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The Mean Economy: IBM workers suffer culture change as jobs go global
Technological advances demand new skill sets, lower labor costs
That is what nearly everyone did in this town, the birthplace of the century-old technology titan. IBM offered the best salaries, the best benefits, and — best of all — trained Mr. Martin in accounting, management or whatever skill the company needed at a school for IBM employees on its sprawling campus here.
“My whole family was career IBM,” he recalled, a group that included three uncles and an aunt who thought it was simply the best and most admired U.S. company. An IBM staffer starting in the 1960s and 1970s could look forward to many years of generous treatment, from IBM-paid family recreation, child care and golf facilities at the exclusive Heritage Country Club here, to an extremely comfortable retirement with full medical benefits for both employee and spouse. Mr. Martin still cherishes the grandfather’s clock that IBM gave him on his 25th anniversary.
But that was not the IBM from which he retired last year. The company had changed in major ways, mostly to the detriment of its longtime employees.
To prop up its profits and match lower-cost rivals, the company has been on a drive to curb benefits and reduce its North American workforce, replacing thousands of U.S. staffers with lower-paid hires in India, Brazil and other countries. IBM’s U.S. workforce dropped about 30,000 to 105,000 in the past decade while its Indian workforce grew by 9,000 to 75,000. Fewer than one-fourth of people it employs worldwide now are in the U.S.
Most people who work at IBM today do not expect long careers, and the IBM school for training staff was shuttered long ago. Workers now have to keep up their own education, constantly compete within the organization and “reinvent” themselves to maintain their positions. Even those who get good performance reviews can find themselves on the street if they are deemed no longer necessary.
While Mr. Martin’s father and grandfather were feted at company parties when they retired, his retirement came with no applause or even a slap on the back from office mates. Having worked alone from his home here for the past eight years as a part of an IBM drive to eliminate overhead real estate costs, the company was unwilling to fly in colleagues from scattered places across the country to send him off.
Mr. Martin simply woke up one day and quietly realized that he no longer had to go through his daily work routine. That was the beginning of his retirement. But it came with a great deal of relief as he also realized that he no longer had to scramble to keep his job by finding new work to do within IBM as he had six times in his final decade at the company.
His story is not unique, not in the high-tech business and not in many other sectors across the American economy still striving to make up ground lost in the Great Recession of 2007-2009. The Labor Department outlined the depth of the problem Friday, reporting that only 56 percent of Americans laid off from January 2009 through December 2011 had found jobs by the start of this year, and more than half of those workers took jobs with lower pay. One-third took pay cuts of 20 percent or more.
In the leaner, meaner economy that has emerged the recession’s wake, American workers shared their stories of hardship, struggle and recovery with The Washington Times in in-depth interviews, and revealed how their experiences have forever changed their lives and views of the world.
“I don’t miss it. It just kept changing. You’ve got constant churn,” he said. “You’d have to sell yourself, have another skill set” to keep your job. “You didn’t want to be the guy who doesn’t have a chair when the music stops.”
The change over the years at IBM was dramatic. IBM’s founders in the early 20th century went to great lengths to treat employees with dignity, like family members, giving the company a reputation as one of the nation’s most progressive employers. It was the first to offer paid vacations, life insurance benefits and salaries rather than hourly wage rates.
Today, workers are still among the best-paid in the country, but they are treated more like “outside contractors” or “interchangeable parts in a manufacturing process,” Mr. Martin said.
Still, Mr. Martin doesn’t blame IBM for his unceremonious push into retirement last year. He says what happened was part of a larger trend. Nearly every company is trimming staff and cutting benefits to try to stay competitive and profitable.
Moreover, today’s technologies — many of them invented at IBM — make it possible for machines or people practically anywhere in the world to do jobs once reserved exclusively for Americans — for only a fraction of the cost. Consumers and businesses also are unwilling to pay more for the better quality work produced by a domestic workforce.
