Sample
only for educational purposes; Copyright 2005, Robert K Russell
for
GTVeloce.com and TheSpiel.com
IBM is
the dominant IT Outsource company in the global market today.
As a
corporation it is global in scope and large by any measure. Revenue for IBM in
2001 was $US 85.9 billion, total assets
were $US 88.3 billion and permanent employees numbered 319,876 (http://www.ibm.com/ibm/us/). In
comparison with companies such as Intel and Microsoft, IBM is a behemoth
generating nearly 3 times the combined revenue of those 2 companies.
Whilst
distinguished by its size and breadth of influence, IBM is unusual in the IT
industry in having also been around for a while – a long while. Whilst the
company was incorporated as International Business Machines Corp. in New York
in 1924, it was formed from the renaming of the Computing-Tabulating-Recording
Company, divisions of which date back to the first mechanically-sorted US
Census in the 1890s (http://www-1.ibm.com/ibm/history/history/year_1911.html).
This historical perspective within the industry is an important factor in the
ongoing success of the company, as well as being a source of unwelcome momentum
and bureaucracy.
By its
size and history the company can demonstrate to the marketplace longevity,
flexibility (having made business machines as diverse as typewriters, PCs and
meat slicers), diverse technical skills, and vast resources (only by the recent
merging of HP, Compaq and DEC has a broad based competitor brought similar
resources to bear - http://story.news.yahoo.com/news?tmpl=story&u=/nm/20021022/tc_nm/tech_hewlett_itspending_dc_1).
This makes for a powerfully attractive proposition to big business and
career-minded employees alike, although not necessarily so attractive to
smaller companies or to people who dislike sheer size and inevitably bulky
bureaucracy.
Nevertheless
in the recent past IBM has shown that it can move with the times, demonstrating
its flexibility in moving from a solid but declining traditional hardware and
software base to a new reliance on a ‘services’ model and open-source software.
The services division called IBM Global Services, now generates 60% of total
IBM revenues and, once again, dominates the market globally as well as in
It is
noteworthy also that the IBM company was foundered on ethical, employee-focused
principles that have survived, largely, to this day. IBM not only survived the
Great Depression of 1929 but emerged with its workforce intact, having chosen
to continue production and build stock levels rather than lay staff off. took
care of his employees. IBM was among the first corporations to provide group
life insurance (1934),
survivor benefits (1935)
and paid vacations (1936).
While most businesses had shut down, Watson
kept his workers busy producing new machines even while demand was slack.
Thanks to the resulting large inventory of equipment, IBM was ready when the Social Security Act of 1935
brought the company a landmark government contract to maintain employment
records for 26 million people. It was called "the biggest accounting
operation of all time," and it went so well that orders from other
http://www-1.ibm.com/ibm/history/history/decade_1930.html
Challenges which confront organisation(s) and amalgamating them:
Outsourcing services are offered by a broad
range of companies in
Whilst we will take a closer look at the industrial relations issues faced by Information Technology (IT) outsourcing, in fact many common elements can be found in all forms of outsourcing and conclusions drawn in this context may be applicable in a broader industrial context.
Some of these IT outsourcers specialise in small-medium businesses (SMBs) whilst others look to the large corporate or government market. This analysis will look more closely at the issues faced by large companies with significant staff numbers impacted by the outsourcing action. We will look at impacts on both sides – from the perspective of both outsourcer and the outsourced.
Outsourcing - what is it? http://www-1.ibm.com/services/stratout/index.html
“IBM Strategic Outsourcing Services is the management of companies' applications and information technology (IT) systems. Customers strategically partner with IBM to manage and operate their applications and IT systems, generally under the auspices of a long-term agreement. The outsourcing agreement may include the transfer of IT employees and IT assets to IBM. IBM provides service level assurances to ensure quality of service is attained and measured.”
What customer value is created? http://www-1.ibm.com/services/stratout/index.html
“Reduces IT costs and improves shareholder value
Provides the flexibility to transition and transform to the next generation of infrastructure and applications
Lets companies focus on their core competencies
Improves service levels
Gains access to industry, business and technology experts”
· IBM GS is a market-leading Global player
· Dominant local participant (as IBM GS Australia)
· IBM GSA is 49% owned by Telstra and Lend Lease
· IBM GSA subcontracts work to Business partners and Telstra’s IT outsourcing arm, Telstra Enterprise Services
The Outsourcing Institute, in publishing their annual survey of Executive responses from within their own membership, suggests this list of “The Top 10 Reasons Companies Outsource” :
1. Reduce and control operating costs
2. Improve company focus
3. Gain access to world-class capabilities
4. Free internal resources for other purposes
5. Resources are not available internally
6. Accelerate reengineering benefits
7. Function difficult to manage/out of control
8. Make capital funds available
9. Share risks
10. Cash infusion
Non-core business units are targeted for outsourcing, IT services being one example. Outsourcing deals may involve taking over a company’s assets, such as buildings and computer hardware, and may include the workforce as well. The impact on the employees is an obvious one, however it will vary in detail across industries, and is dependent upon circumstances such as the company culture and nature of the work. Other factors such as the degree of unionism in the target workforce will influence the scope and nature of the outsourcing deal and its impact.
