Ethics Issues At IBM: Will It Hurt Earnings?

May. 2.14 | About: International Business (IBM)

Summary

An ex-IBMer: "Glad to be gone but I wonder if my soul is intact."

Did IBM cut ethical corners to make earnings?

What about customer service? And where are the cutting edge products?

Robert Cringely wrote a series of columns in 2012 in which he predicted IBM's (NYSE:IBM) ultimate demise because the company was "rotten to the core." To increase profits, he said top management had made the conscious decision to "cheat" customers in the form of a cut back in service. His columns generated massive page views and thousands of comments from readers, many of whom claimed to be IBMers or ex-IBMers.

"Glad to be gone, but I wonder if my soul is intact"

Is IBM really rotten to the core? The evidence, which I will share with you below, is stacking up, not that all of IBM is corrupt, but that there does appear to be a culture at the top of IBM that prioritizes earnings above everything.

Above employees? Yes, there are thousands of passionate IBMers who will say so, and from all over the world. They have tried to make their voices heard in Cringely columns and elsewhere. I will share a few with you.

Above customers? Yes, this is where it gets scary, where rotten to-the-core comes into play. To make earnings, IBM apparently takes it out of customers. A recent spate of legal actions add to the pile of evidence.

Above technology? Yes, innovation and energy in enterprise IT is in the public cloud, an area IBM is dangerously behind in, as we'll learn below.

Above ethics? Let's look at the evidence, beginning with two comments that followed Cringely columns. A specific mechanism of corruption at IBM India is explained in the first, and the second accurately predicts a breakout of corruption in India.

In case you don't already know, India is the global center for IBM's service operations; the largest number of IBM employees work there (estimated 150,000).

Posted April 20, 2012 by "exIBMandenjoyingit"

IBM is thoroughly corrupted inside and my former colleagues are playing the game. As US employees we accepted the internal corruption ourselves. We saw organizations providing bogus sales numbers yet we look the other way because we too may have been paid on those numbers.

The IBM help desk in India participates in the corruption by closing older tickets and informing their internal customer to open a new ticket so that their time to resolution is not badly affected. This fish stinks through and though from decades of internal brain washing reducing employees integrity a little bit at a time.

Glad to be gone but I wonder if my soul is intact.

In a comment following another Cringely column, Not Your Father's IBM, this reader claims to have proof that violations of IBM's BCG (Business Conduct Guidelines) are "going viral" in India.

Posted January 31, 2013 by "Indian" (this is the 411th comment out of 425):

Having worked for IBM in India, I have tons of internal material that highlight the fraud going on within IBM in India. BCG violations are going viral in that country. The legal department team of IBM India outsources work to their relatives, the top management team scams millions to line their own pockets, the talent hired is so below par it is a joke - the list goes on.

Of course the Ivory Tower in Armonk is aware, as it was escalated to them. As a result, the India MD Shanker Annaswamy was recently offloaded for another as 'competent' manager. The entire organization lacks the ethics to be a sustainable business model.

It appears IBM headquarters in Armonk leapt into action upon receipt of information mentioned above. As best I can tell, there have been at least three efforts to purge corruption at IBM India. The first occurred a few days after the comment above.

Here's a summary of the three purges. One reporter appears to be following the story, Pankaj Mishra, based in Bangalore.

  • February 2013: IBM India terminated three people in senior management for "forging customer purchase orders" and "diverting materials sourced for customer deals," among other things.
  • July 2013: Twenty-four IBM India officials are fired for "creating false orders" and "overstating revenue" in order to "meet financial targets." According to the company, the fraud involved overstating revenue by about $8 million. It was during July that CEO Ginni Rometty made a "low profile" first-ever trip to meet with Bharti Airtel, a leading cellular provider and IBM's top customer in India (according to this report).
  • March 2014: Nine more IBMers in India are terminated for what appears to be multiple years of fraud in the handling of the $2.5 billion contract with Bharti Airtel.

It's not clear when the Bharti Airtel fraud originally came to light, though we know IBM CEO Ginni Rometty flew to India in July to smooth things over and try to save the contract.

There was culpability on both sides. Bharti's CIO Jay Menon was fired December 3, 2013. His office was sealed and he was asked to leave, according to one report. He allegedly profited from money intended for subcontractors.

What was IBM's offense? It's not clear. Apparently substantial subcontracting funds went to a company owned by former IBMers - they had left the company less than a year earlier.

