March 26, 2009, 3:32 PM — Criticism is mounting as reports surface that IBM is cutting 5,000 North American employees even as it increases its hiring overseas.
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After the Wall Street Journal reported that IBM is planning to lay off about 5,000 U.S. employees, with many of the jobs potentially being transferred to India, IBM confirmed in a statement that it would be communicating to employees that jobs are being eliminated.
"This is a North American action. We are not communicating locations or the number of jobs as a result of this action," IBM said in a statement on Thursday.
The news around IBM potentially displacing American workers and relocating positions in India will not earn Big Blue any points in the court of public opinion. But financially speaking, industry watchers say offshoring work overseas could cut costs and improve service delivery for the company's Global Services division.
"There is certainly going to be some political implications and many heated discussions regarding such a decision, and IBM won't fare well in the court of public opinion," says Paul Roehrig, principal analyst at Forrester Research. "But the question is, does this help companies become more efficient and allow them to more effectively deliver services? And the answer is often yes."
For one, the cost of labor in India is lower than in North America and the expense to build and maintain facilities also is less expensive.
"IBM can pay an engineer in the U.S. $120,000 or an engineer in India $25,000, like the Indian providers do," says Ben Pring, research vice president at Gartner.
But considering only those factors is too simplistic, Roehrig explains. It is unlikely that IBM is matching full-time positions in North America to the same job located in India, so the salary or compensation cost comparisons aren't the only issue to consider. If IBM can reduce expenses by locating jobs in India, customers could ultimately benefit. Big Blue would be able to pass along savings to its clients, ultimately becoming more price-competitive with offshore providers in India.
"The growth of offshore service providers continues at a dramatic rate, and it is forcing all the service providers to be much more efficient in their delivery mechanisms," Roehrig says. "If IBM is moving jobs overseas, it makes sense that it is to lower costs, improve efficiencies and be able to deliver savings to their clients with lowers costs and a broader set of service offerings."
Today customers are looking to engage with outsourcers with shorter contract durations, smaller deal sizes and targeted services. Companies are no longer handing the keys over when outsourcing, and IBM must work to become more agile in its delivery mechanism, taking advantage of talent and resources around the world.
"Service providers are more and more leveraging the savings and productivity offered by global delivery because it translates into better options for clients," Roehrig says. "Clients today can choose to have their delivery done where they want it, and IBM as a service provider would hope to be able to convert such moves as this into more options and savings for customers."
IBM has clearly stated in the past it intends to expand its global presence and has done so in recent years. But it also continues to expand its U.S. presence. For instance, IBM announced a couple of months ago it would be building two new U.S. data centers, Gartner's Pring says, showing the company is committed to maintaining a presence in multiple geographies.
"IBM configures services contracts with clients explaining their options, and often the lowest costs are in India or Mexico. If clients have a political problem with that, they can choose to use services delivery in the U.S. or the U.K., but this global sourcing strategy is a model IBM has been developing for quite some time," Pring says.
Nonetheless, this week's news comes at a bad time for IBM, considering job loss rates in the United States and the current political perspective on American companies offshoring work or hiring non-citizens for positions, Pring says.
IBM explains its global intentions in its 2008 annual report:
"Integrated global economies have opened markets of new opportunity and new sources of skills. The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world," the annual report states. "IBM continues to adjust its footprint toward emerging geographies, tapping their higher growth, providing the technology infrastructure they need and taking advantage of the talent pools they provide to better service the company's clients."
The 2008 report also details the number of people IBM employs worldwide. IBM and its wholly owned subsidiaries employed 398,455 people as of Dec. 31, an increase of 3% over the 386,558 employees reported at the end of 2007.
The United States remained the largest country, with 115,000 employees, IBM stated. But that number is down from 2007, when 121,000 IBM employees were based in the United States.
The number of IBM employees in the BRIC countries -- Brazil, Russia, India and China -- grew, meanwhile, from 98,000 in 2007 to approximately 113,000 in 2008.
"As a globally integrated enterprise, the company operates in over 170 countries and is continuing to refocus its business on the higher value segments of enterprise computing. The company also continues to rebalance its workforce globally to improve its global reach and competitiveness and to reflect the changing geographic mix of its business," IBM states in its 2008 annual report.
Meanwhile, analysts say the North American headcount reduction won't be viewed positively during this economy -- even if it does make sense for the business.
"Job losses and offshoring are under great scrutiny and there has been a change in the political tone," Pring says. "But within the context of IBM's strategy and even the numbers -- considering the company already employs at least 50,000 in lower cost countries -- the news isn't that dramatic."
Forrester's Roehrig adds: "Losing jobs can't be underestimated or diminished. The pain of that for those directly impacted is a terrible thing, but from a broader business strategy perspective, it makes a lot of sense."
The IDG News Service, a Network World affiliate, contributed to this report.
