back to article IBM declares it's the 'backbone of the world's economy'

IBM believes it is "the backbone of the world's economy" and has told its services staff to hold their heads high and behave accordingly as the company rolls out new services offerings it hopes will let it dodge the implosion of outsourcing. But the company's plans are far from finished and staff have been told to be patient …

  1. Anonymous Coward
    Anonymous Coward

    A fine plan

    But for the fact that as soon as a company starts hiring in a low wage economy, it starts to create the conditions that push up wages - experienced, educated staff (well, more so than before), creation of and demand for infrastructure, a more vibrant economy with other opportunities. The presence of a blue chip employer attracts other employers. So what was a great place to offshore (ie a great place to exploit low standards of living) starts to see rapidly rising wages and rising staff turnover. Wage inflation in Mumbai, for example, is projected to be 10% this year, against local CPI inflation around 3.5%.

    The outsourcer then has three options:

    1) tolerate the higher wage costs and staff churn, destroying the economics

    2) Hire the cheap dross that nobody else will and tolerate even worse quality, angering customers

    3) Move to somewhere else and start again - the most popular plan.

    There's probably no point in the forseeable future that scumbag offshore employers will run out of places with cheap labour. But the continual need to move on, or start seeing those cost savings eroded make this a mugs game. Suddenly the long term "core competence" isn't running an ITO or BPO centre well, its finding the next bunch of yet-to-be-farmed natives, and building a new centre, migrating to that, then finding the next location etc etc. It's a mug's game, in which the winners are the most mendacious companies with the lowest standards.

    1. DougS Silver badge

      Re: A fine plan

      They need more than cheap labor, they need cheap educated labor. The pool there is a lot shallower than the pool for cheap unskilled labor for manufacturing.

      1. Anonymous Coward
        Anonymous Coward

        Re: A fine plan

        They need more than cheap labor, they need cheap educated labor.

        At the same price, yes.

        But they will always take cheaper labour in preference to slightly more expensive skills. This is driven by the belief set of Western management that their own skills couldn't possibly be found somewhere else cheaper, but all lesser beings in the business are mere commodities, and skill, education and experience can be substituted by rigorous processes that any low cost numpty can be told to follow.

    2. HmmmYes Silver badge

      Re: A fine plan

      But. My. MBA. Did. Not. Cover. This.

      Yep. At best, you have a cost advantage of about 5 years. After that, you either face rapidly rising costs. Or totally debasing your quality.

      I remember a meeting ~16 years ago where I was being told about how they could hire Indians for 30% of the costs.

      Of course, at that time theyd not actually gone out there and tried to recruit the 50 odd needed. If theyd tried that first they might have a had a more realistic idea of how many skilled, employable Indians there are in India - some, but you you'll find one per 100 interviewees. Not worth your time.

      Then I asked what the current rate of wage inflation was. They said theyd get back to me. They did. It was 20%.

      Ok, you've ~3 years to make the outsourcing work before its more expensive that the UK. And you need to be getting huge productivity increases out of the Indians.

      6 years later. Offshore sie closed down. Some total - 2M spent, nothing created.

    3. Bob Vistakin
      Facepalm

      Re: A fine plan

      Are those the countries President Trump has a special word for?

    4. GruntyMcPugh Silver badge

      Re: A fine plan

      churn,.... a major problem we had with our offshore teams when I worked for IBM. We lost one guy in a lunch time,... he failed to dial into a conference call, someone else joined instead, and explained our guy had popped out to get some food, got talking in the queue, got a job offer and packed up his stuff. Must have been a really good offer to burn that bridge and not see out his notice too.

    5. WatAWorld

      Re: A fine plan

      What matters to IBM's executives and sales people is not the long term good of the company, but the bonuses and stock options they can get for cutting costs over the next 1 to 3 years.

      The long-term 10-20 year picture is simply not their problem.

      Western nations have been outsourcing large quantities of IT jobs to India for over two decades. So claims I'm reading here that outsourcing raises salaries in a country so rapidly that it is only feasible to outsourcers must change countries every 5 years are clearly false. Thirty years is more accurate.

      So what was a great place to offshore (ie a great place to exploit low standards of living) starts to see rapidly rising wages and rising staff turnover. Wage inflation in Mumbai, for example, is projected to be 10% this year, against local CPI inflation around 3.5%.

