The executives of IBM are doing this to boost their earnings per share IN THE SHORT TERM, which will be reflected in their own compensation. In the medium term, this cannot last. In the long term, it will destroy the company.
Cringely has the story:
This is my promised column about IBM — the first of several on the topic, all to be delivered this week. The last time I wrote at length about Big Blue was in 2007. I have been asked by readers many times to revisit the subject, something I haven’t wanted to do because it is such a downer. Writing the last time I hoped the situation, once revealed, would improve. But it hasn’t. And so, five years later, I turn to IBM again. The direct impetus for this column is IBM’s internal plan to grow earnings-per-share (EPS) to $20 by 2015. The primary method for accomplishing this feat, according to the plan, will be by reducing US employee head count by 78 percent in that time frame.
Reducing employees by more than three quarters in three years is a bold and difficult task. What will it leave behind? Who, under this plan, will still be a US IBM employee in 2015? Top management will remain, the sales organization will endure, as will employees working on US government contracts that require workers to be US citizens. Everyone else will be gone. Everyone.
Now industries and businesses change all the time because they have to or want to. Big companies and small have to adjust to the realities and changing reward structures of their markets and cultures. Or they change to better adapt to new opportunities. But what’s happening at IBM is different than that. It’s different because this incredible American success story, if it continues to follow its current course, will utterly fail. It’s different, too, because neither IBM management nor Wall Street seem to have the slightest notion of the peril facing the company. My deepest fear is they simply don’t care.
Read the rest here.
IBM’s 2015 plan was hatched to deliver $20 earnings-per-share to the delight of Wall Street. IBMers were offered a carrot, a few shares of stock granted at the end of 2015, as a reward for helping them achieve that target. It appears that IBM’s goal is not to issue any of those grants as they continue to conduct resource actions (IBMspeak for permanent layoffs) and remove talented and valuable US employees in favor of moving work to low cost countries such as Brazil, Argentina, India, China and Russia.
Work that stays onshore is mainly sent to what are called Global Delivery Facilities (GDF’s), two of which were created at heritage IBM locations (Poughkeepsie, NY and Boulder, CO) while starting new ones in Dubuque, IA and most recently Columbia, MO. IBM’s public position is they are creating jobs in smaller towns when in fact they are displacing workers from other parts of the US by moving jobs to these GDFs or to offshore locations.
In the case of Dubuque and Columbia, IBM secured heavy incentives from state and local governments to minimize their costs in these locations and are achieving further savings by paying the technical team members, most of whom are new hires or fresh college grads with no experience, a fraction of what experienced support personnel would require.
Let’s look closer at Dubuque, not because it is any different from the rest of IBM USA but simply to characterize the company at a finer scale.
When IBM opened the Dubuque center the people of Iowa were expecting great things. The center was staffed by a small number of US IBMers in management positions. IBM then brought over people from India for “training,” then sent them back. Few H1B visas were even required.
Every time IBM sent a batch of trainees back to India from Iowa they laid off US workers. While Dubuque was led to believe they’d get an influx of highly-paid new residents, what the city actually received was a transient workforce of underpaid people — workers that may well be invisible to local government. It would be interesting to know how many permanent hires in Dubuque have been Iowa residents or graduates of Iowa universities? How many workers spend less than a year in Dubuque? Is Iowa seeing any benefit from the investment they made to open the IBM Dubuque center?
Whenever IBM has a big project they now have to bring in extra workers, usually from India. I have been told they plan the arrivals over several days to a few weeks. They route people through different airports. They make sure there are never more than two or three workers coming on the same flight, effectively avoiding notice by Homeland Security.
Are any of these people paying FICA or US income taxes? Good question. Why is IBM sneaking around? Better question.
With hundreds of thousands of laid-off IT workers in the USA, why can’t American workers be hired for these positions? Because IBM doesn’t want US employees. Or, for that matter, European employees, though these are harder to jettison.
