IBM Top Brass Accused Again of Using Mainframes To Prop Up Watson, Cloud Sales

IBM, along with 13 of its current and former executives, has been sued by investors who claim the IT giant used mainframe sales to fraudulently prop up newer, more trendy parts of its business. The Register reports: In effect, IBM deceived the market about its progress in developing Watson, cloud technologies, and other new sources of revenue, by deliberately misclassifying the money it was making from mainframe deals, assigning that money instead to other products, it is alleged. The accusations emerged in a lawsuit [PDF] filed late last week against IBM in New York on behalf of the June E Adams Irrevocable Trust. It alleged Big Blue shifted sales by its "near-monopoly" mainframe business to its newer and less popular cloud, analytics, mobile, social, and security products (CAMSS), which bosses promoted as growth opportunities and designated "Strategic Imperatives."

IBM is said to have created the appearance of demand for these Strategic Imperative products by bundling them into three- to five-year mainframe Enterprise License Agreements (ELA) with large banking, healthcare, and insurance company customers. In other words, it is claimed, mainframe sales agreements had Strategic Imperative products tacked on to help boost the sales performance of those newer offerings and give investors the impression customers were clamoring for those technologies from IBM. "Defendants used steep discounting on the mainframe part of the ELA in return for the customer purchasing catalog software (i.e. Strategic Imperative Revenue), unneeded and unused by the customer," the lawsuit stated.

IBM is also alleged to have shifted revenue from its non-strategic Global Business Services (GBS) segment to Watson, a Strategic Imperative in the CAMSS product set, to convince investors that the company was successfully expanding beyond its legacy business. Last April the plaintiff Trust filed a similar case, which was joined by at least five other law firms representing other IBM shareholders. A month prior, the IBM board had been presented with a demand letter from shareholders to investigate the above allegations. Asked whether any action has been taken as a result of that letter, IBM has yet to respond.

Seems implausible

[Kernel Kurtz]

The market for mainframes is pretty small. If that is propping anything up you have much bigger problems.

Re:

[jeffshoaf]

The market is small but the price is high - and that market (for the most part) is unwilling to move away from mainframes.

Re:

[Kernel Kurtz]

The market is small but the price is high - and that market (for the most part) is unwilling to move away from mainframes.

Not disagreeing, mainframes have a useful niche. But the penetration statistics of your cloud offerings should still not be influenced by a handful of mainframe owners. Should not even be in the same order of magnitude really.

Re:Seems implausible

[ShanghaiBill]

IBM has revenue of about $2B per year from mainframe sales. I agree that is small. If they are understating the sales, the real number may be a bit higher.

Although the death of the mainframe has long been predicted, IBM has steady sales that don't appear to be declining.

But mainframes aren't sexy, and it isn't a growth business that can justify high P/Es.

Re:

[Canberra1]

The accusation is plausible. They tell some shops to use Watson on IBM security logging records, which also means hiring expensive Watson consultants who will never suggest alternatives. Secondly Mainframes are not sold as being sexy, they are sold as close to 100% reliable, and that is actually true, since DEC's VMS was retired. A lot of shops are also discovering running 100's to 1000's of servers, plus endless patching, plus overpriced VM software, plus redevelopment costs, they are behind. Cloud soluti

Re:

[Archtech]

The market for mainframes is pretty small. If that is propping anything up you have much bigger problems.

Exactly the opposite seems to be the case. According to reports I find online, the mainframe market is worth about $3 billion a year - apparently including commercial off the shelf software products. That is indeed a relatively tiny amount by modern industrial standards.

As mainframes have been indispensable to most of the essential services we use since the 1950s, the appropriate inference is that they provide absolutely superb value for money. Every time you use a debit or credit card, check your bank stat

Re:

[Kernel Kurtz]

I have no issue with mainframes, and was not intending to demean them at all. I have even had some direct experience with them earlier in my IT career. I agree they are still state of the art where transactions absolutely have to succeed every time. Modern mainframes are also very impressive technology wise - hot swappable memory and CPUs and all of that.

