Cost Cost Cost

In today's business world, it is all about costs. As in a maniacal focus on cost reduction. This is done today at the expense of just about everything else related to business - focus on customers, product development, respect for and development of employees, social responsibilty and so forth. I can write page after page of examples of maniacal cost cutting at IBM.

Everything is done in the business world for a reason, and the reason for the manical focus on cost reduction is the goal of maximizing profits. Case in point: IBM so far this year has reported solid earnings, in January and then again in April. Earnings are rolling along at record levels at IBM. IBM seems to be immune to the effects of this severe recession - even revenues are flat (not declining). Along with the record earnings, cash flow is excellent and IBM has lots of cash in the bank. Yet IBM seems determined that costs are too high and must be cut - sharply. Profit margins are excellent, yet not good enough. Cash holdings are at record levels, yet not enough.

The primary cost savings at IBM is thru layoffs, and so far this year (2009) IBM has laid off about 10,000 employees in the US, or about 7% of the US workforce.

IBM needs to do something with all their cash. Letting it sit in the bank making meager interest is not a wise place for cash. So IBM increased it's dividend by 10% and increased it's stock buyback program by $3 Billion.

My take on this is that using the cash to support the stock price (thru dividends and stock buybacks) is a smart, but short sighted, investment that will have the effect of increasing the stock price. But who benefits from the increased stock price ? Primarily large stock holders such as the CEO, executives and institutions. Certainly not the average staff level employee and certainly not IBM customers.

So I wonder if it would be a wiser decision to invest the cash instead in employees (retaining some, most or all of those laid off, retraining), by investing in research (how about instead of laying off idle employees, giving them a research project ?), by investing in new productivity tools (like new laptops for those at IBM who have laptops that are 3 or 4 years old), by investing in more productive manufacturing tools. Any of these would provide long term growth for IBM and the US economy, instead of just focusing in on short term gain of the stock price.