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Fat And Mean - IBM's Layoff Plans and the New Downsizing
C R Sridhar
When Sam Palmisano, IBM's chairman and chief executive officer, announced last year, "Our strong performance is the result of excellent execution and the repositioning of IBM's business model to capture the growth and profit areas of a rapidly changing IT industry," there was little inkling of the night of long knives that was to follow for the people working for IBM Global Services.
In a rather unobtrusive manner IBM Global Services laid off 1,300 people from its workforce in the first week of May this year. This did not elicit much comment in the press. But more ominous is the news that the corporate meat cleaver is sharpened for more than a hundred thousand workers at IBM Global Services, which induced panic reaction in the work force. As Robert Cringely, in the Pulpit, notes, 'But this week's "job action," as they refer to it inside IBM management, was as much as anything a rehearsal for what I understand are another 100,000+ layoffs to follow, but no later than the end of this year.'
IBM's Project Lean is all about payroll pruning, which has obsessed corporate America in its dubious quest for short-term profits at the cost of long-term stability and loyalty to its employees. The dynamics of Project Lean are simply to trim the workforce by 1,50,000 out of a total of nearly 1,90,000 people working there.
Cringely explains the horrific cost cutting exercise in a clinically chilling fashion 'LEAN is about off shoring and outsourcing at a rate never seen before at IBM. For two years Big Blue has been ramping up its operations in India and China with what I have been told is the ultimate goal of laying off at least one American worker for every overseas hire. 'The BIG PLAN' continues Cringely, 'is to continue until at least half of Global Services, or about 150,000 workers, have been cut from the U.S. division. Last week's LEAN meetings were quite specifically to find and identify common and repetitive work now being done that could be automated or moved offshore, and to find work Global Services is doing that it should not be doing at all. This latter part is with the idea that once extraneous work is eliminated, it will be easier to move the rest offshore.'
Fat
Headquarters in Armonk, New York, USA and having offices over 300 offices in 170 countries, Global Services has revenue of $47.4 billion (2005). The Global Services group, says Timothy Prickett Morgan (Software, Unix and Mainframe Servers Boost IBM's Profits in Q3), which drove more than half of Big Blue's sales in the quarter, posted revenues of $12 billion, up 3 percent. Global Services has been a problem for IBM for more than a year, as companies are doing fewer big, long-term contracts and smaller, short-term contracts.
Mean
Whatever may be the problems confronting Global Services, a division of the IT juggernaut IBM (total revenues of $91.424 billion 2006), the impending plan to axe nearly 1,50,000 of the workforce has evoked sharp criticism from corporate insiders. Critics of IBM's chop-chop strategy point out that Global Services is not hemorrhaging in profits to warrant such a drastic payroll cut. Moreover, the critics allege bitterly that Sam Palmisano and his corporate honchos 'were losing touch with reality, bidding contracts too low to make a profit then mismanaging them in an attempt to make a profit anyway, often to the detriment of IBM customers.'1
Before the shock waves of the drastic restructuring subsided, the employees of IBM registered another shock wave high on the Richter scale. A terrible realization soon dawned upon them that the pension plan freeze announced by IBM last year would not offer them any benefits by way of IBM providing retired workers with monthly cheques. The pension freeze would come into effect from 2008. 'Companies have been freezing or terminating pensions, says Stephanie Armour, USA TODAY, 'including businesses such as IBM that are financially healthy.' A spokesperson for IBM admitted that the pension freeze along with changes in retirement plan would save IBM worldwide to the tune of $2.5 billion to $3 billion for 2006 through 2010. "This is one more corporate rollback happening around the country," says Lee Conrad of Endicott, N.Y., a former IBM employee, a unionizing and advocacy group. "A lot of people, especially senior employees, are in a bit of a shock. They feel like the rug's been pulled out from under them."