Why didn't Bharti take the contract away from IBM? We can only guess. Months of negotiations, and an "atmosphere of distrust" led to a substantial reduction in the Bharti contract at renewal ($100M/year instead of $300M/year) and also came with new restrictions on IBM behavior, which might be clues as to what happened in the earlier contract.

In the renewal IBM cannot make subcontracting decisions without committee approval, and it's precluded from purchasing hardware and software solutions without prior authorization.

Two brief reader comments from Cringely columns, then I'll tell you an intriguing twist in the IBM India story.

Posted April 26, 2012 by "Former IBM Employee."

Deals (service agreements) were written with a LOT of wiggle room. They had to be - if deals were written with the detail expected by your typical IT specialist, programmer, what have you…then the deal would never get done. The details would be too many to mention in a contract.

In some deals, there would be line items like "Manage 50 UNIX servers" or "Maintain backups for 25 Windows servers", with absolutely no accompanying detail. No backup schedules, no retention requirements, no up or downtime specifications, etc. The idea was that those details would be filled in later on, but often they never were. As you can imagine, this often became a recipe for chaos.

Posted March 25, 2013 by "Gail Gardner"

We routinely broke contracts knowing full well there was no way we could meet the terms. We went into accounts requiring secret clearances because there was only one person who actually had one and he had to sleep sometime.

When I left it was primarily because they had downsized us from 18 to 3 and my phone rang almost every single night. I was so exhausted I was falling asleep driving. First my manager avoided me for a week, and then he offered me MORE WORK for the same pay to stay. Hysterical. And clueless. They never replaced me. I accurately predicted that he would retire shortly after I left because HIS phone would then ring almost every night once I wasn't around to answer.

This is interesting

Every good mystery needs a twist, and this one doesn't disappoint. The informer at the top of this column said: As a result, the India MD Shanker Annaswamy was recently offloaded for another 'as competent' manager.

Well, guess who's back in town. Yes, the former managing director of IBM India, the guy ultimately responsible for purchase orders, revenue, etc. He wasn't offloaded, as the informant claimed. Turns out he retired.

Again, it's Pankaj Mishra reporting from Bangalore: IBM "extended the tenure of its former India head Shaker Annaswamy by another two years till November 2015. Shanker, an IBM India veteran of over a decade, had retired last year and now serves as a senior advisor."

To summarize: After internal documents suggesting several acts of fraud were allegedly submitted, a cascade of events - lots of senior officials at IBM India get sacked, and in three different stages; the CEO makes a first-ever trip to India during the second event; the last case involved a multi-year fraud that resulted in a material cutback in a $2.5 billion deal. Oh, and the managing director retired, then was signed on as a senior advisor to "help steer through the crisis."

Posted April 22, 2012 by "your-completely-clueless"

I personally saw them bring in a 100 million dollar operations deal where the customer was shown staff who would be running the operation, the room full of mainframe specialists had easily a combined 100 years of experience, a quite impressive array for the 'customer' to be confident in.

By the time the contract came a few months later that crew had been hacked up and fired off and replaced with contracted new hires so that those running the systems had in some cases just a few months of experience, a big profit for the company via a 'bait and switch' tactic and a big screw job for the customer, but since the customer was a government operation, the victims would keep silent rather than reveal themselves as dupes.

"Talent hired is so below par it is a joke"

If we go back to the accusations of the informer at the beginning of this column, it's the last accusation that is most troublesome for IBM - that "talent hired is so far below par it is a joke".

Has management been using inadequately skilled labor in an effort to squeeze additional profit out of its customers? It's a scheme that Robert X. Cringely claimed was hatched years ago...

From "IBM Will Look Like Oracle"

A decade ago in one of those Aha! moments that transform corporations IBM figured out that it was better to ask forgiveness from its customers than to ask permission. Specifically, IBM modeled two competing scenarios: 1) follow service agreements to the letter, and: 2) ignore service agreements thus saving money and expect to pay penalties as a result. IBM decided it could make more money - a lot more money - by paying penalties than by actually doing what it was being paid to do.

One individual was rewarded for this stroke of genius, by the way, sanctifying what could be one heck of a class action lawsuit.

Just like Ford deciding it was cheaper for a few customers to die than to improve Pinto fuel tank safety, IBM decided to deliberately cheat its customers. The result is today's IBM, rotten to the core.

Posted April 20, 2012 by "Glad I Left"

I left last August of my own choice. When I left, I was architecture profession lead for my business unit, a senior certified Executive IT Architect, and the chief engineer of a billion+ dollar account.

