Talk of IBM reducing its India-based workforce by 50,000 over the past three years, with more to come, is a reflection of the diminishing importance of low-cost operatives.
The reported reduction in staff in India, although unconfirmed, is in line with changing IT-outsourcing demand and delivery models. One source claimed India's Tata Consultancy Services (TCS) is now IBM Global Service's biggest competition.
According to a report from India, the IT giant has reduced its India-based workforce from about 165,000 in 2011 to 113,000 in 2014. The report quoted sources close to IBM’s plans who said this number will be down to 100,000 in 2015. The firm’s global workforce is made up of 431,212 employees.
In IBM Global Services, the company boasts the world’s biggest IT services firm. It is often referred to as an IT bellwether and its every move is scrutinised by IT executives at enterprise users and at its competitors. When the offshore-IT services delivery model was at its peak, the firm was the biggest IT employer in India.
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But new technologies, such as automation software – including IBM’s very own Watson – and cloud computing, are reducing the need for high numbers of offshore staff to carry out business processes and software development.
Telecommunications firm O2, for example, uses automation software from Blue Prism to cut its reliance on offshore recruitment to cope with spikes in workload.
IT services firms traditionally grew in a linear way – typically, they win more business, then add more staff to support it. In many cases this has involved building large offshore workforces. But service providers are now trying to reach the holy grail of non-linear growth. This means adding business without needing to add to the workforce to support it – reducing the proportional increase in the cost of providing an additional service.
At the same time, increased use of cloud-based IT is forcing IT services firms to add more higher-level support services, while the move to platform-based services in the cloud means there is less need for businesses to develop their own software.
IBM not moving away from offshore delivery
In a recent presentation to equity analysts IBM said it is not moving away from offshore delivery and, in fact, will be harnessing global delivery centres to make it more competitive.
We are executing on a clear strategy that is moving IBM to higher value, and we've taken significant actions to exit non-strategic elements of the business
Ginni Rometty, IBM
“In parts of our portfolio that aren't as well differentiated, we're continuing to see price and profit pressure," said an IBM statement. "These are the areas where we'll be more aggressive on the use of global delivery centres and applying intellectual property for faster time to value for our clients and improved business results for us."
In its recent results for the third quarter of 2014, IBM said Global Services sales decreased by 3% to $13.7bn, compared with the same period of 2013. Pre-tax profit from Global Technology Services reduced by 11%.
IBM CEO Ginni Rometty said in areas of focus – which did not include IT services – the company did well.
“While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas – including cloud, data and analytics, security, social and mobile – where we continue to shift our business. We will accelerate this transformation,” she said.
“We are executing on a clear strategy that is moving IBM to higher value, and we've taken significant actions to exit non-strategic elements of the business,” she added.
Reflecting its shift in focus, IBM has reportedly reached an agreement with Globalfoundries to take over its semiconductor operations. IBM will pay the manufacturer $1.5bn to take the chip operations off its hands.
Competition from Tata Consultancy Services
Berwin Leighton Paisner outsourcing lawyer Mark Lewis said it is not yet clear what IBM’s strategy is, and compared the company with India's biggest IT services firm Tata Consultancy Services (TCS).
TCS has 276,195 global staff, with 92.3% being Indian. Just over 21,000 of the company's staff are not Indian, while it has an increasing UK workforce, with more than 10,000 UK-based staff.
In Europe, TCS will add almost $1bn in new business in 2014, which underlines the enormous market momentum and customer confidence they now enjoy
Peter Schumacher, Value Leadership Group
“TCS is achieving both linear and non-linear growth. It is still recruiting heavily in India and is building its global workforce at the same time,” said Lewis.
While IBM is the biggest IT company in the world, Lewis said he is unsure if it is leading the way in terms of strategy in IT services.
“Until its strategy is clearer, it is difficult to say what it is a bellwether for,” he said.
According to CEO at management consultancy Value Leadership Group Peter Schumacher, based on meetings with about 200 outsourcing customers around the world, IBM is losing ground to offshore-based firms.
“Pricing is one reason but, perhaps more importantly, top customers also cite IBM's arrogance and weaker partnership capabilities as key reasons. In other words, IBM is seen as lacking price competitiveness, operating flexibility and customer intimacy. These are a complex mix of interrelated challenges and overcoming these can take years to resolve,” he said.
The stronger presence of the offshore-based firms has given clients enormous bargaining power over IBM, added Schumacher, and they are using this to extract pricing concessions and renegotiate contracts. He said TCS is the main challenger to IBM Global Services.
“In Europe, TCS will add almost $1bn in new business in 2014, which underlines the enormous market momentum and customer confidence they now enjoy,” he said.
IBM still an IT services bellwether
IBM is always in the mix when it comes to global outsourcing deals, according to KPMG management consulting partner Lee Ayling. “I don’t think IBM has taken its eye off the ball in services – it quietly gets on with its work,” he said.
IBM could still be considered a bellwether for global IT services, Ayling added. In four recent large global IT-outsourcing deals he has been involved in, the firm has been in the running. “IBM is more often than not in the bidding for large global enterprise deals,” he said.
He suggested the reduction of staff at IBM in India could be linked to the companies scaling back on business process outsourcing (BPO) services, with more focus on IT services.
One former senior IBM executive says IBM was focused on growth markets, which could mean building staff numbers in countries like China and those in South America.