If my foresight were as clear as my hindsight, I should be better off by a damned sight.
If my foresight were as clear as my hindsight, I should be better off by a damned sight.
IBM's Financial Engineering: Workforce Rebalancing |
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Published July 28, 2021
IBM’s twenty-first-century Chief Financial Officers (CFOs) have lost sight of their primary duty to their corporation: spend money to make people more productive, processes more effective, and products more valuable. It is what I call "business-first." In this vein, Tom Watson shared his thoughts with the Controller's Institute of America the year before the trough of the Great Depression:
If the controller can find more ways to spend more money where it will expand the business, where it will bring in more orders to the factory, that will be the greatest service he can perform for the business with which he is connected.
Thomas J. Watson Sr., Controller’s Institute of America, New York, N. Y., 1932
IBM's Workforce Rebalancing Is Financial Engineering
- The Promise of Workforce Rebalancing
- IBM's Two-Decade-Long, Losing Fight with Sales Productivity
- IBM's Manipulation of Profit Productivity Hit a Brick Wall in 2013
- IBM’s Workforce Rebalancing Has Failed the Business
- An Embarrassing Seventeen-Year Profit Performance Record
- The Impact of Financial Engineering
The Promise of Workforce Rebalancing
At first blush, moving workloads to lower-wage countries would seem an intuitive and indisputably logical step to optimize profits if: (1) this financial change addresses one of the highest expense components of a corporation’s financial spreadsheet, (2) employees’ wages and benefits can truly be cut by 75% to 80%, and (3) the new employees operate at the same or higher levels of productivity.
Satisfy these requirements and net income per employee should increase exponentially. At least, that has been the financial promise behind offshoring workloads. Unfortunately for IBM shareholders, two out of three in the game of business isn’t necessarily a winning strategy—in the long run.
Satisfy these requirements and net income per employee should increase exponentially. At least, that has been the financial promise behind offshoring workloads. Unfortunately for IBM shareholders, two out of three in the game of business isn’t necessarily a winning strategy—in the long run.
Workforce rebalancing is an unrealized financial promise because the last of these conditions—operating at the same or higher levels of sales and profit productivity—has not been realized. IBM has been increasing profits by lowering wages, but this has been offset by the ever-decreasing productivity of a newer, larger, disconnected, and more widely dispersed workforce.
This is a tortoise and hare race: the hare—workforce rebalancing—provided a very-high, short-term, increase in profits while the tortoise—individual productivity—produces a very-slow, methodical, long-term, drop in profits and sales. When the tortoise (lower productivity) overtakes the hare (financial engineering) the impact can be pretty dramatic: note the 62% drop in profit productivity at IBM since 2013.
Unfortunately, it has taken a long time to visualize (and eventually chart) the damage done.
This is a tortoise and hare race: the hare—workforce rebalancing—provided a very-high, short-term, increase in profits while the tortoise—individual productivity—produces a very-slow, methodical, long-term, drop in profits and sales. When the tortoise (lower productivity) overtakes the hare (financial engineering) the impact can be pretty dramatic: note the 62% drop in profit productivity at IBM since 2013.
Unfortunately, it has taken a long time to visualize (and eventually chart) the damage done.
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IBM’s Workforce Rebalancing Has Failed the Business
If the gauge of workforce rebalancing is to improve profits by replacing highly-motivated, highly-productive and therefore highly paid individuals with low-wage, warm bodies, then IBM’s workforce rebalancing has been a smashing success. It has delivered short-term, record profits. But if the goal of workforce rebalancing is to maintain or improve productivity while keeping labor and benefit costs down, then workforce rebalancing is a twenty-first-century disaster.
IBM has failed to successfully replace its highly-productive, highly-motivated employees to the detriment of its customers, its shareholders, its supportive industrialized societies, and its long-term competitiveness in the production of profits. As I cover in THINK Again: The Rometty Edition, IBM’s net income per employee, within the knowledge industry, is lower than: Microsoft, Google, Apple, Cisco, Oracle, Symantec, EMC, Juniper, and not much higher than Hewlett Packard (to name a few).
