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IBM Posts Record Revenue, Yet Lays Off Employees—What Gives?
Article ID: 63383
Posted May 1st, 2009
Earlier this year, all the tech sector giants reported their financial revenues for the fourth quarter of 2008 and the entire year. Many of those giants, like Microsoft, Hewlett-Packard, Sun, and Dell, reported lackluster earnings, and they also announced thousands of layoffs—Microsoft announced it would lay off 5,000 workers over 18 months, but many other companies made large layoffs as well. Dell started with its heavy layoffs late last year, cutting 8,900. And in 2009 others followed. Intel laid off 6,000, SAP 3,000, AMD 1,100.
Other large companies also were hit hard, and they laid off thousands of employees, too: Motorola laid off 4,000, Pioneer 10,000, Cisco 3,000, Panasonic 15,000, NEC 20,000, Hitachi 7,000, Toshiba, 4,500, and Circuit City, of course, bit the dust entirely and laid off 34,000. Even Caterpillar, which is a big IBM customer, was hit hard.
Meanwhile, IBM reported record revenue of $103.6 billion for 2008 and a record pre-tax profit of $16.7 billion. Net income in the fourth quarter of 2008 rose 12 percent to $4.4 billion, and IBM's gross profit margin moved 3 points up to 47.9 percent. Everyone seemed to be pleasantly surprised.
And then the rumors of IBM layoffs started filtering in. IBM got a lot of media coverage, and even more coverage once Alliance@IBM (the non-IBM national website for the IBM Employees Union) started posting mostly anonymous comments from IBM employees about layoffs, about workers holding their breaths as the axes started falling at various IBM locations, about how angry they were at IBM for laying them off.
Local newspapers that have major IBM facilities started reporting cuts in their neighborhoods, yet every official report was vague. And the numbers provided by Alliance@IBM are really just good estimates because they hadn't been officially announced or provided by IBM.
Some media queries to IBM by various reporters went unanswered by the time they published their news stories, but some IBM spokespeople did confirm that some layoffs had occurred, which in turn prompted more news stories and blog posts.
What Gives?
Amid IBM's wild 2008 success, there are some interesting numbers regarding the fourth quarter—revenue of $27 billion was down 6 percent, software revenue only rose 3 percent, and WebSphere revenue decreased 1 percent, with operating system revenue falling 6 percent. Global Technology Services revenue fell 4 percent (but pre-tax income was up 35 percent). Global Business Services revenue was down 5 percent (but pre-tax income was up 26 percent).And revenue from the Systems and Technology segment totaled $5.4 billion for the quarter—representing a 20 percent drop.
Clearly the fourth quarter wasn't nearly as hot for IBM as the entire year, but also IBM was doing some cost-cutting and somehow picked up some substantial gains in profitability. And the shift to software and services as profit drivers has also now become quite amazing. In services for the year, IBM signed more than $57 billion in new business at a rate of 30 percent profit growth.
"You can see that 40 percent of our profit came from our software business, and 42 percent from services, while hardware contributed just 9 percent," IBM CFO Mark Loughridge noted in the Q4 and 2008 financial report to investors.
Think about this: demand for hardware (if not pricing) is slipping, and its relative importance to IBM has fallen to single-digit percentage points. Ouch. This means a lot of things. But more importantly, it means that IBM's workforce is shifting to people as profit drivers; and people, of course, are easily laid off. It's not a bad business model if you're the guy running the show. Got demand? Hire more people to fulfill services contracts. Demand falls? Lay those people off.
Do you really need to rapidly improve hardware and software products in this sort of business? Do you have to pay people to constantly innovate with new solutions? Sure . . . but definitely not as much as in previous years for IBM.
What's Going On?
