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Will IBM layoffs mean more jobs sent overseas?

Big Blue is expected to reduce headcount by 5,000 in North America, and unconfirmed rumors suggest the jobs could be sent to India.

By , Network World
March 26, 2009 01:30 PM ET

Network World - Criticism is mounting as reports surface that IBM is cutting 5,000 North American employees even as it increases its hiring overseas.

Slideshow: Most notable layoffs of 2009.

After the Wall Street Journal reported that IBM is planning to lay off about 5,000 U.S. employees, with many of the jobs potentially being transferred to India, IBM confirmed in a statement that it would be communicating to employees that jobs are being eliminated.

"This is a North American action. We are not communicating locations or the number of jobs as a result of this action," IBM said in a statement on Thursday.

The news around IBM potentially displacing American workers and relocating positions in India will not earn Big Blue any points in the court of public opinion. But financially speaking, industry watchers say offshoring work overseas could cut costs and improve service delivery for the company's Global Services division.

"There is certainly going to be some political implications and many heated discussions regarding such a decision, and IBM won't fare well in the court of public opinion," says Paul Roehrig, principal analyst at Forrester Research. "But the question is, does this help companies become more efficient and allow them to more effectively deliver services? And the answer is often yes."

For one, the cost of labor in India is lower than in North America and the expense to build and maintain facilities also is less expensive.

"IBM can pay an engineer in the U.S. $120,000 or an engineer in India $25,000, like the Indian providers do," says Ben Pring, research vice president at Gartner.

But considering only those factors is too simplistic, Roehrig explains. It is unlikely that IBM is matching full-time positions in North America to the same job located in India, so the salary or compensation cost comparisons aren't the only issue to consider. If IBM can reduce expenses by locating jobs in India, customers could ultimately benefit. Big Blue would be able to pass along savings to its clients, ultimately becoming more price-competitive with offshore providers in India.

"The growth of offshore service providers continues at a dramatic rate, and it is forcing all the service providers to be much more efficient in their delivery mechanisms," Roehrig says. "If IBM is moving jobs overseas, it makes sense that it is to lower costs, improve efficiencies and be able to deliver savings to their clients with lowers costs and a broader set of service offerings."

Today customers are looking to engage with outsourcers with shorter contract durations, smaller deal sizes and targeted services. Companies are no longer handing the keys over when outsourcing, and IBM must work to become more agile in its delivery mechanism, taking advantage of talent and resources around the world.

"Service providers are more and more leveraging the savings and productivity offered by global delivery because it translates into better options for clients," Roehrig says. "Clients today can choose to have their delivery done where they want it, and IBM as a service provider would hope to be able to convert such moves as this into more options and savings for customers."

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