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By | Ashlee Vance 11th May 2007 21:31

America is under siege. Do we blame IBM or Cringely?

150,000 staff fired. -20,000 left ...

Analysis America faces a very serious question. Is Robert Cringely right?

Last week, Cringely presented the idea that IBM will layoff 150,000 workers, hoping to reduce costs. Cringely's reputation for making the boldest of claims seems to have reduced the impact of his piece. A few technology trade publications mentioned the IBM crisis speculation. The mainstream press ignored Cringely altogether.

If Cringely is correct, then the Wall Street Journal and New York Times had better find some reporters with investigative instincts and start digging into this situation. IBM firing 150,000 US workers would devastate the current, rather optimistic business climate. Worse than that it would leave IBM without a single worker in the US. Perhaps CEO Sam Palmisano has already purchased an estate in Shanghai.

Yes, Cringely overshot with the 150,000 figure by quite a margin. I should have picked up on this but failed to do so. Thankfully, our readers and his bailed out the fourth estate.

At last check, IBM employed close to 130,000 people in the US and well over 350,000 staff worldwide. In a fresh column this week, Cringely, reporting for PBS, addressed these numbers.

"Maybe the number WAS too high," Cringely writes. "Instead of 150,000, maybe the true number is only 100,000 or 75,000 or even 50,000. Would 50,000 layoffs from IBM Global Services be significantly less catastrophic for the workforce than 150,000?

"And while the number of layoffs to come may indeed be less than 150,000, I'd prefer to stick with that larger number, which I feel is not far off. . ."

Cringely's casual approach to these layoff claims strikes me as appalling. I love a controversial, hard-hitting story as much as the next reporter. You cannot, however, mess around with this type of issue and just "prefer" to pick and choose layoff numbers. Reporters, even columnists, need concrete information in these instances. After all, Cringely has targeted nothing less than a technology sector meltdown with his pieces - a meltdown that would reverberate well beyond IBM's boundaries, probably into your home.

Much of Cringely's criticism for IBM centers around a program dubbed "LEAN." The reporter makes it sound like he met with IBMers in a dark alley to obtain this acronym, which portends great change at Big Blue.

As best as I can tell, Lean stands as a common tactic for companies that have embraced the Six Sigma methods for improving process within an organization. You can see for yourself just how common the Lean idea is.

The Lean concept focuses on eliminating waste and redundancy in an organization. If IBM considers the majority of its US workforce waste, we're in real trouble.

In a letter to employees, IBM, of course, argued quite the opposite angle. The company tried to explain a recent 1,300 person layoff and to counter Cringely's original column.

The letter, obtained by Cringely, reads in part:

We said when we released 1Q results we would be putting in place a series of actions to address cost issues in our U.S. strategic outsourcing business. We have undertaken efforts toward that, and recently implemented a focused resource reduction in the U.S. While any such reduction is difficult for those employees affected, these actions are well within the scope of our ongoing workforce rebalancing efforts.

The blog also completely misinterpreted our efforts around Lean. To fully understand Lean, you have to view it in a strategic context - a key part of what we're doing to reinvent service delivery to provide more value to clients and make IBM more competitive. We are using Lean, which is a commonly used methodology to conduct process design and development, to make informed decisions about how to improve and streamline processes. We are going about that in a disciplined and rigorous way, and the intent, as it has always been, is to improve our speed, quality and responsiveness to clients.

IBM faces three major near-term issues - all of which revolve around its services business.

Graph showing the rising services revenue of all the major hardware makers

Hard Services. (Slide borrowed from MIT professor Mike Cusumano)

Big Blue committed whole hog to the services game well before its major hardware rivals HP, Dell, Sun Microsystems, and EMC. That proved a pretty smart strategy with IBM able to gobble up lots of easy cash.

The rivals, lacking competitive muscle, mocked IBM's services play. Sun's then CEO Scott McNealy took the criticism lead, saying things such as "IBM Global Services doesn't want to solve the problem with the car, they want to customize the jalopy. They have to find a way to keep the hundreds of thousands, the hordes dutifully working and completely billable."

As the chart above shows, IBM now faces plenty of services competition from its main rivals. This has made the services market painfully competitive, leaving IBM with tons of services revenue but thin margins. To illustrate this point, I turn to another slide (below) - this time from IBM's own services researcher Paul Maglio.

Maglio spends most of his time these days trying to create more efficient relationships between IBM and its customers on the services front. He argues that the US will be driven by a services economy in the years to come and that vendors along with the government need to invest money into proper services studies.

Such a response from IBM seems only natural given the fresh competitive pressure it faces and the falling services margins. These factors only compound IBM's third problem, which is that its financial results over the past few years are made to look much better than they really are, thanks to a weak dollar.

Chart showing that IBM's services business brings in the most revenue for IBM but only 33 per cent of profits

Is the Services Biz doing its part?