IBM's business is shifting, certainly. The unification of Power Systems focuses resources, and if demand for Power Systems falls, IBM—and most any company—isn't likely to pay workers to show up to build things customers aren't buying. And what about investment? Very hard to track if you're not an IBMer privy to the financial reports. But layoffs can sometimes provide insight into how a company is doing. For example, if certain divisions get hit with bigger layoffs, it's fairly safe to assume that those divisions aren't performing particularly well, or that demand is soft.But IBM's layoff strategy is a complicated beast. On the one hand, it is either astoundingly nefarious . . . or simply constantly reacting to business conditions.
Let Me Explain
IBM has taken a lot of heat for not reporting its layoffs in any visible, up-front way. But is the company doing anything illegal with its lack of disclosure? After all, IBM is a public company."We comply with all governmental regulations concerning disclosure," says Douglas Shelton, director of IBM corporate media relations.
Really? If other companies are reporting layoffs with even lower overall numbers, why doesn't IBM have to report layoffs?
"IBM only discloses job cuts that fall in the range of the WARN Act: 500 at a given IBM location," says Lee Conrad, national coordinator of Alliance@IBM. "IBM plays games with this by cutting under 500 or having the cuts at many locations," he notes.
In late January, NBC affiliate KTTC reported that IBM may have cut as many as 800 jobs in the Rochester, Minnesota facility, but KTTC only cited an unnamed "inside source," and IBM did not confirm the number.
Overall this year, "IBM terminated the jobs of close to 5,000 employees. About 1,200 were in the Systems Technology Group. The cuts so far have been in the U.S. and Canada," Conrad says, noting that job cut reporting is weak and that Alliance@IBM is working with politicians to strengthen the reporting requirements.
Either way, "The company should be more forthcoming," Conrad says.
If IBM is strategically cutting to avoid disclosure—that's unfortunate, but legal. If IBM isn't required to publicly announce its layoffs, why doesn't IBM do it anyway? From the standpoint of Americans and workers, it seems as if a lack of information promotes fear, uncertainty, and doubt. Why would IBM not just lay it on the line?
"We provide information to the people who need the information, and those are employees potentially impacted," Shelton says.
Ready to Judge Yet?
Interestingly, IBM, in all of its communications about layoffs, appears to avoid the term "layoff." Instead, the company calls its layoffs "resource actions." IBM also got hammered early this year by a few reporters, bloggers, and Alliance@IBM posters who derided the notion of resource actions. These are people, we're talking about, right?
Well, not so fast. IBM actually may be doing something quite remarkable. Layoffs are typically effective immediately. An employee's access to the company is cut off: email, LAN access, PC, cell phone, etc. Sometimes employees are greeted at the door and then led out of the building by security or other employees as they carry out their personal effects. Imagine saying "bye" to friends and former co-workers on the way out—not fun, and not exactly humane, either. Sure, disgruntled employees could cause some problems, but a lot of layoffs are astoundingly pathetic and they come with little to no warning.
IBM's resource actions, however, are far more humane than most layoffs. After employees are notified that they have lost their job, they aren't actually terminated immediately from IBM. "They remain on the payroll for a minimum of 30 days—or 60 or 90 days, depending on the location and impact—from the day they are notified," Shelton explains. "They are focused on looking into other job matches, if they choose, within IBM during that period. If they separate after that period, they will be eligible to receive their separation benefits," he says.
Granted, an employee may not find an IBM job within the same geographical location, and they might not find a suitable job at all. But they do have the opportunity, which is better than what happens at a lot of other companies, and they remain IBM employees while they're looking for new work. This alone is a huge benefit. You could sell your expensive car, for example, and buy a cheap replacement at a better interest rate than if you were unemployed. You can keep paying the bills while you focus full time on finding new work.
"If an employee is not able to find a job match internally, IBM provides each IBMer with an immediate lump severance payment, based on length of service," Shelton says. Severance packages are common, but they usually start at the moment you're laid off. In IBM's case, the severance package is a week of pay for each fully completed six months of service, up to a maximum of 26 weeks, which is just a little over 6 months.
"In addition, IBM continues to subsidize the employee's medical and life insurance for up to one year after leaving IBM, based on service. We also provide financial planning and counseling from outside experts for up to four months, outplacement services for up to one year, and reimbursement for retraining expenses incurred up to one year after departure," Shelton explains.