“It’s about the choices people make,” Mr. Martin said. “When you don’t demand the best, then the work can be done anywhere in the world.”
Mr. Martin’s story in many ways reflects the evolution of the technology industry and the broader American economy, which has been radically shaken and reshaped in recent years by the technologies invented by IBM and other tech giants.
Take a look at a sampling of the long list of IBM inventions — bar codes, magnetic swipe cards, floppy disks, computer hard drives, automated teller machines (ATMs), and the electronic airline reservation system. On that list are many of the technologies that enabled businesses to eliminate millions of jobs, including bank tellers, grocery cashiers and airline clerks. Other businesses used the computer and Internet capabilities created by IBM and other American tech giants to ship jobs overseas.
It is no small irony that the disruptive potential of the technologies is affecting IBM’s workforce in a big way. But the threat of job loss as a result of automation, outsourcing and offshoring has become a theme in nearly every American industry since the technologies emerged and were enthusiastically adopted by American businesses seeking to cut costs, increase efficiency and pump up profits.
Transformed by technology
Despite the pervasive threat to workers’ jobs, perhaps no industry embodies the promise, “gee-whiz” achievement and never-ending churn of the American economy better than technology.
In the eyes of the world, the U.S. brand is tech. People around the globe are transfixed by America’s high-tech wars and Hollywood’s big-ticket action films. They rooted for Google in its struggle over free access with the Chinese government and applauded Facebook and Twitter for their critical roles in facilitating protests and promoting democracy in the Arab Spring revolutions.
The broad social and economic changes made possible by technologies such as smartphones, computers and the Internet have reached nearly every corner of the globe and broadened America’s influence, making civil technology arguably the best ambassador in the world for the American system of open, individual expression and free competition. But the impact of those changes on the U.S. economy has been decidedly mixed.
A leader in the creation of jobs and businesses since the 1990s, the transformative technologies also have led to the destruction of millions of jobs in older industries, such as publishing and the postal system, that were rendered outmoded by the fast pace of change.
The creative destruction unleashed by successive generations of technology seems to pick up speed each year and has led to constant churn in the tech industry itself. Apple Inc., which was a second-tier competitor against the likes of IBM and Microsoft Corp. in the 1990s, used continuous innovation and within the span of a decade became an industry leader and global giant while its competitors struggled to remain relevant.
But as Americans are learning, technology by its nature belongs to the world rather than the country where it was born. Innovations spring as often today from countries such as India, South Korea and Israel as they do from Silicon Valley, Boston or New York. The technologies are rooted not in any one geographical location but rather in the airwaves and ether of the Internet, where the world’s 7 billion citizens can compete and interact as equals.
The operations of technology firms span the globe, and the companies profess little allegiance to any one nation. Firms such as Apple and Dell Inc. may have headquarters in the United States and design and market their products domestically, but they manufacture key components of their computers, smartphones and other devices in China and other low-wage Asian nations.
Competition and cost-cutting is so ruthless in the industry because, unlike most other sectors, the prices for technology goods typically fall over time rather than rise as the companies strive to open mass markets for their latest devices and inventions.
This constant churning is what drove the changes at IBM, once the most iconic “Made in USA” corporations. It started in this quiet New York town of 13,392 as a manufacturer of tabulators and other business machines used to help the U.S. government conduct the decennial census and keep track of Social Security revenues and benefits. After World War II, Big Blue, as it came to be known, invented mainframe computers and played a pivotal role in developing the personal computers and offshoot smart devices prevalent today.
But no tech company is ever able to rest on its laurels. IBM jettisoned its pioneering PC division in 2005 by selling it to China’s Lenovo to focus on the more profitable business of providing customized software and technology services to big corporate and government clients around the world. Analysts say that model now is being followed by other hardware specialists such as Hewlett-Packard Co. and Dell.