From a productivity perspective, it only seems capable of outperforming smaller, services-based organizations such as Infosys, Wipro and Accenture.
IBM is remaining profitable but, within its industry, it is not optimizing profits.
Eventually, this is a go-out-of-business proposition.
IBM has failed to successfully replace its highly-productive, highly-motivated employees to the detriment of its customers, its shareholders, its supportive industrialized societies, and its long-term competitiveness in the production of profits. As I cover in THINK Again: The Rometty Edition, IBM’s net income per employee, within the knowledge industry, is lower than: Microsoft, Google, Apple, Cisco, Oracle, Symantec, EMC, Juniper, and not much higher than Hewlett Packard (to name a few).
From a productivity perspective, it only seems capable of outperforming smaller, services-based organizations such as Infosys, Wipro and Accenture.
IBM is remaining profitable but, within its industry, it is not optimizing profits.
Eventually, this is a go-out-of-business proposition.
An Embarrassing Seventeen-Year Profit Performance Record
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Gerstner-Palmisano-Rometty-Krishna’s 32% drop in net income per employee over two decades pales in comparison with Watson Jr.’s 215% growth over a comparable sixteen years, Learson and Cary’s 163% growth over ten years, or even Gerstner’s 100% growth in his first five years.
More embarrassingly—especially to a corporation focused on earnings per share—IBM has experienced in constant 1999 dollars a drop of 56% in profit productivity.
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Probably more concerning, in the last seven years, profit productivity has dropped by more than 60% even though Rometty sold the x86-Server Division under the premise of improving corporate profitability.
Samuel J. Palmisano, who loved talking to the press and analysts about his new records in the areas of revenue, pretax earnings, earnings per share, and free cash flow, should also be remembered as a major contributor to this never-seen-before dismal record in net income per employee. Can’t all analysts agree that his two, earnings-per-share roadmaps were unmitigated failures?
Shouldn’t it have been intuitive that employees who often referred to themselves as roadkill in the face of these roadmaps were probably less productive than when they worked in an environment that encouraged self-motivation?
Samuel J. Palmisano, who loved talking to the press and analysts about his new records in the areas of revenue, pretax earnings, earnings per share, and free cash flow, should also be remembered as a major contributor to this never-seen-before dismal record in net income per employee. Can’t all analysts agree that his two, earnings-per-share roadmaps were unmitigated failures?
Shouldn’t it have been intuitive that employees who often referred to themselves as roadkill in the face of these roadmaps were probably less productive than when they worked in an environment that encouraged self-motivation?
The Impact of Financial Engineering
IBM has maintained its profitability for two decades by replacing its highly-productive, highly-motivated and therefore highly-paid individuals with lower-wage, less-productive, less-motivated employees; this has maintained profits but it has not optimized them.
If IBM’s 375,300 full-time, equivalent employees were as productive in producing revenue at the end of 2020 as in 1999 (in inflation adjusted dollars), the corporation would have attained revenues of $143 billion instead of $74 billion.* To state it (cynically) in terms that even a twenty-first-century, financial mind like Martin Schroeter can understand—a reduction in headcount rather than increased revenue, the corporation could have achieved $73.6 billion in revenue at the end of 2020 with 182,754 fewer employees.
If only Tom Watson were still alive to train IBM's Chief Financial Officers (CFOs) instead of them training IBM's Chief Executive Officers (CEO).
Cheers,
- Peter E.
If IBM’s 375,300 full-time, equivalent employees were as productive in producing revenue at the end of 2020 as in 1999 (in inflation adjusted dollars), the corporation would have attained revenues of $143 billion instead of $74 billion.* To state it (cynically) in terms that even a twenty-first-century, financial mind like Martin Schroeter can understand—a reduction in headcount rather than increased revenue, the corporation could have achieved $73.6 billion in revenue at the end of 2020 with 182,754 fewer employees.
If only Tom Watson were still alive to train IBM's Chief Financial Officers (CFOs) instead of them training IBM's Chief Executive Officers (CEO).
Cheers,
- Peter E.