The Job Spam
The future for many of its workforce is nearly sealed with a fortunate few being retained as contractors at fraction of their wage. For the technical workers there is the spectre of cheap educated workers from India haunting them and the pressure of lowering their wages in the employment market remains a credible threat. Even the jobs posted for recruitment in IBM have incurred the ire of job seekers as Spam. Says one embittered job seeker on Dice.com, 'They have a large number of jobs posted and have been for months, many of which are marked "entry level" although they are asking for midlevel+ skills and/or education. I know a lot of people, myself included have applied for some of these positions and never so much as gotten an acknowledgement even though we were reasonably solid matches to the job descriptions.' Another job applicant blamed globalization and short term profits with the words, ' We have to blame globalization and shareholder greed. Unfortunately it is not the same technology company it used to be, its future is driven by what's happening in Wall Street.'
The New Downsizing
The winnowing measures of Plan Lean by IBM are a part of a larger problem confronting Corporate America. By the early 90's, downsizing became a mantra for efficiency experts in management. Corporations were becoming 'lean and mean' with corporations cutting out their managerial staff. 'After years of layoffs,' reported Business Week (1992), 'the spectre of downward mobility is haunting legions of once secure managers and professionals... As corporate stalwarts such as General Motors, United Technologies, and IBM join in a long list of downsizing companies, the economic trajectories of thousands of white collar workers plunging.' Another warning came from the American Management Association: 'There is consensus that middle managers and technical professionals - the exempt employees who fill the boxes on the organization charts between line management and officers- are among the hardest hit in this leaner, meaner business climate.'
For the excised victims of downsizing a new term came to be employed - dumpies - downwardly mobile professionals.
Technology had a role in displacing the workforce. Throughout the 80's corporations used high tech machines to displace well-paid skilled workers. The sophisticated knowledge required to run machines was concentrated in the hands of a highly educated elite while the rest of the workforce was reduced to the level of keypunchers. The de-skilling of the workforce was no accident as it served corporate interests to hire non-English speaking non-skilled workers at cheap wages. With quality mangers, engineers and designers available at low cost in Third World countries the corporate axe fell on middle and upper middle levels of management.
Bloated CEO Compensation
The main driver to payroll cost cutting is the handsome compensation packages given to CEO's and to shore up shares of the company. In a study of 229 firms that laid off employees at least once between 1993 and 1999, Craig Rennie-Professor of Business/Financial Markets in the Walton College found that specifically, for the year after a layoff occurred, CEOs of these firms received 22.8 percent more in total pay than CEOs of firms that did not have layoffs. The attractiveness of layoffs was not far to seek. "Our results were consistent with the view that layoffs create shareholder value," Rennie said. "Layoffs are followed by an increase in operating income and a decrease in expenses. In addition to reducing direct labor costs and related overhead costs, layoffs also appear to increase future operating efficiency."
The buzzwords "shareholder value" and "bloated CEO compensation" were red rags to the thousands of downsized workers who complained that corporations owed a duty of care to the community at large. In an article titled Den of Thieves (Salon News, 2000), Merrill Goozner bristled with anger, 'If size is your thing, just flip through the proxy statements of publicly traded companies that will be arriving in mailboxes over the next month or so. The releases provide shareholders with a fleeting glimpse into the surreal world of executive compensation — where company boards never let tanking stock prices, paltry earnings or massive worker layoffs get in the way of hefty raises and bonuses. CEO paychecks are swelling like never before.'
Eye of a perfect Storm
The IBM layoff plan is in the eye of a perfect storm for these reasons. Its CFO, Loughridge in 2005 announced about 10,000 to 13,000 workers were to be axed to pave way for "more competitive cost structure." This meant $500 million in savings that year. The threatened 1,00,000 plus layoff this year is a more serious matter as apart from gutting the workers in IBM, the plan may create huge communications and logistical problems, worsen customer relations to the detriment of the company' operations. More controversial is the proposed dumping of customers without notice who are perceived as unprofitable.
The gigantic restructuring of IBM Global services would perhaps, in the words of Cringely, 'eliminate much of the company's traditional wisdom and corporate memory' and push the business to a death spiral.