Once dominant here, IBM no longer has any major presence in Endicott, having shuttered or sold off most of its property years ago. But it has built glittering corporate towers and cutting-edge research labs all over the world, including in Australia, Brazil, China, Israel, India, Japan, Switzerland, France, Canada and South Africa.
“IBM was international before people even thought about international companies. It was multinational” before that word entered the vocabulary, said IBM’s then Chief Executive Officer Sam Palmisano, as he announced the redirection of the company in Bangalore, India in 2006. “Now we’re taking it to the next dimension and creating a truly globally integrated company.”
The global workplace
In the U.S., the new technologies provided by IBM and others have broadly improved the standard of living and ease of work. But perhaps the biggest impact has been the transformation of the U.S. and world economies into one truly global marketplace of commerce where U.S. citizens use products and services originating in every corner of the globe while increasingly competing for jobs with potentially billions of foreign workers.
In the last decade, U.S. businesses made a major bet on the globalization and automation trends, stepping up their spending on information technology despite two wars, two recessions and two different presidential administrations. Investment in IT soared by 66.4 percent while growth in all other kinds of business investment rose only 12.6 percent, according to the Information Technology and Innovation Association.
The IT revolution wrought some of its biggest changes in the way companies do business and the way workers do their jobs. The tech industry itself led the way with many of the changes in the American workplace, instituting flexible hours, telecommuting, casual dress codes and other trends that have taken hold in offices around the country. Mr. Martin and other staffers in IBM’s IT division worked from their homes and on the road rather than offices for years before that became fashionable.
The innovations speeded up routine tasks and cut down driving and commute times, freeing up more time for leisure and work, while holding down prices. Technology has made it possible not only for workers to spend much of their workday at home or on the road, but go to the bank, check out of a hotel, monitor their investments, and purchase nearly any product online without ever physically encountering or talking to another human being.
Economists frequently sing the praises of these innovations. While he was Federal Reserve chairman, Alan Greenspan was a prominent cheerleader for the efficiency and productivity gains yielded by the IT revolution.
The Fed’s own complex economic forecasting, research, and market operations have been aided immensely by software advances over the years. But Mr. Greenspan also frequently noted that the fast pace of change has led to a pervasive sense of job insecurity in the U.S. as workers feel more dispensable than they were in earlier eras.
Businesses as well as economists trumpet the potential for improved living standards and economic growth through technology, even if it means less need for human labor.
“Innovation has been the hallmark of the U.S. economy for decades and a key overlooked driver of growth,” said Joe Carson, economist at AllianceBernstein, a New York-based global investment management firm.
During the 1990s, when information technology started to play a pivotal role in revolutionizing American business practices, advances in computer software created “huge gains in productivity across a number of industries” by making it much easier to access and manage data, he said.
More recently, “the creation of the iPad has fostered a broad range of applications from medicine to media, lodging, entertainment and beyond” with further potential to transform lifestyles and the workplace, Mr. Carson said.
While consumers and workers have enthusiastically embraced the changes that came with smartphones, laptops and other devices, less visible to the naked eye have been the wide-ranging changes in the backrooms and inner plants of corporations big and small.
“Process innovation, such as developing new manufacturing methods or innovative delivery or distribution methods” have been “powerful drivers of economic trends,” Mr. Carson said, including the “just-in-time” inventory system that has slashed the cost of carrying supplies for most businesses.
To address the competitive challenges from China and other emerging markets in the past decade, businesses “created global supply chains, increased outsourcing and shifted investments offshore,” he said, taking advantage of the increasingly automated and globalized workforce.
Following standard economic advice, Congress regularly enacts tax incentives for businesses to invest in the latest technologies as part of legislation to stimulate the economy in the face of downturns.
But there’s a darker side to such policies for workers that is not much discussed in Washington. As the technologies are adopted more widely each year, the efficiency gains have come at the rising cost of displacing workers who are no longer needed to carry out tasks that can be more profitably automated, or performed by lower-paid workers overseas. The shedding of workers has occurred steadily since the 1990s, but it increased dramatically during the Great Recession, when millions of workers lost their jobs.