Many benefits are proffered for outsourcing. The underlying value proposition must be a cogent one for CEOs as the governance and risk management structures and procedures that are required are necessarily complex and onerous.
The investment in risk management involved in these deals would appear preferable to continued internal management and resourcing of an increasingly complex IT infrastructure. Cost may indeed be taken out of the business (assuming that an outsourcer can take advantage of and will pass on any economies of scale) or capital can be released (for example by property and IT asset sale) and put to ‘better’ use in core areas of a business. These must be persuasive arguments to justify such disruption. Large-scale corporate outsourcing will inevitably affect large sections of a company, its assets and its workforce in ways that can be difficult to predict. What, for example, is the effect on staff morale, and how will the move to viewed in capital markets?
Such moves may be viewed positively, of course, and the decision reflected in increased share prices and rising staff satisfaction. Outsourcing may indeed allow swifter uptake of new technologies, improve a company’s internal IT service levels (thus increasing employee satisfaction with that technology) and allow management focus and energy to be redirected onto core business objectives.
However the unadvertised advantages of outsourcing run broader, whereby structural or physical changes that would otherwise be difficult to explain or justify to their staff are made materially easier or more palatable. A company may have a strategy to divest itself of high-rent CBD properties and move poorly-located facilities such as data centres into a lower cost but (from an employee point of view) relatively less attractive area. It may be a geographically distant area, with such relocation incurring concomitant redundancies, lengthy negotiations, extra travel allowances and so on. However an outsourcer may be more than willing to take upon itself that “bad guy” role, shifting the responsibility for tough business decisions clearly and cleanly away from the original employer.
It may also be that outsourcing presents an opportunity to divest a company of a troublesome or expensive area of staffing, to de-unionise or reduce the number of unions involved in their broader workplace, or to simply reduce total accrued costs such as annual leave. Depending upon the contract and agreed long term outcomes, it may be that the outsourcer will undertake the agreed reforms and accept the costs by design or by default. In any case it makes sense for the outsourcer to undertake efficiency reforms in order to derive a profit, or to meet other goals such as their own internal business ‘transformation’. Potentially the ‘reformed’ IT department could be returned to the customer at the end of the contract in a very different, ‘improved’ state. Whether that was intended or not is a moot point.
A large organisation with an entrenched, longstanding bureaucratic heritage or culture may wish to make changes that would otherwise be at odds with precedent and established practice. Rather than make those changes directly and of itself, by outsourcing an indirect means and an accompanying 3rd party is introduced. Whilst the outsourcing itself will be subject to communication and negotiation within the industrial relations context, it does wrap many changes within the cloak of a new, single issue and deflects any attempt to focus on any ‘hidden agenda’. The staff concerned must fit into the new corporate mould, and are obliged to make the effort. Money, tied to certain targets, may sweeten the deal and encourage staff to stay for at least a defined period.
The outsourcer may be aware of the customer’s ‘hidden agenda’ or not. In either case they agree and become contractually bound to deliver at a stated level. In essence they may be prepared to risk being exploited in this way, as the revenue and enhanced cost sharing may justify the added cost of reorientating and resizing the incoming staff.
From the outsourcer’s perspective the challenge is very real. The staff are accepted at current rates of pay and with any ‘heritage’ employment conditions – and attitudes - that may be attached. It is in the outsourcer’s interest to make the arrangement work, as penalties will inevitably be built into the contract and loss of key skills will be damaging. Service delivery will be set at least at current values and the customer may well expect improvements. It is a fine balancing act, then, to take on the task of delivering a service with limited knowledge of the staff concerned and a new set of variables including turning what was a cost centre into a profit centre.
A customer’s workforce may be unionised, whereas the outsourcer may in all likelihood have no such union background. The outsourcer will ostensibly work with the union whilst wishing to maintain the individual bargaining nature of the ‘new industry’ workplace. Separated from the traditional workplace and faced with a more flexible, individual approach, the union’s attractiveness may diminish and membership may be lost.