I can vouch for the conditions this article speaks of…things were so bad, that in order to service my customer's 30 million dollar backlog of business, we had to bring in Glasshouse. Executives would not let us hire the people it took to service the business.

The Avator lawsuit vanishes

Cringely says IBM is cheating customers so they can meet earnings estimates; so is there any evidence of substandard work on the part of IBM?

Actually, it seems to be growing at an alarming rate. Let's review what's transpired in recent quarters. Avator, a chemical maker in Pennsylvania, hired IBM in 2012 to install a new software package. The software installation failed and Avantor sued, saying IBM provided Avantor with "incompetent and inexperienced consultants."

Then, just like that, the suit disappeared per an agreement with the parties.

That's the way it's supposed to work when you're in a customer-facing business. When there's a problem, get it settled so it doesn't become public and tarnish your reputation.

IBM's Bridgestone Problem

But what happens when your customer discovers you've been dishonest? A pissed off customer, to state the obvious, ushers in a whole different set of risks. As in: forget settlement, we'll see you in court and we want a jury trial. What's interesting is that Bridgestone made the discovery during mediation with IBM.

Let's start at the beginning. Bridgestone paid IBM $78 million over two years, and this was delivered: A "defective system [that] lost or deleted scheduled customer orders, would not process orders, duplicated, or partially processed orders and, for those limited orders that were processed, did not complete critical corresponding business applications."

Bridgestone was upset over the botched installation, of course, and eventually ended up in mediation with IBM. It was during mediation that Bridgestone discovered IBM had been engaged in a course of "intentional deception" during their engagement. Whether an IBMer talked, or Bridgestone discovered new documents, I don't know. The case is heavily redacted - or, at least it is now. A reporter saw a copy of the suit right after it was posted, when you could plainly read through the redaction.

"IBM knew its system was not suitable, was not 'next-generation,' and assigned personnel without expertise to handle the design, roll-out and troubleshooting."

Bridgestone is suing IBM for $600 million, which includes $200 million in lost revenue.

IBM vigorously denies Bridgestone's complaint, and blames pretty much everything on their former customer.

Should be an interesting jury trial.

Posted June 28, 2013 by "Thats What I Did"

I remember when I began my career with IBM, telling my friends and family that I was an IBMer. Oh how proud they were, and so was I.

Then over the years, I began to see the erosion, competent execs that you looked up to, respected, even liked for the most part, being replaced with BULLIES who didn't have the technological savvy to boot their laptop.

Then the lies began to surface, management telling the workers to 'book 30% overtime, no matter what', or 'bill your team meeting time to the customer'.

Armonk, where is the revenue going to come from?

IBM secured a $500 million contract with Hartford for a private cloud, to be built over 5 years ($100 million per year). That's good, but it's a fraction of what they've lost just in India alone - 2/3rds of the Bharti Airtel contract, and Tata Motors as well.

If you add up the customers that have walked away (or sued) IBM in recent quarters, it adds up to billions in revenue that hasn't been replaced: Big names leaving IBM include Disney, ING, Tata Motors, AstraZeneca (nasty dispute), the NFL, the states of Indiana, Texas, Pennsylvania, to name a few.

Meanwhile lawsuits for failed projects keep coming, such as the $2.5 billion suit last month from Iusacall, a leading telecommunications business in Mexico.

In Indiana, in February, IBM was found to have materially breached a contract to modernize its welfare system. We're waiting to hear what the award will be.

In Texas, the state accused IBM of "contractual violation" and "chronic failures" in a $864 million datacenter consolidation project that was years behind schedule, and the subject of all sorts of controversy. The city of Austin is angry at IBM too, for a system that didn't work.

The liabilities in Texas are not nearly important as the implications for future business. With a swarm of new competitors in the enterprise space - thanks to the cloud - IBM is already having a tough time convincing buyers to sign up for billion-dollar bundled contracts for hardware, software and service.

As I explained to Warren Buffett in a letter last year (my feeble, failed attempt to persuade him to "duck" on IBM stock), IBM's model is caught in a trap. It can't move upmarket (the pie of high-margin dollars is vanishing), and it can't/won't move downmarket, where margins are lower.

In Pennsylvania, after being $60 million over budget and 42 months behind schedule, the state hired outside experts (from Mellon University's Software Engineering Institute) to review IBM's work.