Congressional investment tax credits helped to turn the recession into a watershed event that accelerated the technological change in many industries. Tech firms and most other American businesses including manufacturers and law offices used the sudden drop in demand across the economy caused by the October 2008 financial crisis as a pretext to lay off staff and switch to an online-business model or adopt other automated approaches that would help them cut costs and streamline their businesses.
This technological restructuring was not the cause of the recession, but it played an important role in accelerating the layoffs and holding back growth in jobs even when the economy started to recover in mid-2009.
Awareness of the role of this technological change in the economy is growing in Washington. President Obama himself singled out the phenomenon as one reason he said was behind the sluggish pace of job growth since the recession ended.
“A lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you use an ATM — you don’t go to a bank teller,” he said in an interview with MSNBC this month. “Or you go to an airport and use a kiosk instead of checking in at the gate.”
The president, like most others in Washington, suggested that this “structural” change is something Washington should continue to promote rather than hinder, despite the hardship it may cause workers in older industries. The bipartisan belief is that more investment will open up new jobs in advanced technologies and offshoot industries, even if it destroys some old jobs along the way.
With the boost from Congress and drive by recession-plagued businesses to find cost savings, the tech industry fared better than most other sectors during the recession. Tech jobs grew by 6.8 percent while the overall workforce shrank by 4.5 percent between 2007 and 2011 as a result of the downturn, according to the Information Technology and Innovation Foundation.
Companies continue to frenetically update their business models. For a firm like IBM, modernizing business is its stock in trade, making it little wonder that it found opportunities during the downturn and applied the same housecleaning techniques to its own operations.
Empowering a global workforce
The offshoring of manufacturing jobs was the story of the 1990s and 2000s, as U.S. businesses shifted production overseas to take advantage of lower wage rates and looser environmental standards in emerging countries such as China. Some analysts and entrepreneurs think the trend toward offshoring service-sector jobs like tax preparation, accounting and paralegal paperwork is only in its infancy as people around the world get increasingly wired with access to computers and mobile devices.
The technologies are spreading rapidly, according to the World Bank, which last month reported a sixfold jump in mobile-phone contracts to 6 billion from 2000 to 2012, with most of the new contracts in the developing world. People in the most far-flung places are now using their cellphones to start businesses, petition the government and generally improve their lives.
Empowering workers with talent around the world may be in the democratic nature of the technologies, which famously got their start in the garages and living rooms of American college dropouts such as Microsoft Chairman Bill Gates and Facebook co-founder Mark Zuckerberg, and have raised the fortunes of talented people from diverse cultures in the U.S. and abroad.
IBM has been ahead of the game in exploiting the emerging global services workforce, having shifted much of its operations overseas years ago. But Silicon Valley is hard at work finding ways to help smaller and less-sophisticated businesses tap into the global army of workers through online recruiting arrangements pioneered by such firms as oDesk.
Top of the food chain
The blindingly fast change has come as a stunning surprise and letdown to many American workers who got used to being at the top of the food chain with secure jobs for decades. Mr. Martin said nobody at IBM in the 1970s imagined they would ever see their jobs move to India. The Asian workforce at that time was not as well-educated, and there was no Internet or computer capability for the company to locate operations so far from its clients.
But now that jobs are disappearing at a rapid pace, not everyone has been willing to bow out as gracefully as Mr. Martin. In fact, IBM’s latest round of reductions in force this spring set off a hornet’s nest of criticism among insiders in the tech industry. Staffers claim that the company has a road map to cut its U.S. staff by more than half to 40,000 by 2015 through early retirements and layoffs, while increasing staff overseas.