For the beleaguered workers whose heads are on the chopping block the words of David Gordon, author of Fat and Mean, should offer some courage:
'US corporations are fat and mean. We bear the costs of their commitment to the low road. We cannot expect those corporations to change their ways either easily or willingly. We need to change the environment in which they operate and to push and pull them, no matter how deeply they dig in their heels, in order to overcome the wage squeeze and corporate bloat. It will take time and it will take power.'
And it must begin.
Fat And Mean - IBM's Layoff Plans and the New Downsizing
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Jason
May 8, 2007
03:37 PM
Thank you, that is one of the better articles I have read today on the rumored IBM layoffs.
o
URL
May 8, 2007
03:55 PM
I'm confused, in the office where I sit, seven people are looking for new internal jobs since last week, none of them are from Global Services... I think the truth isn't Global Services they are just the public excuse
Greg McBrady
May 8, 2007
04:45 PM
With a US workforce diminished by such massive off shoring, and other US workers forced to work for diminishing wages it seems IBM and other companies that play by this sword will inevitably lose their customer base as well as their workforce. Laid off workers don't buy tech gear and people struggling to pay for health insurance and retirement costs don't either. Ultimately this Ouroboros of CEO / Shareholder kiss assing will lead to a market place with no customers and eventually no shareholders, or at least no happy ones.
Greg in Seattle
Anand Menon
May 8, 2007
10:21 PM
Neutron Jack's skills are being emulated and honed to perfection at IBM and elsewhere in the US.We are witnessing the rise of shell companies and that trend is disturbing.No nation can sustain this trend....no nation can afford to treat its educated white collar workforce like dirt without facing the fallout in the middle to long term.Indians may be happy about all that outsourcing coming to our shores but if its prudent to remember that if they go down we go down with them.
The author has already hinted at the consequences of downsizing for all the wrong reasons and the phenomenon of white collar unemployment in his previous articles.here are the links
http://desicritics.org/2007/03/18/052546.php
http://desicritics.org/2007/03/28/084258.php
sridhar
May 8, 2007
10:43 PM
Dear Greg,
'Shareholder kiss assing will lead to a market place with no customers and eventually no shareholders, or at least no happy ones.'
A very astute observation.The transfer of jobs from high wage economy to low wage economy also means loss of purchasing power in high wage economy which is not made good in the low wage sector. The result demand compression.
Over supply of goods with diminished purchasing power leads to stagnating sales. This in turn leads to further payroll cuts and an unstable economy.
Ultimately,this affects the low wage countries too.
sridhar
May 8, 2007
10:59 PM
Dear Anand,
'Indians may be happy about all that outsourcing coming to our shores but if its prudent to remember that if they go down we go down with them.'
very true. Moreover,if there are wage increases on account of short supply of qualified people in low wage countries the strategic value of low cost economy is lost.Then the corporations would seek other low wage economies with lower wages.And so on.
Soros
May 9, 2007
05:31 AM
I.B.M what does it stand for??It means INTERNATIONAL LIVELIHOOD BUTCHERS OF MANKIND.
Anand Menon
May 9, 2007
06:02 AM
I.B.M stands for Intentionally Butchering Mothers
Soros
May 9, 2007
06:49 AM
Anand Menon
Thats a better one than mine.
anonymous at IBM
May 13, 2007
03:36 PM
Excellent article describing the problems at IBM as a poster child for many of the large US coporations. It will be interesting to see if IBM acts in similar vein as GE has done. LEAN may be just a way to milk the cash cow until the commodity services can be sold off. Stay tuned, but don't just stand by. Employees need to take care of themselves, the corporation won't take of them.
Sanjay
May 13, 2007
06:21 PM
Cringely is an idiot. He posted a US layoff number of 150,000 -- which is greater than the number of people employed by IBM USA (130,000)
By the way, IBM should shift its employment to areas offering the most value. If India is offering more value, then why not?
LeftiCritics.org wants to whine about Indians being out of work, but when work is being sent their way, then the LeftiCritics want to vilify that too. Stupid.