      Also, remember: IBM's core business is sales. The senior sales people and their executives are considered individual valuable assets, not commodities. IBM counts on its ability to sell services based on it reputation for quality and cost effectiveness in tech services back in the second and third quarters of the 20th century.

      They feel they sales depends on the sales skills of their sales team, and that an adequate sales team can use smoke and mirrors to continue selling any kind of rudimentary commodity technical skills to government and corporate customers based on what a great company they were from 1950 to 1997.

      1. HmmmYes Silver badge

        Re: A fine plan

        Nope.

        IBM are more cynical than that.

        They sell SLAs then assume they can beat the customer is its took to court for missing them.

        So far its worked.

        However, Id no longer consider IBM as a reliable partner.

    6. Anonymous Coward
      Anonymous Coward

      Re: A fine plan

      There's probably no point in the forseeable future that scumbag offshore employers will run out of places with cheap labour.

      Ironically, at the rate these companies are outsourcing/offshoring to cheaper places, they'll eventually destroy the US economy to the point *that* will be the place with the cheap labour.

  2. Anonymous Coward
    Anonymous Coward

    IBM is the backbone of employment for "new collar" cheap grads who "know everything" replacing actual experienced workers who are paid more.

    IBM should be ashamed of its employment history, its only a matter of time before they get dragged before the courts and end up paying billions in fines for breaching work agreements and laws.

    1. Pascal Monett Silver badge

      Nope, not gonna happen.

      IBM is part of the companies that write the law. Don't worry about those work agreements either - the courts don't have time to bother with that, they have The War Against Drugs to occupy them.

      1. Anonymous Coward
        Anonymous Coward

        I've always wondered by IBM doesn't get taken to pieces by a half-decent employment lawyer. For example, I thought that to be made "redundant" the requirement for your job role had to go, not for the individual doing it? So how can making onshore resources 'redundant' and then using offshore resources to do those jobs satisfy that "redundancy" definition?

        1. This post has been deleted by its author

        2. Anonymous Coward
          Anonymous Coward

          t's a bit more complicated than that and moving business to another location is a valid reason for redundancy at the original location.

          1. Anonymous Coward
            Anonymous Coward

            But the "business" isn't moving. The offshore, or even near-shore person will be performing the same role for the same client that the onshore resource would have. Therefore, on the assumption that "business" is the work that needs doing for the client, it isn't moving. The onshore individual conducting the "business" is being replaced by an off/near-shore individual doing the same "business".

            I see it more like the scenario where you make an onsite person 'redundant' and give their job to someone else who can work remotely. Is that a valid "redundancy"? The job is still there. You've just got shot of the onsite individual and given their job to the remote individual.

            1. Anonymous Coward
              Anonymous Coward

              Transfer of work to another site is a valid reason for redundancy. From the Government's HR1 form which employers have to submit, possible reasons for redundancies are:

              A. Lower demand for products or services

              B. Completion of all or part of contract

              C. Transfer of work to another site or employer

              D. Introduction of new technology/plant/machinery

              E. Changes in work methods or organisation

              F. Other (please give brief details below)

              G Insolvency

              I have not seen IBMs HR1 but I would imagine that they ticked box 'C'. In this circumstance the jobs do not have to cease for the people to be made redundant.

    2. Anonymous Coward
      Anonymous Coward

      IBM is the backbone....

      ..of the third world's economy.

      However, this act of charity requires the top notch management skills of US directors who have to be paid top dollar salaries. Couldn't possibly outsource their jobs and pay Indian director salaries, could we?

  3. ijustwantaneasylife
    Go

    Where will it end?

    I might be overstating/extrapolating this a little, but if these companies get really good at relocating their operations - to get to successive new outsourcing/low-cost labour pools - might we then see a global economic improvement over a relatively short period of time - say 20-40 years ball park?

    A lot of upheaval and uncertainty, but possibly good for the global economy over time.

    Just my 2c ...

    1. HmmmYes Silver badge

      Re: Where will it end?

      If you can point to anyone 'really good at this' Id be interested to meet them.

      The reality is the whole process is a clusterfuck.

    2. Anonymous Coward
      Anonymous Coward

      Re: Where will it end?

      if these companies get really good at relocating their operations - to get to successive new outsourcing/low-cost labour pools - might we then see a global economic improvement over a relatively short period of time - say 20-40 years ball park?

      It will be relatively good for the local economies concerned, but fundamentally offshoring is exporting jobs. For economies like the UK that have a trade deficit, the last thing our government should be permitting and encouraging is offshoring, despite the fact that it is doing it with its own administrative staff.

