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Weekly Column

The Final Daze: More on IBM's global restructuring

Status: [CLOSED] comments (253)
By Robert X. Cringely
bob@cringely.com

Last week's column on IBM set what must be a modern record for the number of reader comments (more than 1,000). I evidently struck a chord. And from the high emotional content of many of those comments, I can see that whatever IBM thinks it is doing is causing a great deal of pain and anxiety among IBM employees. While my words may have triggered this outpouring, there is nothing I could write that would do so in the absence of a severely dysfunctional corporate culture. IBM as an organization -- not just as a business -- is in trouble.

This week I'll try to tie up some loose ends left from last week's column, deal with some of the issues raised by those thousand comments, and even give the last word to IBM, itself.

The greatest single criticism I received this past week was with the number of possible layoffs I threw out, which was 150,000 -- a number that dozens and dozens of readers pointed out was greater than the total U.S. workforce for IBM. Maybe the number WAS too high. Instead of 150,000, maybe the true number is only 100,000 or 75,000 or even 50,000.

Would 50,000 layoffs from IBM Global Services be significantly less catastrophic for the workforce than 150,000?

And while the number of layoffs to come may indeed be less than 150,000, I'd prefer to stick with that larger number, which I feel is not far off for reasons I will now explain.

IBM's mysterious LEAN program, which the company says I mischaracterize but then won't explain specifically what I got wrong, is global. LEAN involves the restructuring of IBM's global workforce to achieve certain unstated goals, most likely centered on profitability, with the goal of regaining that 37 percent decrease in market cap IBM has suffered since 1999. This restructuring means firing employees in some places and hiring them in others. On a GLOBAL basis I can see this program easily hitting 150,000 employees, which is what makes the number not so impossible. IBM will try to focus the discussion on the total number of employees, which may not drop significantly from the current 355,000. But even a five percent reduction in force, which I see as an absolute no-brainer, could involve firing 100,000 employees and hiring 82,250 in some other place.

IBM is a true multinational company, and any program like LEAN will be applied globally. It has to be since the very essence of LEAN is foreign hiring. So that 150,000 number is a global number. At risk is every non-sales position in IBM Global Services not just in the U.S. but in any country with a cost structure more expensive than the United States, which would include most of Europe and even parts of Asia. At the same time IBM sees attrition in the U.S. and growth in China and India, there may well be significant job losses in the European Union and Japan.

There are two phenomena at work here -- the low cost of technical labor in certain countries and the general weakness of the U.S. dollar. IBM profits are up, we're told, but if you take into account currency fluctuations, most of IBM's improved financial position (and some could argue most of its profit, period) can be traced to a weak dollar. It isn't that IBM is so well run but that the profits it does earn in Europe and Japan look that much larger when brought back to the U.S. and converted into dollars.

Relying on currency fluctuations is not something any company can consistently rely on to appease Wall Street, which is why LEAN came about in the first place.

But while the weak dollar helps IBM in Europe and Japan, it hurts IBM in the U.S., where Global Services' financial performance has gone from bad to worse.

Here is what's really happening. IBM's outsourcing business has been declining for the last several years. Through a succession of cost reductions they've been able to partially compensate for the lost profit. But this costing cutting has had a negative effect in that it has accelerated the loss of business. A few years ago IBM started its "On Demand" service offering, but On Demand has not been as successful as hoped. It certainly has not replaced the lost services business. So IBM needs a Plan B and that Plan B is called LEAN.

IBM Global Services has grown to be a very large organization. It generates a large portion of IBM's gross revenue. The problem is that as Global Services becomes less profitable, it dilutes the financial results of the whole corporation. The intent of IBM's current initiative is to improve its financial results. They will do this by:

  • Cutting costs by moving work from expensive developed nations to less-expensive developing nations -- India, China, Argentina, etc.
  • Cutting costs by reducing the size of the workforce, especially the workforce in the expensive developed nations.
  • Evaluating the work and business IBM does and trying to eliminate things that are a financial drain on the company.

IBM management is impatient and wants to improve its financial results quickly. They have studied the company's situation and probably have come up with numeric goals for downsizing and restructuring the company. They are using LEAN as a means to get to these goals faster.

IBM will of course respect the laws and labor agreements where it operates. However, IBM is now looking closely at the profitability of its business operations -- ALL of its business operations. If an existing business is sufficiently efficient and profitable, little will be done. However, if IBM operations are not as profitable as IBM hopes, then changes will be sought. The offshoring of some jobs is one way IBM cuts costs and improves profitability. If IBM chooses this path it will work with the leaders in the companies it serves as well as with local government. IBM will make a very strong and compelling argument to change how things are done.

Alas, offshoring doesn't work well in practice and certainly doesn't work better than keeping the work here in the U.S. -- a fact that IBM and a lot of other companies consistently fail to see.

Change is inevitable. If IBM cannot change how it does its business in a particular market, it may choose to reduce its operations in that market. IBM is finally figuring out it is not good enough for every contract or business to be able to break even or make a slight profit. Each and every operation needs to make a minimally acceptable profit. Under-performing operations must be made to be more profitable or they will be eliminated. Either way IBM jobs will be lost. This loss of IBM jobs is inevitable. Most businesses and nations will prefer to keep IBM as a supplier, even if IBM sends jobs out of the country.