Sanjay
May 13, 2007
06:23 PM
Read this:
http://www.channelregister.co.uk/2007/05/11/layoffs_ibm_cringe/
sridhar
May 13, 2007
09:59 PM
Sanjay,
From the short term perspective the shifting of jobs augurs well for India. But the issues for concern stem from the long term perspective of outsourcing operations.Issues of concern are as follows:
1.Demand compression- The transfer of jobs from high wage to low wage economies means that purchasing power is reduced in the high wage economy.Such economies get into a tailspin. What about the domino effect on Low wage economies?
2.Political backlash in US/ Europe- when job losses are significant there is bound to be pressure on the political establishment to look closely at outsourcing. The President elect Sarkosy promised the French people that outsourcing would be prevented to save jobs in France.
3. If the supply of trained people in low wage economies is less than the demand then would the wage increases nullify the cost advantage?
These are some of the issues for debate.
Cringely has voiced his concern about the layoffs and the fact that IBM is doing damage control tells us that there cannot be smoke without fire.
Lefties are full blooded capitalists now as West Bengal has shown us in the recent past.So do not anticipate any problems from them.
Sanjay
May 13, 2007
10:46 PM
sridhar, the developed economies don't have to go into a tailspin, they just have to shake off their business-as-usual complacency and develop new value to offer.
You make it sound like the free market is a zero-sum game, and that every poor person who gains a job is then depriving some higher income person. Sorry, but the savings achieved from outsourcing don't get stuffed into a money mattress somewhere. They get reinvested into the market and create new jobs in the process. And those new jobs would naturally be based on new value offerings.
By example, what if I could wave a magic wand and make half the US working population disappear? Would that suddenly mean a spate of newly vacant job openings, because half of the workforce is no longer showing up to work? No, because there would be a corresponding decline in demand.
The converse is then also true - more workers means more demand. If outsourcing then increases the number of workers competing for jobs, it means that the overall quality of workers improves and the value to the economy has improved. The economy is then operating more efficiently.
Furthermore, there is wage inflation occurring in India, so the current wage disparity is only transitional, until Indian wages catch up -- which they will.
Cringeley has mistaken the name of a Six Sigma program, LEAN, for some type of explicit downsizing agenda. That's simply a sensationalist distortion on his part. He's really damaged his credibility with his latest piece.
Naren Naik
URL
May 14, 2007
12:08 AM
Very interesting indeed. The driving psyche part especially. Some comments too --- given below.
"We have to blame globalization and shareholder greed. Unfortunately it is not the same technology company it used to be, its future is driven by what's happening in Wall Street." --- describes the state and concept of present Bharat too !
"CEOs of these firms received 22.8 percent more in total pay than CEOs of firms that did not have layoffs"
--- like the timekeeper in the mines getting paid higher to ring the bells "suitably".
"Technology had a role in displacing the workforce. Throughout the 80's corporations used high tech machines to displace well-paid skilled workers. The sophisticated knowledge required to run machines was concentrated in the hands of a highly educated elite while the rest of the workforce was reduced to the level of keypunchers."
Am not able to see matters in analogies with machines --- running machines is done at the lowest levels typically --- designing and analysing them at the higher ones. This needs a bit more thought by me --- as of now, the design work is done by a few in the "developed" west while all the bull-work is sought to be outsourced. No hassles there. The hassle is that "developing" nations are unwilling to put in that basic concept of "generation of thought" into their systems --- thus no absorption of higher concept possible too --- that is really going to hit us.