The conclusion: IBM's installed system was "unreliable and full of bugs" (software defects in excess of industry norms), and advised Pennsylvania to scrap it and start over.

On the international front, other than Japan, where IBM's business is growing slowly, everything else seems to be in serious decline.

China sales are plummeting because the Chinese allegedly believe IBM helped the NSA spy on them.

In Australia, IBM is caught up in a public relations nightmare. The worst of many problems: the botched installation in Queensland that cost the government $1.2 billion. It's hard to believe, but this started as a $6 million contract and, well, there was project creep, several hundred million dollars of it.

Depending on how you look at it, the Australians were either stooges and should have been more careful (predatory contractors are the norm in IT), or they were naïve and inept, and deserved a high standard of care from professionals - which they didn't get. (The government's 264 page report is here.)

The system went off the rails as soon as it went live: "85,000 health workers either were not paid or were overpaid."

For its part, IBM says it "successfully delivered" on the contract, which really pissed off the Aussies.

"IBM itself is now saying that they met all of their benchmarks," Health Minister Lawrence Springborg said. "If you signed a building contract like that, if you signed an insurance contract like that, if you signed any other contract like that, would you be happy if you had such dodgy benchmarks, such dodgy wording in your contract, whatever it may have been?"

IBM has been banned from business with the Queensland government, as a lengthy investigation showed they cheated in obtaining the contract in the first place. "IBM took Queensland for a ride," said Premier Campbell Newman."I don't want companies that have this sort of culture doing work for the people of this state."

Queensland filed suit in December, it's not clear what sort of damage award they'll be asking for.

Are there problems in Europe?

This tipster suggests Queensland and Pennsylvania issues are just the tip of the iceberg. I've seen hints about problems in Europe (Switzerland? UK?) in other posts, similar to the one below.

Posted August 9, 2013 by "LostinEurope"

The reported project issues in QLD, PA etc. are only tips of the iceberg. There are plenty of similar, to be eruptions of projects in Europe, with red ink project control status. Red ink financially and off schedule.

BM TSS (the maintenance guys) controllers and execs now even take aggregated risks on downsizing spare part stocks for committed recovery services contracts to beef up profits. Literally speaking: "lets take the risk of paying the penalty first, and then we will see.

Posted June 28, 2013 by "John"

Ginny, are you reading this stuff? You should go see Bruce Ross and ask to see the list of "code red" accounts. You should then go find out what is really is happening on them and how YOUR VP's are making things worse instead of better.

FYI, Bruce Ross was the head of Global Technology Services, he left the company in October.

The CIA contract and IBM technology

Judge Thomas C. Wheeler of the U.S. Court of Federal Claims said IBM used "gamesmanship," in his opinion in the CIA case last year (this a good summary).

But it's really the technology conclusion in the GAO report that's most damning to IBM. The company wasn't close to being competitive in auto-scaling (it's really difficult to do at scale, but it's vital if you want to be relevant in the public cloud).

Is this what it has come to? In pell-mell pursuit of profit, has the company fallen behind in the race to innovate? What happened to vaunted IBM technical prowess, to cutting-edge innovation?

From a galaxy away (or, almost), an IBMer will answer these questions, putting a wrap on this column.

Hello Armonk? "This is not the IBM we were proud of"

In closing, here is a young (I'm guessing) IBMer toiling away on the other side of the world from IBM executive offices.

Melborne, Austrailia is 10,458 miles from Armonk, that's 22 hours by jet travel.

This Glassdoor review was posted on March 3, 2014.

Architect (Current Employee)

Melbourne (Australia)

I have been working at IBM full-time for more than a year

Pros - Knowledgeable people. Wonderful colleagues who want to do what is right. Team level is cooperation is good.

Cons - The top brass has no strategy other than firing people to get their own mega bonuses for their own Earnings per Share 2015 road-map. Instead of investing in people and new products they are consumed by financial engineering and they don't see that the ship is sinking (or perhaps they do and just want to squeeze out the last pennies from the corpse). Everyone is consumed by fear that they might be the next layoff. All divisions are cut to the bone and management still demands growth. There is a total disconnect between top management and the people below on why sales are not working.

Advice to Senior Management - Skip the EPS2015 roadmap (which is clearly only your own bonus interests) and start building the company again with long term investments in people and cutting edge products. Your employees have lost all trust in you. This is not the IBM we were proud of.

No, I would not recommend this company to a friend - I'm not optimistic about the outlook for this company.

Disclosure: I am short IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.