A few weeks ago I said startups need discipline in finance, operations, and organization. I suggested these disciplines are so important that when big companies stop practicing them, they get in trouble. 

Companies like IBM.  We are going to talk about this company as an object lesson in management for entrepreneurs--and not as a suggestion that there's an investment play of any kind here. 

It is true, I have never turned around anything like IBM.  But to be fair, neither has its current chairman, president, and CEO, Ginni Rometty.

Ms. Rometty is overseeing a dramatic decline in IBM's traditional systems and consulting businesses, which she is gamely trying to counter through frenetic acquisitions and the hoped-for rise of new technologies. 

In my opinion, IBM would do well to focus instead on the same fundamental disciplines startups need:

Financial

Here's how to turn--or build--around any company: Focus on core products and core customers. This means making unromantic financial measurements that answer a simple question: "Where do we make and lose money?"

IBM is having trouble with this.

Maybe it's because of too-complex structure. It has five brand-new business reporting units, which were recently changed to look remarkably like last year's five business reporting units.  

In addition, it has five strategic imperatives in things called analytics, cloud, mobile, security, and social. (How do you manage an imperative, by the way?)

IBM says that the five imperatives are making up a growing proportion of revenue, from 22 percent a few years ago to over a third today. Meanwhile, the business as a whole had quarterly revenue a year ago of $20 billion, and this past quarter it had ... $20 billion.   

So, if the company has identified its core, the financial statements don't show it.

Marketing  

Are you marketing your core products, and are you measuring results? This is a simple prescription for success.

It's not happening at IBM. Instead, the company is pursuing a massive merger effort.

IBM does not announce every one of its "dozens of acquisitions" (its words), but the 30 named ones cost more than $7 billion over three years.

This complicates the marketing task, because acquired revenue and profits have to be measured. Acquired sales and marketing channels have to be aligned. New sales forces have to be trained. All the systems have to be merged.

This tactic diffuses marketing efforts rather than focusing them.

Organization

Speaking of focus, Ms. Rometty's 2015 Letter to Shareholders used the word focus, or a variant, 23 times. She speaks of focus on core competencies, focus on industries, focus on initiatives, focus on innovation.

The poor IBM organization must be wondering where all that focus will land next, because the employee count for IBM itself has declined from 431,000 in 2013 to 378,000 in 2015. 

Usually in a restructuring the decline stops at some point.

Watson, I need you!

The story of Watson, IBM's most-promoted product, tells all. The 2015 annual report says:

For the past five years, IBM has continued to invest in Watson, including dedicating $100 million to venture investments ... Paired with Watson is the company's core big data and analytics business. IBM has invested over $15 billion in these areas since 2010, including over $7 billion on more than 20 acquisitions.

After all the investment, how's Watson doing? Well, a noted research analyst was quoted as saying that Watson accounted for less than $200 million in revenue for 2015. 

Somebody, quick! Compute the return on investment when you never get your money back!

Management's soft spot for Watson betrays a lack of discipline, and lack of discipline is why IBM has not turned around. 

For entrepreneurs, the lesson always is: When you decide on your core products and core customers, your operating decisions are made easier and your financial success is assured.

Published on: Aug 4, 2016
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