Also, I am reluctant to accept the connotation of the "highly educated elite", since the highly educated are in fact financially worse off --- as seen in the dwindling numbers of local PhD seekers in the US itself.
sridhar
May 14, 2007
06:39 AM
Sanjay,
1.Job losses in rich countries would mean decline of purchasing power in that country.eg If a computer programmer earning $6000 per month in US loses his job to his counterpart in Bangalore for say $1000 per month there is loss of $5000 per month of purchasing power in US. If these examples are multiplied then the loss of purchasing becomes significant in US.Consequently,on account of low sales/spending in US there is cost cutting of payroll leading to downward spiral of purchasing power in the rich economy.If this happens in US(worrying signs that they are)then the consumer of last resort(US) with diminishing purchasing power would also slow down outsourcing to low wage economies.If stability has to be maintained then the $6000 per month job has to be relocated in India which would be plain silly as low wage advantage would be lost for US corporations.(refer-William Greider,One world ready or not)
2.All the available evidence suggests that the money saved does not go towards job creation but goes to the top Management honchos and to the shareholders.Economists have noted that out of nearly 2 trillion dollars of cash floating per day only 2% is invested in trade ,manufacturing or job creation.98% is put in speculation.
3. Are we de-skilling our workforce in the outsourcing game?As Naik a research scholar who has joined the debate points out-' The hassle is that "developing" nations are unwilling to put in that basic concept of "generation of thought" into their systems --- thus no absorption of higher concept possible too --- that is really going to hit us.'
These issues are important and open fresh perspectives for thinking.
Soros.
May 21, 2007
08:29 AM
Naiks analysis is interesting and so is Sridhars "Fundamentals Of Economics" .
The path shown by Jack Welch is being taken by all the corporates in the U.S.The best of the companies as we know are looking at 'Funds Management' than to sweat it out in the Sun.
The urge to hike the stock value of the scrip is certainly not in the Share Holders Intrest but to ensure that it is the 'MOST Sought After Shares" as the promoters within the organisation speculate on the shares and make a huge Ransom.The idea is to make more and more money. It is not only on Out Sourcing but every single cost angle is worked out to ensure that the CEOs and interested promoters keep reaping the profits.
No wonder why companies like Enron, Arthur Anderson,Morgan Stanley have all had thier roles in unscroupless ways of looting the Investors savings and making the CEO's rich over night.Mind you, every corporate fraud is not done by a person or two but key officials in every aspect of the organization are involved.If one needs to know about Corporate manipulation one has to recall Bush's systamatic lies to the world about W.M.D.in Iraq and the American Corporate controlled Media played to Bush's gallery.
Life long i have been working for corporates and i know the language of money and what it can do.
Sanjay's para 2 is the typical Management Student approach. They are all hammered into the belief that additional profits generated gets back into the economy by way of additional investment or jobs.To this Mr.C.R.Sridhar's "Fundamentals Of Economics "is an apt reply.
The additional profits does not go via the mainstream Economic Activity but gets into countries that are Called "Tax Heavens" and thereafter it gets into global speculative trade such as stock markets and real estate.If one checks the records of all the CEO's who busted up their companies for insatiable appetite for wealth, they have always got gentle punisments. No sooner they end their prison terms they enjoy the same lifestyle as before.
Resorting to the old life syle comes through the assets made in ficticious names.Capitalism does not work on the principles on ethics but it thrives only when there is access to manipulation,fraud,cheating,no accountability and a host of acts of debauchery that management Guru's call it "IN SEARCH OF EXCELLENCE"
I have personally asked many Corporate honchos as to why underdeveloped countries are not willing to go beyond as Naik puts it "Generation Of thought" and their replies are standard.When easy money comes why go elsewhere.
For a lenght of time i have been observing the shift in the patterns of business conducted by underdeveloped countries and it is alarming to note their dependency on advanced capitalist countries for markets.Once a shift takes place or even a global slow down occurs underdeveloped countries will be hard hit.
All said and done which segment of the population in underdeveloped economy gets hit by the cascading affect? Again it is the poor as subsidies are ruthlessly chopped to ensure the so called "ECONOMIC GROWTH" is maintained at any cost.A dip in the saving is never thought off but business has to be usual.
The story of IBM is just the beginning and we are yet to see the worst practices to follow.It is sad to observe how many fly by night authors glorify the practices of the most ruthless CEO's in the U. S.(who have gone to the exdtent of canibalising the middle order
executives) and their so called success stories titled "Motivational Theories" of business management or 7 ugly habbits of the most highly notorious people --- Title coutesy. Steven Covey.
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