IBM Layoffs: Bad Economy as a Smokescreen for Outsourcing

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Today’s IBM layoffs have a different nuance than most corporate axings. The company is transferring most of its global business services unit to India. From the Wall Street Journal:

International Business Machines Corp. plans to lay off about 5,000 U.S. employees, with many of the jobs being transferred to India, according to people familiar with the situation.

The technology giant has been steadily building its work force in India and other locations while reducing the number of workers based in the U.S. Foreign workers accounted for 71% of Big Blue’s nearly 400,000 employees at the start of the year, up from about 65% in 2006.

Zero Hedge’s Cornelius had this to say about the IBM layoffs:

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.

Kurt Cagle commented:

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.

Personally, I think a critical litmus test for disbursement of government funds to companies is the requirement that those companies 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.

His last idea is a good one. If the government gives money, it should be able to put conditions on that money. I don’t see how GM pouring government money into Brazil, EADS acquiring government contracts over Boeing, or rampant outsourcing are helping the national economy.

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  • Alan McRae

    It is fascinating watching the US economy eat its own legs. I’m a computer consultant, not an economist, but I can’t help but think that 3 decades of rising trade deficits, mounting consumer, commercial and government debts, and then the derivatives fiasco have all combined to push a once great nation to the edge of a cliff. Clawing our way back onto solid ground is going to be very challenging, and I suspect that we will soon be faced with weighing free trade against balanced trade. Economists have led the near universal mantra of “Free Trade” all during this period of ever-increasing trade deficits, and some advocated the de-regulation of the financial services sector that made our present economic meltdown possible. The results of following their prescriptions are utterly catastrophic, so why should we believe them anymore? I think we as a nation had better get some new advisors before we become a second world country and another failed footnote in the history books.

  • BOB WIRE

    NEW IBM MOTTO…BETTER,FASTER,CHEAPER, OVERSEAS OF COURSE!
    IBM IS SENDING JOBS, OVERSEAS TO INDIA, MANILA, PHILIPINES, NEGRON,ETC,ETC. ITS ALL ABOUT CORPORATE GREED..HOW MANY BILLIONS AND BILLIONS OF $$$$$$$$$$$$$$$$$$$$$$$$$$ DOES ONE COMPANY NEED. NOW THEY LAID US ALL OFF NATION WIDE. THE IBM EXECS ARE FAT AND HAPPY…WHILE WE ARE LIKE LAMBS LED TO THE SLAUGTHER HOUSE. MAY GOD HAVE MERCY ON THERE SOULS!

  • It is understandable especially in this time of global crisis that companies want to cut costs as much as possible.
    The first thing that comes to the mind of the affected companies is outsourcing. However, this is not an easy decision on their side. They have to weigh everything before making the final move. We really understand that.

  • rachel

    This off shore workers they bring in to the US are only given $21/day for meals and that’s it. They work 12-20/hrs per day, juggling their hours in the US client’s office in the daytime then spending their nights on teleconference to other countries on the other side of the world coz of time difference. They have no time for themselves nor a break from work almost 24/7. They are treated as work horses. These poor professionals are paid 1/5 or 1/8 of their US counter parts.
    IBM is a legitimate and authorized company for foreign worker exploitation.