It is not so much the value of the market I was alluding to as the number of customers. I'd still expect there are an order of magnitude more cloud

IBM Slowly circling the toliet

[big-giant-head]

Look they got rid of printers, laptops, never understood cloud. They do a bunch or R&D but little of it appears to add to the bottom line. THE LAST THING THEY HAVE TO SELL ARE MAINFRAMES. Who knew selling crappy services from india wasn't a long term money maker. Now they will probably spin off mainframes too and double down on bad consulting from India. It's only a matter of time until Lenovo buys the rights to IBM and starts selling wait for it, wait for it, IBM laptops.

Re:

[Canberra1]

Harsh. But it sure is strange when an accounting firm is the first IT stop when things go wrong. My take is Deloitte etc are known to write reports less damaging to management, ever since budgets and cost-centres were devised to make ICT as the drain. But how often has data leaked from mainframes? See https://www.youtube.com/watch?... [youtube.com] so you see AMD is not new.

Microsoft does the same thing

[mwarner1]

I don't get it. Microsoft has been doing the same thing forever, bundling software and services customers don't necessarily need or want. It's how they suck you into their ecosystem. Other companies also do bundling and lost leaders are also common in sales. How is this significantly different?

Re:

[Archtech]

How is this significantly different?

It's significantly different because, while IBM has always been dedicated to high quality and high long-term profitability, Microsoft dropped the "quality" bit and focused relentlessly on profits. That's why, for instance, almost as soon as Windows appeared, it pioneered the clever idea of not bothering with beta tests and getting customers to do the field testing unwittingly. For a quality-conscious supplier, bad quality represents a cost; for Microsoft, it is an opportunity to make more profits by offerin

Re:

[wideBlueSkies]

Banking IT here. We rely on those frames, and while we are forced to constantly evaluate solutions that don't involve them, it simply doesn't make sense to take the core transaction processing away from the frames. Speed, reliability, capacity on demand when we need it, IBM still has great support.

Sure, the cost of potentially migrating businsss code away from COBOL and FORTRAN figures into the equation. the reverse engineering, re-design, testing, bla bla bla... would be expensive. For what? Platforms

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[Deal In One]

There are many bad things you can say about IBM, but it has always taken great care about the quality of its products - which is why, when quality was paramount, many customers chose it almost without hesitation. They paid through the nose, but they thought it worth while. Cutting costs on hardware and software is very shortsighted, and often leads to disaster sooner or later.

IBM Deskstars. Don't expect everything from IBM to be high quality.

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[Tablizer]

It's about misleading shareholders about the practice. MS shareholders probably already expect bundling and to my knowledge MS never denied it.

Oracle allegedly did something similar to IBM to prop up cloud numbers.

Translation

[sjames]

The executives bet on the wrong horse and now they need to drag it's carcass across the finish line so they don't look like they failed.

Put another way they're painting the roses red so the Queen of Hearts doesn't demand their heads.

Like Radio Shack

[Putins Boyfriend]

Unimaginative and cowardly executives bet the farm following boring technology trends already a day later than their established competition.

Shareholder class action lawsuits are worth a grai

[brunes69]

Anyone who tracks these kinds of lawsuits knows they happen multiple times per year against every Fortune 100 company for every reason under the sun. Even people who make millions off a stock can sue, suggesting they could have made more.

It is the new hot trend for certain law firms who specialize in them, allowing for the chance of a big payday for relatively little investment in the case.

IBM Watson still exists?!

[fbobraga]

Heard about it before something like 10 years ago...

So Ginni Rometty tried to

[Tablizer]

...ginni up sales?

The lawsuit doesn't make sense

[Kremmy]

This sounds like they're suing IBM for standard operating procedure concerning large support contracts.
How is "You used money made in one division of your business to float another division" even an accusation?
What are they being accused of?

Re:

[Kremmy]

To add to this, the previous summary had pointed out that they were specifically calling out IBM for giving them deep discounts on things they didn't need.
Which is a big part of large support contracts to begin with.

Re: The lawsuit doesn't make sense

[nasch]

I think the complaint is they lied about where their revenue was coming from.