Access Remains
Meanwhile, instead of IT cutting all electronic use immediately, IBMers retain access to IBM equipment and resources "as long as they need to," Shelton says, either on-site at IBM or off-site via an outplacement/counseling service."The employee has access to email, printers, etc., entirely during their notice period, and then they have access for as long as necessary afterward through the outplacement/career counseling services. For those who don't have equipment at home, we provide it to them through this service," Shelton says.
Wow. This means you can look through your old email and contacts and look for work via companies that you've done business with.
Room for Nefarious Activity?
Despite IBM's under-appreciated resource actions, there's still room for shady activity. IBM can slowly and systematically dismantle divisions, groups, and product lines, and leave competitors, business partners, ISVs, and customers in the dark. Sure, no one wants to go around explaining themselves all the time, but a lack of openness when you're a global leader is unfortunate—especially for business partners, ISVs, and consultants who make their living in IBM's sunshine.Plus, IBM can systematically turn jobs into commodities by moving jobs and work to other cheaper, international locations. Alliance@IBM reports on the locations in the world where IBM is hiring in 2009: India will get 18,873 jobs, Asia/Pacific 13,376, Latin America 7,112, CEEMEA 3,988, USA 3,514, Europe 2,923, Japan 868, and Canada 820.
Now, these numbers are interesting for a few reasons. First, a lot of jobs are going offshore. We all know this is bad for American workers and the American economy. But, while IBM may or may not be a good corporate citizen of the United States, IBM is most definitely a global company.
"The needs of our clients are constantly changing, and we continue to hire around the world, including the U.S., to obtain the skills required by our clients," Shelton says.
The Big Question
IBM has a global workforce of about 400,000 employees. In America, IBM laid off about 5,000. That's about 1.25 percent of its workforce. That's tiny compared to lay off percentages of many other companies. Even if the numbers rose to 16,000 worldwide in layoffs, IBM seems to be hiring more employees than it is turning into resource actions. In this economic climate, IBM overall seems to be doing well, which is what its shareholders want.
But for a company with IBM's power, reach, and influence, is that good enough?
Chris Maxcer is news editor for System iNEWS magazine. Chris says, "The hardest thing about covering the topic of layoffs is that companies tend to do it to cut costs, and knowing whether they are making smart decisions is the debatable question. In addition to the loss of jobs, layoffs are troubling because we don't know what IBM's really investing in, and what we really want is to hear that IBM is investing heavily in innovative products—not best practices in commodity delivered services."
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By my line of thinking, I think all employees should consider themselves contractors, that is, if at any time the product and price are out of whack, you either renegotiate the agreement or you end it and go your separate ways.
It would force employees to continuous reconsider how they work: they work for themselves, not for somebody else. They are independent contractors. So there's an impetus to ensure that they keep their skills and the value they deliver high. Employees don't owe the company anything, and they don't owe the company loyalty.
Because really, as you implied, loyalty only really lasts as long as everything is fantastic. Economy changes, and boom, your job is gone. And private employers lay people off, too. Overall, it levels the playing field.
By the same token, it seems astoundingly difficult to fire anyone for lackluster or even outright lousy performance. So I think some companies turn to layoffs as a solution rather than dealing with changes proactively. I think IBM already does some of this, but IBM is a global company with interests that lie globally.
I've been fired, I've quit, and I've been laid off. And I've renegotiated contracts. But I'm also a young white healthy male, and this is where it gets a bit sticky for a society (or a nation) . . . and I definitely don't know the answer. There's definite economic benefits to job security. People put down roots, buy houses, become stable members of the community. If jobs too easily could come and go, I'm sure people would stop the wild spending, but it could also be problematic for many people who do a good job . . . but for reasons beyond their control, aren't able to do a stellar job. All I'm saying is there's some disruptive forces that would be hard to imagine if tomorrow everyone became contractors with 30-day, renewable contracts.