The IBM I'm experiencing does not seem like a company ready to collapse its US workforce. Rather, it seems like a company making gradual cuts to deal with a changing business while at the same time researching ways to pursue services in a more sophisticated fashion. No major vendor can afford the reputation of being a cash cancer on its clients. IBM seems to know this and appears to be trying to fix its past ways.

Cringely argues that IBM's public face is all show. He urges readers to delve into the 1,000+ comments left in response to his first story as proof of IBM's woes.

The problem with most of these comments is that they start by accepting Cringely's premise as true. Such is the nature of message boards.

I also take issue with Cringely's notion that the comments prove all that helpful. You'll find readers leaving poems by Shelley and providing worthless statements such as "Bob, I imagine you emailed a copy of this article to Lou Dobbs" and "Let it(IBM)crash & burn FOREVER!"

True enough, some of the reader comments are fantastic. I enjoyed the same experience with messages left on our original Cringely story and via emails. In fact, a couple of my most respected emailers backed up Cringely's arguments, making me think the columnist is on the right track here.

I'm going to quote one reader, who shall remain anonymous, at length because this is a crucial issue. I have edited the e-mail as I saw fit.

First, this has been kept extremely quiet until now. (I'd heard rumblings about this a year ago, but thought it was more "localized" to specific accounts in the outsource services area - didn't connect the dots.) IBM services is having some problems with accounts that were acquired by IBM as outsource contracts, mainly due to the competency of the acquired team - both management and worker-bees. No surprise here: that was why the customers outsourced the services to IBM in the first place - the customer couldn't manage their own infrastructure. IBM had intended to do some serious load-shedding on these accounts anyway, but the scope is really much larger than I expected.

Which brings us to part two: there is a serious problem with work ethic in the technology sector. This also covers both sides of the management line, with incompetent managers being just as prevalent as incompetent workers. IBM services has had what is probably a similar exposure as other companies to the problems this causes; however, unlike most other companies, IBM is choosing to do something proactive about it.

What do I mean by that last remark? IBM is not just reacting to the incompetence of the acquired worker-bees the way most companies do: IBM appears to be doing one of their every-decade-or-so house-cleanings at all levels. This is going to cut deeply into their middle management ranks, their technical leadership ranks, even into some senior-level positions (although these will probably be couched as "early retirement" or "personal pursuits").

IBM has established a tradition of leadership for over 100 years in all its fields. It has done this by aggressively pruning its workforce time and time again and establishing super-human standards for its workers. In the past this was typified by the IBM philosophy that you live "a Company life" - wearing dark suits and white shirts, taking transfers and relocation regardless of the impact to your personal life, and being forced to work in every area of the company on your way up the management ladder. Failure was NOT an option: you failed at an assignment, you were working elsewhere in two weeks.

Over the past decade, IBM has transitioned from "Big Iron" to the Internet economy with solid success - something that none of its contemporaries (if they even exist) can boast. In the process, IBM expanded aggressively into many "new" technology and services areas - mainly by hiring and buying from the outside. No rocket-science here: that's how everyone does it. IBM is NOW doing what the other companies (SUN, HP, Microsoft, etc.) are NOT doing: it has identified what is working and what is not, and is now purging the failures - especially the human failures, the workers that are not contributing to IBM's growth.

Foreign out-sourcing is not a panacea; however, many foreign workers - especially Chinese and Eastern European - have a very different work ethic than their American or European counterparts. They WILL work harder, study harder, spend more time working and less whining about their company. Their leaders - technical and non-technical - are much more serious about their work and less concerned about becoming dot-com millionaires than their counterparts. So, IBM is choosing to keep a core of motivated workers and replace the rest with new workers without the baggage of a whining Euro-American society. The fact that the new workers are cheaper is a side benefit - IBM has always understood the difference between cost and value - and they will be judged on the value they provide, not simply the cost they save.

If all of you wrote me emails like that, I'd be a genius.

As a Silicon Valley historian and a technology reporter, I have tremendous respect for Cringely. He knows his stuff.

Cringely, however, seems to have confused IBM adjusting its business model to vibrant, competitive threats with some kind of anti-American assault. And, rather than approaching this subject, with the careful touch it deserves, he's relied on fear-mongering and rampant speculation.

It may just be the case that Cringely has a deeper, more insightful agenda at play with his recent pair of flippant stories. Perhaps the American technology worker needs a wakeup call. The rising stock market has us all feeling pretty good again. Sure, China and India have all those engineers, cheap labor and relentlessness work ethics. But we're ideas people and will always be profiting from the cutting edge, while shipping the grunt work overseas.

Well, if the US is truly to rely on its status as a "knowledge economy" and an "information services economy" in the years ahead, we'd better get a lot better at figuring out which services matter and how to accomplish the whole services "engagement" in a way that leaves customers feeling decent about the experience. ®

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