      The administrative & support function cost of most businesses is about 2-3% of the total revenue. Since management are highest paid and won't offshore themselves, and there's some operations that can't be offshored, even the most committed of offshorers can only move say 1.5% or revenue offshore. The net savings after the technology cost, lower productivity typical in low wage economies, and outsourcer costs and margins is about 20% (sometimes the net savings are negative), so the most you can save is about 0.3% of total revenue, in return for a never ending ball ache of trying to keep the low cost plates spinning, and the impact on quality of service.

      All part of a hollowing out of decent jobs in the Western world, following the pattern of offshoring manufacturing. When there's a much reduced middle class to buy stuff, where's the demand for these companies going to come from?

      1. MrBanana

        Re: Where will it end?

        That's true for the general business case, but this is IBM's service division where the cost of the IT focused jobs that could be outsourced is way more than 2-3%. I believe their target was 80% but it is now 60%. That makes it very attractive for the period of time when the low wage economy is working for them. Once the wage bill starts rising then the figures don't add up any more, but the IBM execs that pushed this scam through will be long gone by then.

        1. Anonymous Coward
          Anonymous Coward

          Re: Where will it end?

          but this is IBM's service division where the cost of the IT focused jobs that could be outsourced

          That's correct, I was thinking from the perspective of the client corporations. As for when the figures don't add up, in my experience of this, the figures only ever add up for the client company in the first two years of a 5-7 year contract. After that it is open season, and it costs substantially more. By that point the client corporation has lost any in house competence, any organisational memory of the metrics of in-house service and costs is gone, and they have also lost the courage and management knowledge to be able to bring it back in house. They pay the higher charges because they have no option, and then try re-sourcing to the next snake oil BPO vendor, who rinse and repeat.

          The client corporations have only themselves to blame. The believe IBM when they say "we can hire an MBA/Comp Sci graduate in India for less than $11,000 a year, and a call agent or process operative for less than $4k" . But if I divide GBS revenues by the estimated number of GBS employees, the actual figure I got for 2016 full year was about $35,000 per employee. And that was with a 3.6% pre tax loss, so to be profitable (and profitable after tax) they'd need to be charging around 10% more per employee, say $38k. That $38k per employee is what needs to be charged on average to every client, plus the costs of managing the vendor relationship, which is often a significant and hidden internal cost. Intermediary consultants I've spoken to have suggested that managing a BPO vendor relationship properly is around 3% of the contract value. Now factor in that it is often the case that productivity is lower offshore (low pay = less skilled, less innovative workforce, no common goals with client, poor communication), and you can either add 30%+ to the costs, or you can put up with a brutally crude process that brooks no exemptions, won't adapt to business needs, won't fix process faults or input problems. If the client company put all of that into their calculations, plus the quality, risk, and difficulty of change, the case for offshoring becomes wafer thin.

          Don't get me wrong, find the right people, train and pay them well, and they'll do as good a job as your UK or US staff. But an employee with fluent English, business experience, education to graduate or post graduate level will be costing vastly more than the money offered by the offshore outsourcers, and they'll be wanting a far more rewarding job than processing invoices or bashing out cheap code. And they probably won;t want to work the skewed shifts to match UK or US time zones, or three shift working for a global service centre.

          1. WatAWorld

            Re: Where will it end?

            You also have the fact that with any of the major big outsourcing companies (not just offshoring companies), their company goal is to maximize their profits -- not yours.

            - Driving other external competitors out internal of a client is a key goal.

            - Driving internal expertise out of a client is a key goal. (Such a simple goal to achieve too: simply offer to hire the clients staff away from them).

            - Internalizing documentation is a key goal.

            - Ensuring a strong need for ongoing maintenance is a key goal.

            - Building code that you can re-use on similar future projects with other clients is a key goal.

            To an major outsourcing company, it is all about maintaining sales commissions by keeping the money train rolling.

            The key skill isn't the ability to deliver easily maintainable systems with low error rates. The key skill is getting selling the client on accepting delays, escalating costs, and high maintenance costs.

            1. Wallsy

              Re: Where will it end?

              Outsourcing only really works in a "steady state" environment, which is why accountants think it's great and everyone else knows it will end in disaster. A change usually means T&M charges and extra chances to fleece the customer.

