Wednesday, March 25, 2009

IBM layoff numbers

For a more anecdotal view of the unemployment numbers, it's interesting to look at the recent story on IBM. The tone of the article focuses on the "bad economy, everyone's firing" meme without really digging into the details. It's pretty clear that IBM is using the current economy to shift a significant chunk of its global business services unit (everything from management consulting to IT support) to India - a labor arb play that would never fly in more normal times.

The hullabaloo over outsourcing is completely drowned out these days (and rightly so) by discussions on the economy and there surely are many other firms who are using this as an opportunity to shift operations overseas.

To be sure, a significant chunk of the lay-offs are attributable to lower demand for services but there is also a significant chunk using the poor economy as a smokescreen. A big reason that Lou Gerstner reorged IBM in the late 90s from a hardware provider to a service provider was to avoid the cyclicality of hardware sales.

The bottom line is when the economy recovers, don't expect many of these jobs to come back. Sphere: Related Content
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8 comments:

Anonymous said...

IBM Services staffs know-nothing soccer moms as managers. It's last hope was to keep the technical talent on board. The outsourcing to India is a dumb move by executives who think IT employees should make less than taxi drivers. But the real issue is that this move by IBM simply won't work. American companies must have American IT workers. Staffing in India may be possible for a period of time, but as soon as global tensions rise, American companies will not want to rely on oversees employees to manage critical business data.

Anonymous said...

IBM = Iiddy Bitty Morons.

IBM made about $2 Billion in earning last year from intellectual property alone. Licensing patents is big biz-ness.

So just keep the think tanks and layoff the consultants. Things will be golden.

And maybe they could invent a Kindle like device that pumps out cold beer through a tube while you read it. The faster you read the more beer you get. Conditioning.

Kurt Cagle said...

Your analysis seems to accord with mine. My suspicion is that IBM and related giant consulting companies will end up with an army of American lobbyists in Washington to soak up IT stimulus moneys, which will in turn pay for Indian programmers through subsidiary subcontracting arrangements, less because of profit differential and more because it is easier to release those workers when they are no longer needed.

I'm not altogether opposed to contractors being paid that aren't in the US - there are some good arguments for seeking out the talent wherever it is - but this ultimately looks like a ploy to effectively siphon off money into a black hole.

Anonymous said...

"The bottom line is when the economy recovers, don't expect many of these jobs to come back."

So, there will be no recovery.

Kurt Cagle said...

Yup. If you assume that the primary imbalances occurred due to the mortgage "balloon" on 2003-2007, consider that many of the people who took out second mortgages, or signed up for questionable first mortgages, did so because in inflation adjusted terms, salaries were falling quickly and refinancing helped many of those people pad the shortfall for a while.

This is one of the unstated issues with the current mortgage crisis. A significant number of the mortgages that were originated during the 2000s were second mortgage liens made against home equity.

Salaries drop for one of two reasons - either your wages remain stagnant while inflation increases, or you lose your job and are forced to take a lower paying one. When you outsource those jobs oversees, this accelerates both of these trends.

Since labor is typically the largest cost of running a business, companies usually want to minimize these costs as much as possible, even if the effect of it in the aggregate is to reduce the effect market of consumers. Thus, while such actions benefit shareholders in the short term by increasing their dividends, in the long term it destroys markets.

We're in rampant job destruction mode now, unfortunately. This means that even those people who could pay their mortgages (first and second) when they had jobs are falling behind now, and the jobs on the ground are increasingly hard to come by, and as such represent a sellers market, depressing wages even further.

This in turn means that there's a race going on right now. Housing purchases are partially financial (do my wages allow me to purchase a house?) and partially psychological (am I sure that I can continue making mortgage payments on this house for the foreseeable future?). Layoffs to hide off-shoring hurt both sides of the equation.

I'm skeptical that we have hit a bottom in the housing market at this stage; rather, I suspect that we've reached a temporary plateau in which the credit markets have unfrozen to the extent that people who are secure in their future are now seeing what they believe are deals (and they may be) and are purchasing against a perceived low. This is good, because its part of what needs to happen to reach the bottom. However, we should see yet one more leg down as rising unemployment begins to affect those that otherwise felt themselves "safe".

Personally, I think a critical litmus test for disbursement of government funds to companies is the requirement that those companies would be required to show that any jobs created would be in the US. Otherwise, the only benefits that would accrue would be to shareholders in the form of dividends and/or bonuses, which only exacerbates the problem.

No doubt there will be a lot of companies and countries that object to this, but the reality is pretty simple - the stimulus funds in question are essentially future tax revenues. US exports are not going to increase dramatically if India or China is employing more workers (these countries are not going to be purchasing US goods, which are typically at a sizeable premium to their domestic products), but if American workers are making more money, then they will be able to stabilize their income, plan for the future, and start making longer term capital purchases again.

Until then, I agree with the previous poster - there will be no recovery, and the US will continue to decline.

William Todd said...

The problem with multinationals is that they have no sense of place, no loyalty to any one country or workforce. This allows them to ignore long term issues like the overall health of markets in favor of short sighted goals like enhancing shareholder value.

As Kurt Cagle rightly points out, this is ultimately foolish because it is impossible to increase the value of nothing.

Anonymous said...

ITS ALL ABOUT CORPORATE GREED!!! HOW MANY MILLIONS DOES THE CEO NEED FROM 20 TO 24 MILLION A YEAR $$$$$$$$$$$$$$$$$$$$ FAT PENSION PLAN, BODY GUARDS, LIMO DRIVER,ETC,ETC,ETC, ETC.
NEW IBM MOTTO, BETTER FASTER,CHEAPER, OVERSEAS, INDIA, MANILA, PHILIPINES,NEGRON,EGYPT, IBM IS LAYING OFF FROM 16,000, TO 20,000, NATION WIDE. LOWER COST OF LIVING, LOWER PAY, THE IBM EXEC'S ARE GOING TO GIVE THEMSELVES, BIG BONUSES $$$$$$$$$$$$$$$$$$$$$$$$$ AT THE END OF THE YEAR, MORE STOCK ALLOCATIONS, BIG CHRISTMAS PARTY! HOW DOES OUR CEO AND THE IBM EXECS SLEEP AT NIGHT????????????? WHAT PROFIT CAN A MAN SHOW IF HE GAINS THE WHOLE WORLD $$$$$$$$$$$ BUT LOSES HIS SOUL IN THE PROCESS??? AND WE ARE LED LIKE LAMBS TO THE SLAUGHTER HOUSE. MAY GOD HAVE MERCY ON THERE SOULS!

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