Instead, what disturbed me so much about this incident was the way management seemed to be taking their marching orders from the accounting rules rather than the real world.” That statement has been confusing me for a while. First of all, as you point out, they made a choice to use “cost of sales” when they chose to give large commissions to salesmen instead of selling to dealers for a lower price. There must be a good reason for this or they wouldn’t do it. Second, You say you are not complaining about the rules of accounting, yet you say they should not take their marching orders from the result of using these rules. That sounds like saying the rules of baseball are needed to keep score, but the resulting scores should be ignored when making decisions about the team.
I think your baseball analogy is a good one. Unlike in some other sports, the final score in baseball is is irrelevant beyond the win/loss distinction. There is no more credit for a 16-0 win than there is for a 16-15 win. So, from a win/loss record perspective, you don’t need to construct an overpowering team, and you probably don’t want to spend the money to do so. You may still want to construct an overpowering team for the purpose of putting fans in seats. From a scoring point of view, winning 2-1 on the strength of a defense that has glue in their gloves and a pitcher that can paint the corners at 105 mph is just as good as winning 20-0 on the strength of a batting lineup where the weak guy is going to slap 20 homers a season. However, from a fan’s point of view homers are way more exciting than watching a pitcher throw strikeouts.
So, yeah, I don’t think you take marching orders directly from accounting practices.
Just to be clear, I quoted Bob’s statement to point out that it did not make sense to me. I don’t know enough about competitive sports to discuss the finer points of scoring, but I’m sure that all teams, managers, and fans use some measure (the agreed upon scoring system and rules of the game) to decide whether a team is good, bad, or in need of improvement. The agreed upon rules of accounting and business, should be used for evaluation since that’s what’s being measured, and are all we have. If a company looks bad by those measures, they need to cut costs or increase revenue. I doubt if taking a bad company private, will make it more successful, although I agree that temporary cost increases MAY result in future profits. Firing CEOs, going private, and throwing good money after bad doesn’t ensure those future profits. If I knew how to do that, I’d be doing it.
The accountants in baseball give you lots of credit for a 20-0 win than a 2-1 win. You could even lose the game and be credited with a win from the sabermetric folks. This is how guys like Felix Hernandez win the Cy Young despite winning just 13 games. Your team is actually scored on things other than wins and losses, which is why Kansas City is considered just a ‘lucky’ World Series contestant.
Dear Bob, I always look forward to your insightful thought provoking articles. Your book on IBM has a special place in my library and congratulations to you in giving John so much space with his analysis. Thank you John!
Respectfully, Deb Kelly Proud Alliance@ IBM Member
Hey look Carly Fiorina wants to be USA President. Couldn’t even lead HP so she is definitely qualified!
Let see what Meg Whitman and Ginni Rometty will soon do once they are bounced from HP and IBM respectively.
Corporate CEO and Politcian or Lobbyist are much the same
Are we on the Eve of Destruction?
“Are we on the Eve of Destruction?”
Clever.
Watch your mailbox for bulky packages from feminist organizations. Don’t open them if they’re ticking or showing grease spots.
Yes, this article is SPOT ON…its ALL about financial engineering AT ALL COSTS to keep the elites wealthy, powerful, controlling and owing the worlds assets…The customers, clients, employees, investment, innovation, professionalism, integrity, “accountability”, honesty, etc..etc. is all out the door…Lord knows however, that this negative situation will not last forever…a day of reckoning is SURELY coming….
This is another statement I don’t really understand “About the only thing you can do with the money that doesn’t cause margins to fall, other than giving it back in dividends, is investing it in other companies. When you make an investment, that’s carried on the books as capital.” I was under the impression that it is possible to invest in your own company and show it on the books as capital, just as you can invest in other companies. Perhaps an accountant can chime in with an explanation of Bob’s point.
Well if HP were buying manufacturing equipment, sure.
Capital investments are eventually written off as expenses, since they’re a large up-front cost that can be distributed over the life of the equipment. Employees aren’t purchased that way, so there is no point it calling them a capital investment. Even though they are good for the future of the company, they’re continuing, unending, cost simply makes the product more expensive. The accounting rules make sense despite Bob’s desire to blame them for the demise of large companies.
Bob, why don’t the companies just engage in the ‘money laundering’ you accused Microsoft of with the Nokia deal?
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You can read my comments on the other posts about H1Bs. Those posts hit points on this blog. If I could guarantee that investing say $5 billion a year, for 10 years nets you a working Fusion reactor, that would revolutionize the World power grid, it will NEVER happen. Wall St did NOT invent Google, Facebook, Twitter, Instagram or Dell, HP, IBM, et al. They reward or punish you for sins against their rules. Conspiracy theorist, cure for Cancer, why when the business of TREATING it is $100 billion plus, same with Heart disease, or FILL IN THE BLANK. IBM, dead horse being propped up. HP, only printers still rule, who buys HP servers ? Not the Gov’t agency I contract to. We dumped the IBM mainframe for virtualized MS, cheaper and they can throw more modern apps that direction. HP, only use the printers, nothing else, NOTHING. And the color machines we have are ALL XEROX. Oh, but both those printer sets are serviced by, are you ready, outside contractors, haven’t seen anyone from Xerox or HP, EVER. Seems the story is same everywhere.
Re: “Wall St did NOT invent…” Quite true, but that has never been its purpose. It merely provides a mechanism where the public can participate in the risks and rewards of company ownership, or ceditorship.