Mad Dog 21/21: Toasting Savonarola

From the 13th into the 18th century, except for an interlude beginning in 1494, the Medici family dominated Florence and surrounding Tuscany. That exceptional 18-year interval began as Girolamo Savonarola, a Dominican monk, spearheaded a dramatic reform movement. The epitome of Savonarola’s campaign was the spectacular burning of valuables deemed tokens of sinful self-indulgence: bonfires of the vanities.

Savonarola irritated many powerful people, including the Pope. Ultimately, he was tortured, convicted of heresy, publicly hanged and burned. Since then, inspired reformers in politics and commerce have often chosen to tread lightly, even at decorous institutions like IBM.

Girolamo Savonarola: This Domican monk took to the pulpit and spearheaded a radical reform movement in Florence at the end of the 15th century.

When Virginia Rometty took the reins at IBM, she soon discovered that her company wasn’t as tidy as it looked from the outside. Her predecessor, Sam Palmisano, had stayed the course chosen by IBM’s prior chairman and CEO, Louis Gerstner.

Gerstner had rescued IBM from disaster. He slashed its payroll. He reshaped Big Blue as a powerhouse in computing services, reducing the portion of its revenue generated by manufacturing. He enlarged IBM’s extraordinarily profitable software business. And, as the company returned to fiscal health, he significantly increased the size of its Indian operations, building up a powerful intellectual capacity to support IBM’s growing need for application programmers, software analysts, operations specialists, and the mid-level managers needed to bring their gifts to bear on clients’ workloads.

Palmisano continued and enlarged Gerstner’s Asian strategy, giving IBM a talent pool that had the excellent skills needed to win contracts along with the competitive costs to participate in services deals not only in the wealthy post-industrial economies of North America, Europe and Japan but also to deliver good results in the cutthroat services markets of Latin America, Asia and Africa. But it has now emerged that Palmisano didn’t run a sufficiently tight ship.

During Palmisano’s tenure, IBM’s hardware groups were coasting. IBM produced ever-more-powerful proprietary servers, but these systems inexorably lost ground to less costly equipment, mainly X86 machines, made by rivals. IBM’s own industry-standard line of X86 boxes offered great technology but brought their maker little if anything in the way of bottom line financial benefits even as they helped IBM gain revenue and market share. Similarly, IBM introduced ever-improving storage subsystems that repeatedly suffered unsatisfactory sales results compared to EMC and other rivals. As was the case with servers, IBM’s offerings were very good but customers often chose other vendors’ even more appealing products for technical or economic reasons. Making the corporation’s deteriorating situation even worse, IBM’s services business, which brought in more than half the company’s revenue, was heading for tough times, bidding aggressively to win contracts in competition with increasingly capable rivals and consequently suffering from an erosion of margins.

The execution of Savonarola: Famous for the bonfires he instigated, the firebrand ended up on a pyre of his own.

IBM’s complex bookkeeping processes enabled Palmisano’s company to escape prompt recognition of mounting difficulties. It was not until after Rometty took over that the enormity of the company’s challenges became visible. Even then, the emergence of IBM’s profitability issues, obscured by the complex accounting in the services business and elsewhere, took quite a long time. Rometty took office at the start of 2012, but didn’t publicly recognize IBM’s weakened situation until the end of the third quarter of 2014. It was at that time that Rometty said IBM would not fulfill its promise to generate $20 per share in profit for the full 2015 year.

While recanting a pledge made during the Palmisano administration that IBM could not fulfill during his successor’s term, Rometty boldly addressed IBM’s inability to achieve growing profitability when the basis of so much of its activity was based on the sale of hardware.

IBM tried and failed to gain ground and profitability in point-of-sale technologies, but ultimately withdrew, selling out to Toshiba in April 2012, just four months after Rometty took office. The selling price, about $850 million, was a bit more than half the POS group’s annual revenue. At the beginning of 2014, IBM said it would sell its X86 server business to Lenovo, which had seven years before acquired Big Blue’s PC business. IBM’s semiconductor fabs produced excellent chips that apparently had to be sold for less than their fully-burdened cost, leading to financial losses that IBM seemed to be able to camouflage during the Palmisano administration. In October 2014 IBM said it would pay Global Foundries $1.5 billion to take over its semiconductor fabrication facilities, fulfill IBM’s promises to complete ongoing contracts and manufacture CPU chips for future versions of IBM’s two groups of proprietary servers, mainframes and Power systems.