So I totally hear you on the unfairness of the issue for employers and employees . . . but, again, many large companies established campuses based on favorable tax benefits offered by cites and states . . . in return for offering jobs to locals, which provides the cycle for new tax revenue to handle the roads, streets, parks, and prisons, etc. As these companies become larger and more powerful, I expect them to be good corporate citizens. So yes, they have more responsibility than your average employee. Definitely.
Geez, it's like the first episode of the Spider Man movie: "with great power comes great responsibility".
That tends to be where my moral compass points: the more power you have, the more important it is to consider how you wield it.
--Chris
1. To me, the hardest thing about covering the topic of layoffs is getting past the tacit assumption that employees somehow "own" their "jobs," and that employers have some vaguely defined obligation called "loyalty" and "job security" which does not apply to employees.
When jobs are plentiful with salaries and perks on the way up, employers have to compete with each other for employees -- employees are allowed to dump an employer without cause or stated reason to chase the better offer (better salary, more perks, etc.). Nobody seems to complain about that. But in the reverse situation when jobs are scarce with salaries and perks drying up, employees are not expected to have to compete with each other for employers -- if an employer dumps an employee to chase the better offer (lower wage rate, fewer required perks, etc.) people start whining about "loyalty" and "job security" and "corporate greed" and set up all kinds of moral soap boxes aimed at the obligations of the employer.
Why is it that when someone is in the class called "employer" he finds he must provide some implicit obligation of 'til-death-do-us-part loyalty, while for those in the class called "employee," it is a job-hopping, go-for-the-best-offer, no-greed-implied free-for-all. If this class called "employee" can dump the class called "employer," why not the reverse? (And people don't even like 'til-death-do-us-part loyalty. Want to see a red-faced, steam-from-the-ear "discussion"? Start talking about company towns, company stores, and company scrip. Whoo boy! Hold on to your hats folks!)
The issue is contractual. The moral obligation is for both parties to fulfill the terms agreed upon by both of them at the time of hiring or contract, not some heap of misty-eyed assumptions about the way things ought to be. If the employer wants to go the extra mile with additional concessions (as it appears IBM has done), then great. If the employee wants to go the extra mile with additional concessions (oh boy, that'll be the day!), then great! But neither case sets the required standard for everyone else. It still comes down to fulfilling your word.
Is there a moral obligation to tell the world about business decisions, which includes hiring and firing? I don't believe so, government mandates not withstanding. If it is important to me, I should put in my own hard work to ferret out the details -- like you did, I might add -- and not expect someone else to pour out all the data to me that I deem valuable.
2. You stated near the end of your article, "We all know this [IBM's moving jobs to other countries ] is bad for American workers and the American economy." I don't know this, and I don't think it is necessarily true. Whenever a business becomes more efficient at what it does, it helps the economy -- workers, consumers, owners, other businesses, you name it -- because it uses scarce resources better and more efficiently.
Yes, some are displaced in the reallocation such as people that lose their jobs at that company, other businesses that are not as efficient and cannot compete with the more efficient company, a vender of a no-longer-needed widget, etc. But, overall what usually happens is that the whole economy gets more efficient and losses in one area are balanced by increases in other areas.
Let's say that because IBM has lowered its salary expenses, it can make the same products/services available for less. Now those that buy IBM stuff don't spend as much on that stuff, leaving them more money. They can, for instance, hire new people, raise existing employees' salaries, invest it, or buy more stuff from others, giving them more money to hire new people, etc. --- round and round we go.
This is very simply the old case of what is seen and what is not seen. Job losses are seen, especially when they are concentrated. But if one company loses 5,000 jobs (very visible) and 6,000 companies each hire one individual because of that (not very visible), I'd say the "economy" has improved even though we'll only hear about the visible losses.
Undoubtedly, losing a job is not fun. But it's also not fun, and certainly not fair and moral, to force an employer to pay inefficient wages or employ unneeded resources, whether people or widgets. And "inefficient" and "unneeded" can only be defined by the one doing the paying -- only he can decide what is the value to him.