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IBM Offshores to India and Business Still Shrinks

November 02, 2017

By Jeff Ferry, CPA Research Director

Technology giant IBM reported its third quarter results on Oct. 17th, and extended a stunningly long losing streak with its 22nd consecutive quarter of declining sales.  

In four years, quarterly revenue has dropped 18%. As they say on Twitter: Sad! The problems at the computer giant are due mostly to the transition in the corporate world from onsite facilities to cloud computing, in other words shifting their computing needs to centralized operators like Amazon Web Services. IBM is a laggard in that business.

However in another area of the US technology business, IBM is the world leader. That area is shifting jobs to India. According to a recent report in the New York Times, IBM is now one of the few US technology companies with more employees in India than the US. IBM stopped disclosing employee numbers by location a few years ago, but according to the Times, Big Blue employs some 130,000 people in India now, compared to less than 100,000 in the US. IBM’s total employee base is 380,000. Each year it lays off thousands of people, and hires thousands more. But more and more of those new hires are in low-wage countries like India.

The Indians, who are good engineers and hard-working people, take a humorous eye to the American outsourcing trend,. The illustration below shows what Indians think of the US: “they export jobs”.

 The_World_According_to_India-map.png

  

IBM says it’s trying to hire more people in the US. But even this claim is more public relations than reality.  A recent story in the Greater Baton Rouge Business Report documented how IBM has picked up state and local government handouts for commitments to help cities in Louisiana, Missouri, and Iowa build up their local tech industries. But IBM has failed to live up to its hiring commitments in all three cities. A city councilor from Columbia, Missouri told the newspaper that IBM was falling short on hiring—and refusing to disclose figures. “Nobody ever want to talk about any numbers and I toured the building one time and the place inside was virtually empty,” city councilor Karl Skala told the newspaper.

Cloudy Future

IBM’s core problem is that cloud computing, often presented as a technology revolution, is not that at all. It is mainly a business organization revolution, where corporate America (and the world) has discovered that it’s just too expensive and complex to manage the ever-proliferating number of software packages onsite, and instead outsourcing them to low-cost operators like Amazon. IBM is at the heart of the expensive, complex onsite software, services, and support business. Until a decade ago, this was a license for IBM to print money. Look at the example of a payroll system for the Canadian government. In 2011, IBM won a deal to install a new onsite payroll system with a bid of $4.62 million. Six years, and three dozen bid revisions later, the price for this project is up to $150 million and, according to The Register, a British tech publication, the payroll systems remain “a mess” and the project is “a boondoggle.” 

 The payroll system comes from Oracle. Now that Oracle has built its own successful cloud business, who in his right mind would manage their own payroll system? They can turn the entire headache over to Oracle to build, manage—and provide performance guarantees!

 So business for the IBM army of software engineers is evaporating. Other companies that are successfully making the transition to the cloud like Oracle, Microsoft, Salesforce, or Dell-EMC have one or more “franchise” technology platforms that customers cannot do without. IBM lacks that. It tries to present its artificial intelligence platform that way, but this is too small and too young to carry an $80 billion giant.

So IBM tries to lower costs by eliminating workers in the US and western Europe and hiring new employees in low-wage areas. History shows that tech companies that try to make the transition to a new wave of technology by merely cutting costs rarely succeed.

 US financial analysts and the US technology press generally buy the IBM hype about its leadership in buzzword technologies like “artificial intelligence” and “blockchain.” The British press is more realistic. A recent Financial Times article pointed out two things about IBM. First, if it does show its first revenue growth in more than five years next quarter, it will be because of a new mainframe computer product introduction. Second, at current stock prices, CEO Ginny Rometty’s stock options are worth $30 million.  

Meanwhile, the “Watching IBM” Facebook page, which gathers information from laid off and retiring IBM veterans, is full of posts from folks with 15 or 20 years’ service at Big Blue. These employees are scrambling to get their just desserts in terms of health care coverage, pensions, and other benefits.

In the final analysis, it’s up to the US government to consider whether IBM’s lucrative government contracts should be more closely tied to IBM’s support for the US economy and employees. 


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