It is difficult even now, as it was during the Palmisano administration, for any outsider to know when IBM’s top executives determined that their company was losing its strength and identify what they thought were the main causes of IBM’s difficulties. There is considerable evidence that Palmisano and his team had no idea that Big Blue was heading for a fall, as Rometty and her administration eventually came to believe. On the contrary, by every indication Palmisano’s administration was confident that IBM could continue to deliver great financial results (measured in terms of improved earnings per share) long after they passed the torch to successors.

Virginia Rometty: IBM’s leader has sold off hardware manufacturing groups that she said could no longer yield sufficient profits.

Toward the end of the 15th century, when the Medici and many other prominent Tuscan families believed Florence and the surrounding Tuscan region was moving from one success to another, leading the world in commerce, in art, in architecture, in literature, and in other facets of an evolving society, there was an undercurrent of dissatisfaction. The Vatican was led by a member of the Borgia clan.

The Borgias were as powerful in religious circles as the Medici were in the business community, was in the view of critics woefully corrupt, making a mockery of the moral principles preached from the Church’s pulpits. The monk Girolamo Savonarola, not only preaching a life of austerity and simplicity but also living it, believed that a better future for Florence and Tuscany, if not all of Italy including Rome, would only come with help from outside forces. In particular, Savonarola believed the French king Charles VIII, whose army invaded Italy in 1496, would lead to a resurrection of basic virtues that had been swept aside as the Medici and Borgias rose. But the people of Florence, even those who despised the excesses of the city’s powerful establishment, didn’t want to be ruled by foreigners.

When the armies of Charles VIII came near, Savonarola met with the French and persuaded them to leave Tuscany intact while it formed a new republic. That new regime would lean against the political ambitions of Rome and allow Charles VIII to gain influence without immense bloodshed. The result was, for a little while at least, an end to the de facto rule of the Medici. The Medici were not, at the time, always direct rulers. Instead, they held feudal power and shaped the choice of political leaders while concentrating on their empire of manufacturing, banking, and trade. They similarly exercised influence over the religious hierarchy in Tuscany and to a lesser extent in Rome. Later, there would be Medici popes, but by that time the Italy of Savonarola had been considerably transformed.

Like the Medici of his day, Savonarola did not wish to occupy an official political office, but rather shaped politics by influence, using speeches and essays to bring his ideas and wishes to public attention. While his beliefs were in the ascendant, Savonarola was, particularly in the view of his rivals and enemies, far more than a persuader. He was seen as a despot who wielded power but accepted little formal responsibility. His followers, called the Weepers (Piagnoni in Italian), became quite influential, and the gangs of young men who collected goods to be burned in Savonarola’s bonfires of the vanities made their presence felt in Florence.

After a couple years Pope Alexander VI, irritated by Savonarola, intimidated by the military forces of Charles VIII and motivated by a furious Curia, struck back. Savonarola was excommunicated, arrested, tortured into confession and, in 1498, publicly executed smack in the middle of Florence. After being hanged (along with a couple of his closest colleagues) the condemned were thoroughly burned. There were probably no relics left for the Piagnoni or anyone else to hold. This gruesome process mirrored that of the execution of Joan of Arc some 60-odd years earlier. She, too, was burned multiple times with the intention that there would be nothing left of her but ashes.

If Savonarola’s entreaties led to any reform in Florence and Rome it was short-lived. The powerful Italians in church and state would soon resume their scandalous ways until, twenty-five years later in Germany, the inspired (and constipated) cleric Martin Luther would sow the seeds of the Protestant Reformation.

Savonarola’s brief effort to clean up Florence and Tuscany may well have been an inspiration to later reformers like Luther, but the Dominican monk and his followers never lived to see a lasting change in their city-state. Instead, nearly two decades after the Medici were deposed the family’s place at the pinnacle of Tuscan commercial society was restored. The Medici remained quite powerful until the 18th century.

