Monday, January 19, 2004

Internal IBM memos reveal plans to move thousands of jobs offshore

The Wall Street Journal is reporting today on internal IBM documents that reveal IBM's apparent plans to move thousands of jobs offshore. IBM's analysis of its hourly rates in the US vs. offshore is striking.
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.
But, for political reasons, IBM doesn't really want to call attention to its offshoring intentions:
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.
However, the article points out that, because of the overhead involved in moving jobs offshore, the total savings from offshoring are much less than the simple comparison of hourly rates would suggest.
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.
I wrote previously on the fact that companies moving jobs offshore are not particularly eager to trumpet the cost savings. IBM's internal documents are further evidence of that.

The full WSJ article is on the WSJ website (subscription required). A brief summary is available here.

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