IBM: Offshore outsourcing will save $168m a year

19 January 2004 IBM expects to save $168 million dollars annually by shifting programming jobs from the US to China, India and Brazil, according to documents leaked from the systems and services giant.


Initial transition costs, such as severance costs for US redundancies of $30.6 million in 2004 and $47.4 million in 2005, mean the shift will generate a loss of $19 million in the first year. But the resulting savings, which are forecast to reach $40 million in 2005 and $168 million by 2006, will more than compensate.

IBM puts the cost of a Chinese programmer with up to five years’ experience at $12.50 per hour, while his or her US equivalent costs $56 per hour. But an analyst at Meta Group has noted that in general, actual cost savings from offshore development are far less than straight wage comparisons might suggest.

In December 2003, it was revealed that IBM intends to move up to 5,000 of its jobs from the US to countries with cheaper labour during 2004. A spokesperson for IBM recently confirmed that at least 3,000 US jobs would be moved abroad. Of the 15,000 new jobs IBM expects to create in 2004, about two thirds will be located outside the US.

These freshly leaked documents, seen by The Wall Street Journal, refer to IBM’s Application Management Services division, which comprises more than half of the company’s 315,000 employees.

The documents also reveal the “suggested script” managers should use to break the news to US employees. “Do not be transparent regarding the purpose/intent,” says one memo. “Terms ‘on-shore’ and ‘off-shore’ should never be used.”

But the reality will become clear to the unfortunate staff when they are asked to give on-the-job training to their replacements.

IBM executives have stressed that they will be hiring more staff in the US than they will be sending offshore. But that has not stopped the issue from becoming a major topic in the US presidential election, with Democrat presidential hopefuls using the threat as a campaigning tool against incumbent President George Bush.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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