IBM will also argue there is a worldwide shortage of skilled IT workers and those laid off should be able to find work. What IBM fails to mention is there is high demand for ULTRA-CHEAP IT workers. Well-compensated IT workers will have a hard time finding replacement jobs with comparable pay and benefits.

The good old days are over -- long over -- at IBM.

Now to the 1,000+ comments from last week, I suggest you read them -- all of them. They are among this week's links. If you care about IBM or care about what is happening in corporate America, these thousand comments write a book about what's happening from the inside. If anyone thinks I am making up this story, read the comments and you'll know that my aim here is true.

The comments tell this story far more eloquently than I ever could.

Now a thought about the survivors -- those technical people at IBM who won't get the axe. If the company's motivation is purely financial, isn't everyone equally exposed to layoffs? Hardly. Most of the people I spoke to at IBM for these columns HAVEN'T lost their jobs nor are they even in danger of losing their jobs. I try to speak to the people best qualified to comment, and those are in this case the ones generally charged with making the new system work. IBM isn't stupid. The company will make an effort to pursue LEAN in a way that causes as little collateral damage as possible, which means relying even more on its strongest contributors. And these very able, if harried, folks have a fair chance of saving the day. But they aren't whining to me, they are annoyed. They are tired of HAVING TO save the day. They are people all of us can admire and most of us would be better for emulating. And that makes their reluctantly held positions all the more eloquent.

Nobody WANTS IBM to fail. Certainly I don't. But neither can I ignore reality.

Finally, here is IBM's internal response to last week's column:

05/10/2007 03:57 PM
From: ITD COMM/Somers/IBM
Subject: Rumors of massive layoffs

Patrick Kerin General Manager Global Technology Services - Americas

Joanne Collins-Smee General Manager Integrated Technology Delivery - Americas

Patt Cronin General Manager, Productivity Initiatives Integrated Technology Delivery

We have received many inquiries regarding the subject. If IBM responded to every rumor, we would get distracted from the important work of delivering value to our clients.

However, a recent external blog report suggesting that IBM is planning a massive layoff is causing unneeded activity. If this blog is generating concern in your unit, please feel free to use this information to assure your teams and business leaders that the blog is inaccurate, and relies on gross exaggerations.

The blog suggested we would be letting go more IBMers than we currently employ in the U.S. The facts are that our regular U.S. population is just under 130,000 IBMers -- a number that has remained relatively stable in recent years, as we have divested and acquired businesses and continued to invest through new hiring.

We said when we released 1Q results we would be putting in place a series of actions to address cost issues in our U.S. strategic outsourcing business. We have undertaken efforts toward that, and recently implemented a focused resource reduction in the U.S. While any such reduction is difficult for those employees affected, these actions are well within the scope of our ongoing workforce rebalancing efforts.

The blog also completely misinterpreted our efforts around Lean. To fully understand Lean, you have to view it in a strategic context -- a key part of what we're doing to reinvent service delivery to provide more value to clients and make IBM more competitive. We are using Lean, which is a commonly used methodology to conduct process design and development, to make informed decisions about how to improve and streamline processes. We are going about that in a disciplined and rigorous way, and the intent, as it has always been, is to improve our speed, quality and responsiveness to clients.

Read last week's comments, then you be the judge.

Comments from the Tribe

Status: [CLOSED] read all comments (253)

Folks;

Would like to respond to the person in the thread that indicated that the falling Dollar just helps the US Employee compete, and that the statement in the article indicates the contrary. I believe the point in the article was another. And that is that big contracts are stipulated in Dollars.. so if the dollar drops with respect to a currency where the work is delivered the profit margin goes down the tubes with it. So this hurts IBM profit margin wise which puts more pressure on trying to tighten things up and Offshoring is still the lowest hanging fruit, not withstanding the weakening of the dollar.

BillyV | May 24, 2007 | 10:50AM

I voluntarily left IBM before the resource actions began. I had no desire to work through another "lean" cycle - they lay off as many as they can and once the remaining employees start to break, they hire some back. I saw this happen several times over a couple decades during my employment.
I worked in an area where we did most of the outsourcing. I cannot count the number of times we were given the green light to send positions to India, then one week to a month later, told to stop. No official word why but the rumor was that as soon as an Indian employee gained the skill and experience, and got a slightly better offer - they left. And IBM was upset at the lack of loyalty. Ironic that.

My grandmother worked in a shirt factory and her union supervisor gave her the heads up that the business was moving to India for production. She left with her pension intact. And 40 years later, the same happened to me in an I/T position.

Hopefully Americans can figure out the next best thing coming for employment but I don't have any idea what that would be.

As far as the employment numbers go, I would assume that IBM doesn't count the contractors - and there are plenty of them - as employees.

And finally, we need to vote the right people into congress to make sure America gets to play on a level playing field with other countries. CEOs do not care about country, only the bottom line.

Glad I left | May 24, 2007 | 3:19PM

My great grandfather founded the Alexander Hamilton Institute and under their main web page is a fantastic collection of outsourcing articles and references - Posted the link just below:

http://www.alexanderhamiltoninstitute.org/lp/hamilton/index.htm

and I urge this community to review it.

bob eisenhardt | May 24, 2007 | 3:44PM