Readers have lately been asking me to write about IBM. It seems the BBC has been on the case somewhat over imposed changes to Big Blue’s UK pension scheme. These mirror similar — though more draconian — changes imposed on IBM’s U.S. workers a couple years ago. Alas, this just seems to be a trend we’ll be seeing more and more of. The problem isn’t in IBM per se, it’s in the distorted reward structure perceived by most public companies.
Two years ago when I covered IBM’s yet-to-be-announced layoffs in some detail it sent the company into a tizzy of denial. Why? “Because you were right,” said a source who still works at IBM. “You called them on the big changes they were planning to make, forcing the company to issue denials then drag those changes out over a couple years where they’d intended to impose them all at once. They never thought one blogger could have that much impact.”
Explain that to my kids, who think I type for a living.
What happened two years ago was IBM deciding to move most of its jobs offshore to save money after a sobering look at the life cycle cost of its U.S, workers. If you look at the total future cost of an American employee for the next 15 years — it is a pretty big number. Then add the double digit inflation cost of U.S. health care and that number becomes bigger still. The only way companies like IBM see themselves being able to continue to operate is by cutting retirement benefits and/or shipping jobs off shore. In IBM’s case they are doing both.
This is at the heart of the current health care debate, because the cost of medical care is killing U.S. jobs.
The IBM USA pension plan was nuked a couple years ago. Many U.S. workers got less than 15 cents on the dollar for the present value of the pension they would have received. Retirement health care benefits for IBM workers are now down to the equivalent of about 18 months of present coverage. This trend is not limited to IBM. How many auto workers have just lost pension and retirement benefits?
A few years ago Congress was considering legislation that would separate pensions from companies so the company could not spend or lose it. We sure blew that one.
This downward trend is continuing. IBM — like nearly all its competitors — is shipping-in workers from India to staff many new projects. The work could be done as well — perhaps better — by the U.S. workers who were not long ago laid-off. There is something really wrong when a company will lay off its U.S. workers and then import Indian workers to do the same work on-shore.
Now some of IBM’s American workers are being asked to consider taking jobs in Bangalore and other foreign outposts. This program creates new expatriots, giving each a one-way plane ticket. Pay will be in local currency, possibly at local pay scales. IBM is being very elusive about these details. But it is clear that the transported workers will be off U.S. benefits.
But as I say, IBM is merely one example of how messed up things have become for U.S. companies.
During the recession IBM has done extremely well financially with profits better than forecast every quarter. They did this by relentlessly watching their money. Not only do they look at the numbers for the next quarter, but for the next several years.
The automotive industry on the other hand has ignored the long term in their business planning. As a result most car companies were completely blindsided by the recession.
IBM has watched the growing costs of maintaining its U.S. work force. For years they have been cutting staff and moving work offshore. The U.S. auto industry on the other hand was dependent on future car sales to cover obligations made in the past. IBM planned ahead and started shifting the business out of the U.S. Other firms did nothing and have suffered horribly.
What this means is that we should expect more of the same in all industries. Benefits will decrease and jobs will depart.
The new reality at IBM is that if you’re brilliant, work really hard, and earn a world-class degree from a U.S. university, IBM may well have a job for you at one of its U.S. research sites working as a “complementary worker.” But don’t expect that job to last for long. Be prepared to ship out to India or China as a “long-term supplemental worker” after you’ve soaked up knowledge for 13 months.
Newsweek recently reported that IBM, HP, Accenture, and others are finding it profitable to detach from the United States (even patenting the process).
“IBM is one of the multinationals that propelled America to the apex of its power, and it is now emblematic of the process of creative destruction pushing America to a new, less dominant, and less comfortable position,” Newsweek said.
This is the HR equivalent of a neutron bomb, which kills people but leaves structures unscathed. So all these companies will be leaner and meaner — mean enough that there may be nobody left to buy their products.
It comes back to the common perception that the sole function of public companies and their CEOs is to “maximize shareholder value” — a phrase that is interpreted to mean “maximize next quarter’s earnings-per-share.” This philosophy works beautifully with the slightly less than four year average tenure of a U.S. public company CEO. Long before the effects of these bad decisions can show the CEO has bailed, descending beneath his golden parachute toward some retirement heaven.
Where did this cult of shareholder value maximization come from? And who says that’s the prime directive and nothing else ought to matter? Not me. In fact it is bad policy both for the companies and for our society in general. Here’s a good explanation of this phenomenon and what’s wrong with it.
Companies like IBM that take this position are hurting America. The kids graduating from college now are the first American generation that is likely to do less well financially than their parents. My kids will do less well than me. One reason for this is that we’re eliminating high paying jobs and replacing them with lower-paying service jobs. IBM towns like Rochester, Minnesota and Armonk, New York thrived economically because Big Blue pumped money into the local economy by creating high-paying tech jobs. What happens to the local economy when those jobs are exported? It declines, perhaps permanently. That decline does not have to be inevitable unless we make it so.
Companies and countries follow certain life cycles, but we do ourselves and our culture a disservice by thinking those curves aren’t affected by the corporate decisions we make.
If we’re going to be analytical, let’s at least do it correctly.