Historians have never fully explained what moved Savonarola to seek so much power and influence in a struggle against some of the most powerful families in Italy. Savonarola’s forbears, who lived in the small city of Ferrara, had achieved some local distinction but in science rather than politics. They counted among their notables the monk’s grandfather, who was an acclaimed physician. Consequently, academic authorities can debate the causes of the diversion of Savonarola’s interest from medicine to religion and philosophy. But the experts seem to agree that independence of mind was valued by the people of Ferrara, which boasted a viable Jewish community that became prominent in the 15th century and was still viable some five hundred years later when it served as the basis of a novel and related film, The Garden of the Finzi-Continis, set in the time of Mussolini.

Like Savonarola, Rometty is a brave reformer. She has demanded the IBM conduct its operations more cleanly, more openly and with more careful regard to the profitability and growth potential of all its diverse activities. Rometty has undoubtedly rattled and very likely irritated the IBM executives who past accomplishments and until recently, future intentions were based on legacy relationships with the big customers who bought IBM hardware, software and, since the time of Gerstner, services. Their resistance to Rometty’s reforms has so far proved to be futile. And, with Rometty’s disposal of so many hardware divisions, it is likely that the new course of IBM cannot be reversed.

But that doesn’t mean Rometty will escape the wrath of powerful insiders she has disenfranchised. The case against Rometty’s strategy is that the withdrawal of IBM from most of its hardware business deals a triple blow to the ambitions of those who imagine IBM could have evolved with a much less radical strategy.

The first loss is direct: IBM can no longer boast revenue from hardware products it has abandoned, like X86 servers. The argument in favor of Rometty’s choices and against this criticism is very simple: IBM wasn’t making much money on X86 iron and by every indication would eventually be losing its shirt on that hardware.

The second is indirect: Now that IBM must buy rather than build its chips, it may find its proprietary servers suffering from the kind of weakness that beset Hewlett-Packard’s Itanium-based hardware and Oracle’s Sparc systems. The machines may be very good and in some instances truly outstanding, but they are no longer in the mainstream, nor can they be relied on to sustain a processor architecture. The offsetting case is that IBM has been able to preserve the perception that the mainframe is a lasting part of the glass house culture, that Power servers are superior for some strategically vital workloads, and the IBM i built on Power is very deeply entrenched in customers’ computing strategies.

The third is competitive: IBM’s withdrawal from the X86 market does not in any way reduce customers’ dependence on that kind of processor. Instead, it opens glass house opportunities to HP Enterprise, Dell, and other manufacturers. IBM’s argument is that its adversaries are not going to have an easier time making money on X86 than IBM did and they, too, will lose their grip on that type of iron, most likely to the ODM companies that make servers for Google, Amazon, Microsoft and other cloud computing giants.

It’s largely an academic argument at this point. It doesn’t matter if the Rometty regime has made wise or unwise choices. What now counts for IBM, its customers, its employees and its shareholders, is how Big Blue will fare as it reinvents itself as a company pursuing the activities it calls its strategic imperatives.

If IBM slips, and maybe even if it doesn’t, Ginny Rometty’s career may yet suffer a fate reminiscent of the one suffered by Savonarola. While it is of course unlikely that IBM’s directors would stage a coup (even if they had a great new CEO in mind, which they do not) before Rometty turns 60, IBM’s retirement age, in 2017, an outsider with a large block of shares could instigate regime change. Warren Buffet, for example, probably has the power to bring a premature end to Rometty’s reign, but he hardly seems to be inclined in that direction. Alternatively, a company such as Apple, with a fortune stashed offshore and possibly no opportunities for growth that are any greater than that offered by a monumental takeover, might buy Big Blue. Tim Cook, an ex-IBMer, could well develop an obsession that leads him towards that end. Conditions don’t seem quite ripe for such a move right now, but if Rometty tossed Power, IBM i, and the mainframe into a corporate bonfire, there’s no telling what could happen.