From the heritage employee’s point of view the outsource is a challenge, a change and an opportunity. Staff may take a redundancy offer or be attracted by lucrative ‘stay-put’ bonuses. If they do stay with the outsourcer they will have to adopt the values and practices of the new organisation and ‘fit in’. It may be a comfortable change, however for most it will be stressful. Ownership of the change by the worker is low; the decision was made at ‘board level’, not by the individual. In one stroke, much as like in a merger, staff will find themselves ‘taken over’. The landscape may change suddenly or over time, but change it will. What was a comfort zone may become quite uncomfortable, quite quickly. Location may well change as a physical relocation takes place and they may feel ‘outnumbered’.
The feeling of dislocation and abandonment will be real for the staff concerned and will persist for some time. Whilst the new employer may make real and welcome attempts to induct and reorient the heritage staff, the fact remains that these staff will feel under stress. Their heritage status will make them feel ‘different’ for as long as they remain under the former employer’s terms and conditions of employment or display ‘counter-cultural’ values. The choice itself – if offered - to remain under their previous employment conditions or to accept the new employer’s terms is just another stressor added to the list.
These heritage staff will still deal with their former employer, usually on a daily basis and in the same way (ie, the job itself will be fundamentally the same, at least initially). However they are no longer part of that organisation and may feel a conflict arise when they begin representing their new employer (as the service provider) and deal with their former colleagues as ‘customers’. Whilst good customer service values may have been instilled prior to the outsource, now it is ‘for real’ and the internal customers have become an external customer. The outsourcing will have been communicated to all employees and perhaps presented as a partnership, however the feeling of ‘switching sides’ may become apparent. Internal service levels may now be formalised and penalties imposed for missed targets will more clearly impact the service provider, providing more evidence of distance and perhaps alienation from the past employer.
From the perspective of the outsourcer’s existing staff other challenges will arise. Workloads will alter as a potentially large number of ‘new’ staff must be inducted and oriented to the workplace. Conflict based on misunderstanding (“we don’t do it that way here”) will arise. Staff in the IT outsourcer’s workforce may expect flexible work practices and little red tape, expectations that may be quite different within a more bureaucratically based organisation. Examples include the IT staff at a Financial Institution or Insurer, where staff may have been developed from within the organisation and are used to copious regulation, precedent and well-developed career paths and hierarchies.
The outsourcer and their workforce, even that of a large, long-standing one such as IBM, may appear more fast-moving, customer-focused and flexible than that of the culture and workforce within the heritage employer. The organisation and staff within the outsourcer may expect more flexible, creative solutions and a flatter span-of-control. Conversely the outsourcer may have a greater focus on security, global best practice and performance management.
Incoming staff may have attractive heritage employment conditions that will stay with them for a set period of time. These conditions, including pay rates and allowances, may be quite different from the outsourcer’s conditions and pose a challenge to other staff, doing materially the same work but under different conditions. Particular challenges will arise with rostering and allowances for shiftwork.
The character of an outsourcer’s workforce may also be quite different. The proportion of casual and contracted labour may be greater within the outsourcer and the input of a large number of heritage ‘regular’ or permanent staff may result in adjustment across the organisation.
Ultimately the outsourcer will seek to integrate the heritage staff into the main body of the organisation. As the heritage staff accept new roles within the organisation (or choose to leave) the heritage staff will lose those special conditions and become more homogenously absorbed into the organisation. It may in fact be to the worker’s advantage to lose the old conditions quickly if their new employer’s working conditions are in more attractive than those previously provided by the heritage employer.
The Industrial Relations challenges within the IT outsourcing area are many. In summary large scale outsourcing may be seen as mini-mergers or perhaps more accurately as ‘acquisitions’, albeit potentially temporary. The staff absorbed pose a risk and a challenge to the outsourcer and their existing workforce whilst presenting significant opportunities to both the outsourcer and the outsourced. Whether these challenges are addressed to the satisfaction of all parties within the Industrial Relations ambit is a significant and unanswered question.
IBM IT outsourcing
http://www-1.ibm.com/services/stratout/index.html
accessed
IBM Case Studies
http://www-1.ibm.com/services/successes/
accessed
Transformational Outsourcing:
Responding to change in the
e-business marketplace
IBM Global Services
May 2001
http://www-1.ibm.com/services/files/transformational_outsourcing_whitepaper.pdf
accessed
The Outsourcing Decision
http://www-1.ibm.com/ibm/palisades/abi/courses/od.html
accessed
Survey of Current and Potential Outsourcing End-Users
The Outsourcing Institute Membership, 1998,
accessed at http://www.outsourcing.com/content.asp?page=01v/articles/intelligence/oi_top_ten_survey.html&nonav=true
Outsourcing and contracting out of IT products and services
v1.1 issued
accessed
Sample
only for educational purposes; Copyright 2005, Robert K Russell
for
GTVeloce.com and TheSpiel.com