              I worked on a contract at the turn of the millennium where the customer (or at least the customer's accountant) was very smug about the "nailed down" agreement... to support OS/2 and to roll out a new application (that was Windows NT based). Cue huge unplanned costs to migrate to a new operating system.

              1. DougS Silver badge

                There are no longer any steady state environments

                Things change too fast, and outsourcing contract lengths keep decreasing so the amount of post due diligence (i.e. figuring out how everything works because the old incumbent sure isn't going to be of much help) when you are in a true steady state is pretty short. And that assumes you took over something that was pretty new.

                If you are taking over a bunch of outdated stuff and they want "steady state" management that goes out the window as soon as their auditors start telling them this or that is no longer compliant so there will be a constant state of emergency where something has to be replaced ASAP - but because you never truly understood where all the bodies were buried in the legacy gear you'll break stuff and create more emergencies.

                1. Anonymous Coward
                  Anonymous Coward

                  Re: There are no longer any steady state environments

                  Agree 100%. See this again and again. Customers move from one outsourcing provider to another, or even a new arrangement to outsource a system thats so far been insourced, and knowledge transfer is always poor. From the Customers Execs and Accountants view its great - stop having to worry about your own IT, make it someone elses problem and, in theory, reduce IT costs into the bargain. Trouble is, even when there's an element of TUPE, a lot of the customers skilled practitioners will decide they'd rather resign/retire than transfer over. Understandably, they're far more interested in organizing their own personal next steps than providing documentation and knowledge transfer to the people who are 'stealing' their jobs.

        2. Anonymous Coward
          Anonymous Coward

          Re: Where will it end?

          Case in point - IBM's previous preferred low wage offshoring destination was South Africa. Now, its morphed into India. Where next?

  4. Milton Silver badge

    Offshoring, outsourcing—whose head is high, and why?

    Given that IBM's reputation is good only by comparison with Oracle (which seems a lot like claiming I am honest—compared to Donald Trump), and given that offshoring and outsourcing leads to a relentless decline in standards and the proliferation of embarassing, expensive project failures (we've all seen this so often by now that it's just boringly predictable) will it be IBM's saleslizards holding their heads up high? Or will the elevated skulls be those of Asian and Eastern European providers, staring dully from spikes outside IBM Towers, as sacrifical offerings or excuses for poor performance?

  5. Lysenko

    The hubris - it burns...

    IBM are a world leader in one area: mainframes. Everywhere else they are a third rate also-ran, frantically leveraging brand recognition (built with mainframes) to remain relevant.

    It didn't have to be this way. IBM could still be the gold standard x86 PC and server manufacturer with a halo effect making IBM the industry standard in related areas from keyboards to datacentre equipment racking to containerised clouds, but no. They sold that off and went all in with slick suits fronting offshore cube farms. You ate your own seed corn IBM. Own it.

    1. HmmmYes Silver badge

      Re: The hubris - it burns...

      Big Irons not be sneered at.

      Maybe the mainframes need to be rescued from the rotting corpse of IBM and set free.

    2. WatAWorld

      Re: The hubris - it burns...

      IBM are a world leader in one area: mainframes.

      IBM leads in mainframe hardware and mainframe operating systems.

      Getting IBM to write the applications to run on your mainframe is something only fools and ex-IBMers do. Fortunately governments and major corporations employee a lot of fools and ex-IBMers.

    3. James Anderson

      Re: The hubris - it burns...

      They are also the premier UNIX hardware manufacturer.

      Power beats x86 on everything but cost.

    4. Korev Silver badge

      Re: The hubris - it burns...

      The odd thing is that the hubris is arguably justified in this case... A huge number of banks use their mainframes for storing bank accounts etc.

  6. Doctor Syntax Silver badge

    "in a start-of-year team-building video"

    That explains it. These team-building things are always an excuse to insult the employees' intelligence. Either that or an embarrassing display of senior management's intelligence.

    1. Mark 85 Silver badge

      I'm still trying to parse the bafflegab that I just read. It has a certain odor to it that should tell one "don't step in this".

  7. hplasm Silver badge
    Devil

    Hold your heads up high, staff.

    The we can reap them all at a single stroke.

  8. WatAWorld

    even nVidia is bigger now

    Yesterday I was reading that even video chip maker nVidia has greater market value than IBM.

    IBM is a has been.

    The days of working at IBM in order to share the glory and reputation are long over (at least on the software side).

    What I learned working there is that IBM is a sales company, and that technical commodities (such as technical employees) are mere overhead.

