[Reader-list] IBM: Sensitive Plans on 'Offshoring'

geert lovink geert at desk.nl
Thu Jan 22 16:15:58 IST 2004

IBM Documents Give Rare Look
At Sensitive Plans on 'Offshoring'
When Shifting Jobs Abroad,
It's $12.50 vs. $56 in Pay,
And 'Sanitize' the Memos


In a rare look at the numbers and verbal nuances a big
U.S. company chews over when moving jobs abroad,
internal documents from International Business
Machines Corp. show that it expects to save $168
million annually starting in 2006 by shifting several
thousand high-paying programming jobs overseas.

Among other things, the documents indicate that for
internal IBM accounting purposes, a programmer in
China with three to five years experience would cost
about $12.50 an hour, including salary and benefits. A
person familiar with IBM's internal billing rates says
that's less than one-fourth of the $56-an-hour cost of
a comparable U.S. employee, which also includes salary
and benefits.

According to the documents, which also provide
managers with detailed advice on how to talk about the
moves and their effect, IBM plans to shift the jobs
from various U.S. locations to China, India and
Brazil, where wages for skilled programmers are
substantially lower.

At IBM headquarters in Armonk, N.Y., a spokesman said
that the company expects to shift 3,000 U.S. jobs
overseas this year. He declined to comment on plans
for next year. He said IBM expects to add 15,000 jobs
world-wide this year, with a net total of 5,000 of
them in the U.S. That would increase IBM's world-wide
employment to 330,000, the highest level since 1991.

IBM hasn't announced the plan to shift workers
overseas -- elements of which were reported in The
Wall Street Journal last month -- either internally or
externally. It isn't clear if the documents are final
versions; most carry dates of late November and
December 2003. The spokesman declined to comment on
the documents seen by the Journal.

Like other high-tech companies, IBM is moving
knowledge work to cheap-labor sites outside the U.S.
This "offshoring" process has raised fears that even
high-skill jobs that were supposed to represent the
U.S.'s future are being lost to countries that have
already taken over low-skill factory work.

The trend, largely the result of relentless pressure
on companies to cut costs, is seen by some U.S.
workers and politicians as a potential long-term
threat to U.S. employment. Democratic presidential
hopefuls have cited the trend as they have criticized
the jobless recovery under President Bush and noted
worker insecurity. Others argue, however, that the
jobs lost are typically replaced by other,
higher-paying jobs.

The IBM documents show that the company is acutely
aware of the sensitivities involved. One memo, which
advises managers how to communicate the news to
affected employees, says among other things: "Do not
be transparent regarding the purpose/intent" and
cautions that the "Terms 'On-shore' and 'Off-shore'
should never be used." The memo also suggests that
anything written to employees should first be
"sanitized" by human-resources and communications

IBM's human-resources department has prepared a draft
"suggested script" for managers to use in telling
employees that their jobs are being moved. The
managers will tell the employees that "this is not a
resource action" -- IBM language for layoff -- and
that they will help the employees try to find a job
elsewhere in IBM, although they can't promise to pay
for any needed relocation.

The documents describe work done by IBM's Application
Management Services division, part of Big Blue's giant
global-services operation, which comprises more than
half of the company's 315,000 employees. The affected
workers don't deal directly with customers; they write
code and perform other programming tasks for
applications software used inside IBM.

The plan would move jobs from U.S. locations including
Southbury, Conn.; Poughkeepsie, N.Y.; Raleigh, N.C.;
Dallas; and Boulder, Colo. IBM plans to transfer the
programming work to its own operations in Bangalore,
India; Shanghai and the northeastern city of Dalian in
China; and Sumare, Brazil. It isn't clear how many
jobs will be added in each location.

Some of the foreign programmers will come to the U.S.
for several weeks of on-the-job training by the people
whose jobs they will take over. That's an aspect of
offshoring that many high-tech workers regard as
particularly humiliating.

With revenue growing slowly throughout the
information-technology business, IBM and other vendors
are under great pressure to reduce costs to boost
earnings. Last week, when reporting fourth-quarter
earnings, IBM's chief financial officer, John Joyce,
said the company reduced costs $7 billion during 2003
and expects similar savings this year. Mr. Joyce said
competitive price pressures in computer services are
holding down profitability.

IBM's competitors are making similar moves. Accenture
Ltd., one of IBM's main rivals in the
computer-services field, said recently it expects to
double its work force in India this year to nearly
10,000. Google Inc., the online search leader, said
last month that it plans to open an engineering center
in India this year as part of an expansion.

For all these companies, lower-cost labor is the
biggest lure.

A chart of internal billing rates developed by IBM's
Chinese group in Shanghai shows how dramatic the labor
savings can be. The chart doesn't show actual wages,
but instead reflects IBM's internal system by which
one unit bills another for the work it does.

Besides the low-level programmers billing at $12.50 an
hour, the chart shows that a Chinese senior analyst or
application-development manager with more than five
years experience would be billed at $18 an hour. The
person familiar with IBM's operations said that person
would be equivalent to a U.S. "Band 7" employee billed
at about $66 an hour. And a Chinese project manager
with seven years experience would be billed at $24 an
hour, equivalent to a U.S. "Band 8" billed at about
$81 hourly.

Dean Davidson, an analyst who follows outsourcing for
Meta Group, in Stamford, Conn., says that companies
usually find their actual cost savings from moving
offshore are less than they would expect based on
straight wage comparisons. "The reality is a general
savings of 15%-20% during the first year," Mr.
Davidson says. That's far less than the 50% to 80%
savings based on hourly labor rates, he says.

The person familiar with IBM's plans says that
implementation could be slowed if the company isn't
able to hire enough qualified programmers to do the
work in its overseas software centers. He said that
those facilities are already very busy doing work for
IBM's big U.S. customers.

According to the IBM documents, the company expects
severance costs for laying off U.S. employees in
conjunction with the plan to be $30.6 million in 2004
and $47.4 million in 2005. Including other transition
costs, the documents say, the offshoring plan will
result in a loss of $19 million this year. Savings
will amount to $40 million in 2005 and $168 million
annually thereafter.

In the draft script prepared for managers, IBM
suggests the workers be told: "This action is a
statement about the rate and pace of change in this
demanding industry. ... It is in no way a comment on
the excellent work you have done over the years." The
script also suggests saying: "For the people whose
jobs are affected by this consolidation, I understand
this is difficult news."

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