Layoffs at IBM are rarely due to job performance, though complaining will get you sacked. IBM tends to position these actions as job eliminations, but jobs aren’t usually eliminated, they are just relocated to GDF or GR locations staffed by cheaper workers. IBM manages to skirt the Worker Adjustment and Retraining Notification (WARN) Act requiring advance notification of layoffs or plant closings by structuring these resource actions to stay just below the numbers required to provide notifications at given locations. In this way IBM has managed to avoid the mainstream media and touts itself as a good corporate citizen while continuing to expect remaining employees to work 60-70 or more hours per week to keep up with the amount of work.
These draconian tactics might be justified if survival of the company or the best interests of the customer were involved, but they aren’t. It’s mainly about executive compensation. Meanwhile IBM’s work for customers is becoming increasingly shoddy. Contract terms such as vulnerability scanning, ID revalidations, and security implementations are routinely late or not done at all. Account teams are under continued pressure to meet revenue and cost targets regardless of how poorly the contracts were structured by the sales team. Each business sector has a target to move a certain percentage of their technical work to an offshore Global Resource (GR) or onshore Global Delivery Facility (GDF) as mentioned above.
IBM’s goal appears to be to have as few employees in the US as possible, maximizing profit. But doing so clearly hurts customer satisfaction.
Read the rest here.
Looking back over the 35 years I’ve been covering this story I can see in IBM an emotional and financial sine wave as rapture leads to depression then to rapture again, much of it based on wishful thinking. The first IBM rapture I experienced was pre-PC under CEO John Opel, when someone in finance came up with the idea of selling to IBM’s mainframe customers the computers they’d been leasing. Sales and profits exploded and the amazing thing was the company began writing financial plans based not only on the idea that this conversion largess would continue essentially forever but that it would actually increase over time, though obviously there were only so many leases to be sold.
When the conversions inevitably ended, IBM execs were shocked, but Opel was gone by then, which may have set another important precedent of IBM CEOs getting out of Dodge before their particular shit has hit a fan. We see that most recently in Sam Palmisano, safely out to pasture with $127 million for his trouble, though at the cost of a shattered IBM.
Thanks for nothing, Sam.
Opel was followed by John Akers who enjoyed for a time the success of the IBM PC, though Bill Lowe told me that IBM never did make a profit on PCs. No wonder they aren’t in that business today. Akers‘ departure was particular gruesome but it led to IBM looking outside for a leader for the first time, hiring Lou Gerstner, formerly of American Express.
Gerstner created the current IBM miracle of offering high-margin IT services to big customers. It was a gimmick, an expedient to save IBM from a dismal low point, but of course it was soon integrated into IBM process and then into religion and here we are today with an IBM that’s half IT company half cargo cult, unable to get beyond Gerstner’s stopgap solution.
Ironically, in Palmisano’s effort to continue Gerstner’s legacy, he destroyed almost every one of his predecessor’s real accomplishments.
Where will future IBM growth come from? Wherever it comes from, can IBM execute on its plan to grow new businesses using cheap, underskilled offshore talent? If Global Services is struggling to hang on, how well will this work for the new IBM growth businesses coming up? As IBM infuriates more and more of its customers, how long can IBM expect to keep selling big ticket products and services to those very same customers?
Global Services is a mature business that has been around for about 20 years. In IBM’s 2015 business plan big income is expected from newer businesses like Business Analytics, Cloud and Smarter Computing, and Smarter Planet. Can these businesses be grown in three to five years to the multi-billion dollar level of gross profit coming from Global Services? Most of these businesses are tiny. A few of them are not even well conceived as businesses. It takes special skills and commitment to grow a business from nothing to the $1 billion range. Does IBM have what it takes?
Read the rest here.
In his final installment, Cringely suggests various sensible procedures that every business should follow in dealing with its IT vendors, including, but not limited to, IBM. If we still had the economic freedom today that we enjoyed a century ago, corporations would already be following those common-sense procedures, and any vendor treating its customers so shabbily would have been eaten alive by its competitors in no time. In other words, we wouldn’t be having this conversation in the first place!
Suffice it to say that Cringely overestimates the power of the free market to sort things out in a country such as ours that no longer has a free market.
And there you have it: one more reason why I’m bearish on America.