“IBM is gutting smart staff for cheap staff,” said Robert Eisenhardt, owner of a computer systems consulting firm in New York. “IBM is cutting jobs not because of the lack of a skill set, but often age and the cost of an American worker. India can get by on $2 an hour. Try living in this country on $2 an hour,”
IBM has a program to help U.S. workers who want to keep their jobs by relocating them to India, where they receive about half the wages they earned in the U.S., but where the cost of living is considerably lower, staffers said.
“Workers are no longer people. They are costly commodities to be cut in order to increase shareholder value,” said Gary Alexander, another techie. “This is the new American Way, and I weep.”
“What’s scary is now they are moving the higher-level jobs” such as computer design and architecture to India, Brazil, Russia and China, said Stewart McKenna, a tech worker in Detroit. “Inevitably, the business overseas will get bigger. What’s left to do in the U.S.?”
IBM has made no secret of resorting to extensive cost-cutting to maintain profits in the face of falling revenues in recent years. In the past quarter, IBM reported that its earnings rose 6 percent despite a 3 percent decline in revenue. It was the 38th consecutive quarter of net income gains, making IBM a darling on Wall Street. IBM’s stock price has risen from about $75 a share in the depths of the recession to more than $200 earlier this year.
Mark Loughridge, IBM’s chief financial officer, last month said the company is focused on milking growth from fast-growing markets such as China and Russia, where the company’s revenues increased by more than 20 percent in the last quarter, while paring costs and operations in declining or stable markets such as North America and Europe. The company has been investing more in the developing world than in the U.S. lately, he said, because of the faster growth there.
Mr. Loughridge addressed the criticism about layoffs, saying the company will trim more jobs in the second half of the year, but also plans to hire 200 to 300 software sales specialists a month, with many of those positions opening in the U.S.
Jerry Webman, chief economist at OppenheimerFunds Inc., said corporate America since the recession has compensated for lost sales and sluggish growth by ruthlessly cutting costs and selectively adding staff only where growth is expected. This cautious approach is the reason that job growth has been slow, even though the economy is in its fourth year of recovery.
In the past quarter, he said, nearly three-quarters of corporations in the Standard & Poor’s 500 stock index beat Wall Street earnings estimates, while only 40 percent beat revenue estimates — meaning that, like IBM, most managed to eke out growth in profits through cost-cutting as their sales were flat, declining or only slowly rising.
“The story remains much the same as it has been from the beginning,” Mr. Webman said. “Companies continue to find ways to earn money — for now — even as sales disappoint. In many cases, doing so has meant becoming leaner, which is hardly conducive to large-scale job creation.”
Pleasing Wall Street
The never-ending quest of American corporate management to please Wall Street also plays an important role in the layoffs and offshoring drama. John Campbell, who was let go from IBM in 2007, said he was told that “the four goals of IBM are first quarter, second quarter, third quarter and fourth quarter,” as the company became increasingly focused on placating investors and propping up its stock price.
But even at his current job with another tech firm, Mr. Campbell said, outsourcing to India has become a way of life in the industry that workers simply have to accept, He said his Bangalore colleagues are competent and easy to work with. Still, he said, the wisdom of Henry Ford, founder of Ford Motor Co., seems to have gotten lost in the frenzy of outsourcing and offshoring in recent years: Pay your workers well so they can afford to buy your products.
Mr. Martin defended IBM’s focus on earnings, noting that he and many other IBM employees own company stock as part of their retirement plans and a company stock-purchase program. “I want the value of the stock to go up,” even if that means ruthlessly cutting costs and investing overseas rather than in the U.S., he said.
“The kind of business we built in the USA is happening in other countries now because they’re 50 years behind us,” he said. “Why wouldn’t we invest there?”
Zoran Lazarevic, a software developer for Bloomberg in New York, said technology firms have no choice but to keep cutting costs.
“The average American does not desire highly paid IT workers; he desires affordable IT,” he said. “We should not be asking 300 million Americans to pay for more expensive products so that a small minority of us, IT workers, can have highly paid jobs.”
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