    1. Bob Vistakin
      Facepalm

      Re: even nVidia is bigger now

      "IBM missed the boat on the ongoing revolutions in mobile and cloud computing, and it's been scrambling to adjust to the changing technology landscape ever since. Revenue has now declined in 17 consecutive quarters. Its failure to foresee the structural changes in enterprise IT also helps explain why IBM stock has underperformed the S&P 500 by roughly 75% since Rometty became CEO."

      The chart of their market value against the S&P is particularly interesting.

  9. Anonymous Coward
    Anonymous Coward

    Christ, they're still banging on about "transformation". I left there three years ago and even then they'd been pitching it for a few years already.

    They seem to be very much accelerating on their downward spiral. Still, the execs have their exit plan.

    1. onefang Silver badge

      'Christ, they're still banging on about "transformation". I left there three years ago and even then they'd been pitching it for a few years already.

      'They seem to be very much accelerating on their downward spiral. Still, the execs have their exit plan.'

      An accelerating downward spiral is a transformation, just not the one they where / are banging on about.

  10. Zippy's Sausage Factory

    The few IBM employees that remain are probably polishing their CVs ready for when they get the axe, no doubt...

  11. ukgnome Silver badge

    What do IBM actually do these days? Well aside from laying off swathes of 'proud' staff?

    Anyone?

  12. ex-IBMer

    IBM As Part Of Anatomy

    If I were to compare Big Blew to part of the human anatomy, it wouldn't be the "backbone"!

    1. Mark 85 Silver badge

      Re: IBM As Part Of Anatomy

      A little bit lower on the anatomy then?

      1. ex-IBMer

        Re: IBM As Part Of Anatomy

        Precisely!

        1. onefang Silver badge
          Holmes

          Re: IBM As Part Of Anatomy

          Alimentary my dear Watson.

  13. amanfromMars 1 Silver badge

    The bottom line is big into the red

    Reading between the lines and fleshing out the bare bones of the proposal, is it obvious that IBM are in deficit of novel intellectual property to monetise and support/develop and exploit.

  14. John Styles

    Is this a cognitive backbone?

  15. Lbarckmann

    Satiric novel about IT conglomerate

    See the novel “Digging Up New Business: The SwiftPad Takeover”, published by Inkwater Press for details about how “Global Industrial Processors” (GIP) does business.

  16. Anonymous Coward
    Anonymous Coward

    Same old bs

    Pure bullshit to justify senior managers job

    ibm is such a dull outfit

  17. Anonymous Coward
    Anonymous Coward

    IBM declares it's the 'backbone of the world's economy'

    Actually I thought they were pretty spineless.

  18. Bob Vistakin
    Facepalm

    Why the obsession with watching them circle the drain?

    It was game over a decade ago. All the smart one's who could, got out back then.

    Now, all the work it will do for it's customers will be from countries President Trump has a special word for.

  19. WinstonF

    Big Blue is DONE.

    Buffett gambled on IBM, I heard he's got out all except a couple of pennies. Big Blue is finished, when you got freaks who know nothing about tech and only focused of share options and bonuses, running a tech company, it's pretty much GAME OVER.

  20. Anonymous Coward
    Anonymous Coward

    Not quite yet. IBM is still a large, profitable company, with $79bn of sales and $5.7bn NET profit in FY17. It may not be growing as the Street demands but it isn't going to disappear overnight.

    The denouement to the IBM story, along with that of other tech giants in similar positions, will take a few years to play out.

  21. Big Johnson

    BLAH BLAH BLAH !!....way too little...way to late.

    Just another RA in sheep's clothing. They have been spitting 'the value is in our people' crap for years.

    They are being sued at record levels....2018 annual report....and offering parting gifts to clients they lied to.

    They have cut all field selling resources to the point where very large accounts don't even get called on.

    They shuttered all their field offices the past 10 years.....IBM employees are lost. The inflection point has arrived as the average tenure of former GBS consultants is now less than 3 years. Not sure c-suite executives listen to snot nosed kids...smart or not.

    Cloud delivery has crushed this company. They failed to respond under Palmisano has he was purely focused on revenue at any cost...as was Steve Mills and brushed aside the notion that off-prem computing would be a market. This could very well drive them into a takeover by Apple.

  22. Anonymous Coward
    Anonymous Coward

    Love you AWS

    If AWS had published a similar article, The Reg would have given it a big thumbs up #justsaying

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