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IBM Documents Give Rare Look At Sensitive Plans on 'Offshoring'

When Shifting Jobs Abroad, It's $12.50 vs. $56 in Pay, And 'Sanitize' the
Memos
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL


In a rare look at the numbers and verbal nuances a big U.S. company chews
over when moving jobs abroad, internal documents from International Business
Machines Corp. show that it expects to save $168 million annually starting
in 2006 by shifting several thousand high-paying programming jobs overseas.

Among other things, the documents indicate that for internal IBM accounting
purposes, a programmer in China with three to five years experience would
cost about $12.50 an hour, including salary and benefits. A person familiar
with IBM's internal billing rates says that's less than one-fourth of the
$56-an-hour cost of a comparable U.S. employee, which also includes salary
and benefits.

According to the documents, which also provide managers with detailed advice
on how to talk about the moves and their effect, IBM plans to shift the jobs
from various U.S. locations to China, India and Brazil, where wages for
skilled programmers are substantially lower.

At IBM headquarters in Armonk, N.Y., a spokesman said that the company
expects to shift 3,000 U.S. jobs overseas this year. He declined to comment
on plans for next year. He said IBM expects to add 15,000 jobs world-wide
this year, with a net total of 5,000 of them in the U.S. That would increase
IBM's world-wide employment to 330,000, the highest level since 1991.

IBM hasn't announced the plan to shift workers overseas -- elements of which
were reported in The Wall Street Journal last month -- either internally or
externally. It isn't clear if the documents are final versions; most carry
dates of late November and December 2003. The spokesman declined to comment
on the documents seen by the Journal.

Like other high-tech companies, IBM is moving knowledge work to cheap-labor
sites outside the U.S. This "offshoring" process has raised fears that even
high-skill jobs that were supposed to represent the U.S.'s future are being
lost to countries that have already taken over low-skill factory work.

The trend, largely the result of relentless pressure on companies to cut
costs, is seen by some U.S. workers and politicians as a potential long-term
threat to U.S. employment. Democratic presidential hopefuls have cited the
trend as they have criticized the jobless recovery under President Bush and
noted worker insecurity. Others argue, however, that the jobs lost are
typically replaced by other, higher-paying jobs.

The IBM documents show that the company is acutely aware of the
sensitivities involved. One memo, which advises managers how to communicate
the news to affected employees, says among other things: "Do not be
transparent regarding the purpose/intent" and cautions that the "Terms
'On-shore' and 'Off-shore' should never be used." The memo also suggests
that anything written to employees should first be "sanitized" by
human-resources and communications staffers.

IBM's human-resources department has prepared a draft "suggested script" for
managers to use in telling employees that their jobs are being moved. The
managers will tell the employees that "this is not a resource action" -- IBM
language for layoff -- and that they will help the employees try to find a
job elsewhere in IBM, although they can't promise to pay for any needed
relocation.

The documents describe work done by IBM's Application Management Services
division, part of Big Blue's giant global-services operation, which
comprises more than half of the company's 315,000 employees. The affected
workers don't deal directly with customers; they write code and perform
other programming tasks for applications software used inside IBM.

The plan would move jobs from U.S. locations including Southbury, Conn.;
Poughkeepsie, N.Y.; Raleigh, N.C.; Dallas; and Boulder, Colo. IBM plans to
transfer the programming work to its own operations in Bangalore, India;
Shanghai and the northeastern city of Dalian in China; and Sumare, Brazil.
It isn't clear how many jobs will be added in each location.

Some of the foreign programmers will come to the U.S. for several weeks of
on-the-job training by the people whose jobs they will take over. That's an
aspect of offshoring that many high-tech workers regard as particularly
humiliating.

With revenue growing slowly throughout the information-technology business,
IBM and other vendors are under great pressure to reduce costs to boost
earnings. Last week, when reporting fourth-quarter earnings, IBM's chief
financial officer, John Joyce, said the company reduced costs $7 billion
during 2003 and expects similar savings this year. Mr. Joyce said
competitive price pressures in computer services are holding down
profitability.

IBM's competitors are making similar moves. Accenture Ltd., one of IBM's
main rivals in the computer-services field, said recently it expects to
double its work force in India this year to nearly 10,000. Google Inc., the
online search leader, said last month that it plans to open an engineering
center in India this year as part of an expansion.

For all these companies, lower-cost labor is the biggest lure.

A chart of internal billing rates developed by IBM's Chinese group in
Shanghai shows how dramatic the labor savings can be. The chart doesn't show
actual wages, but instead reflects IBM's internal system by which one unit
bills another for the work it does.

Besides the low-level programmers billing at $12.50 an hour, the chart shows
that a Chinese senior analyst or application-development manager with more
than five years experience would be billed at $18 an hour. The person
familiar with IBM's operations said that person would be equivalent to a
U.S. "Band 7" employee billed at about $66 an hour. And a Chinese project
manager with seven years experience would be billed at $24 an hour,
equivalent to a U.S. "Band 8" billed at about $81 hourly.

Dean Davidson, an analyst who follows outsourcing for Meta Group, in
Stamford, Conn., says that companies usually find their actual cost savings
from moving offshore are less than they would expect based on straight wage
comparisons. "The reality is a general savings of 15%-20% during the first
year," Mr. Davidson says. That's far less than the 50% to 80% savings based
on hourly labor rates, he says.

The person familiar with IBM's plans says that implementation could be
slowed if the company isn't able to hire enough qualified programmers to do
the work in its overseas software centers. He said that those facilities are
already very busy doing work for IBM's big U.S. customers.

According to the IBM documents, the company expects severance costs for
laying off U.S. employees in conjunction with the plan to be $30.6 million
in 2004 and $47.4 million in 2005. Including other transition costs, the
documents say, the offshoring plan will result in a loss of $19 million this
year. Savings will amount to $40 million in 2005 and $168 million annually
thereafter.

In the draft script prepared for managers, IBM suggests the workers be told:
"This action is a statement about the rate and pace of change in this
demanding industry. ... It is in no way a comment on the excellent work you
have done over the years." The script also suggests saying: "For the people
whose jobs are affected by this consolidation, I understand this is
difficult news."

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