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IT Unions III

The hidden story behind IBM’s resurgence.

After my mea culpa column (IT Unions II), in which I pretty much conceded that my view of unions naively assumed management integrity, I thought I was through with this topic for a while. Not so.

I have received more than a dozen e-mails from current and former IBM workers chiding me for claiming that IBM is a pretty good place to work. I based my opinion on conversations with young friends from IBM over the years who would like nothing better than to retire from IBM at age 65. From the e-mails, it seems my friends’ views are somewhat unusual. In the early ’90s, many of those who e-mailed had the same ambitions as my friends do now. They wanted to retire from IBM with their good pensions at age 65. But their hopes were dashed by a series of cost-cutting moves that began in 1993 and have become as much a part of IBM’s culture since as the color blue.

The picture that emerges from these readers’ e-mails is that of an IBM under then-CEO Lou Gertsner that consistently delivered shareholder value at the expense of its loyal and talented employees. In the last decade, IBM has slashed tens of thousands of jobs (mostly older, higher-paid workers), changed the entire benefits package typified by what used to be the best pension fund in the industry, and outsourced much of its operations offshore. I lauded IBM’s stock when it stayed in the stratosphere while competitors’ stocks were tanking. From a shareholders’ perspective, Gertsner was a genius. He took a company that looked as though it would not survive the ’90s and returned it to its former power house status. He didn’t just cut costs through layoffs and restructuring, he did it by improving internal efficiencies and company-wide productivity. And he grew revenue-forming alliances with those formerly considered bitter rivals, such as Microsoft. His actions were incisive and showed great prescience for emerging technologies such as Linux and XML.

All these things made him the model CEO of bubble economics. In bubble economics, delivering shareholder value is not just the most important thing a CEO can do, it’s the only thing. Enron showed us that, taken to extremes, bubble economics is not just bad CEOmanship, it is morally wrong. Management 101 says the CEO as good corporate citizen works toward several goods: Employee talent and loyalty, community responsibility, solid accounting, short and long-term profitability, growth, and shareholder value to name a few. Though there are many interdependencies between them, these goods sometimes come in conflict. If all you do is deliver employee talent and loyalty, you will likely find yourself in cost overruns and eventually out of business. Enron shows us that working just for shareholder value can also put you out of business. The good CEO balances these goods, occasionally cutting employees for the greater good of the company and occasionally sacrificing short-term profits by investing in its employees for the sake of long-term gains. (It seems odd to write stuff that should be obvious to most of you. The fact that it needs to be written shows how far off track bubble economics is.)

IBM is a good case study in a company that appeared to sacrifice employee talent and loyalty for (short-term) shareholder value. Leaving aside the moral implications of this decision, it does have economic implications. Whereas IBM once was a bastion of IT talent, sacrificing some of its brightest and most experienced people for the sake of the bottom line leaves it in a more ordinary position now. Like most big IT companies, IBM cuts corners on talent: It hires a lot of H1-B workers to fill the ranks (many of whom are treated by their handlers and agents like slaves, but that’s another story); it outsources to places like India and now China for programming and other tasks; it favors the high energy and enthusiasm of recent graduates over the maturity and careful attention to detail of 30- and 40-somethings.

While all these things help the company keep costs down, they also prevent it from getting revenue in a highly competitive marketplace. For example, when Dell, Sun, and HP are competing with you for an enterprise server deal, all it takes is one screw up by an inexperienced sales person to kill the deal. IBM used to be a slam dunk on these deals because it had the most experienced and knowledgeable people selling and servicing its products. In fairness to IBM, on the development side, cost cutting doesn’t seem to show up as much. But I wonder what might have been if it had retained more of this talent as well.

To bring this discussion full circle with the column that started it all, I like to think about the importance of talent in terms of baseball. For seven years prior to its radical rebuilding plan in 1999, my Twins fielded poor teams. Its owner, Carl Pohlad, kept the budget for player salaries low while the entire community criticized him for not spending a few extra million to put a winner on the field. It seemed to us fans that Pohlad was missing an important formula of a successful business: without good players, we wouldn’t win, without winning, he wouldn’t draw fans, without drawing fans, he wouldn’t have the resources to pay his players. His lack of investment in the team led to a downward spiral that nearly resulted in his checking out of baseball with a $150 million contraction check.

By some miracle, a bunch of plucky minor leaguers broke the spiral and won against all odds. The miracle happened in spite of Pohlad’s poor management. Hopefully he’s learned his lesson and he’ll spend a little of George Steinbrenner’s money to keep this team together for awhile. If he does, he has a chance to make far more than the $150 million he was ready to accept last winter.

The old adage, “You have to spend money to make money” is as true in technology as it is in baseball. True, it is not sufficient-you have to spend your money wisely-but refusing to spend it at all for fear of spending it unwisely will put you out of business. And while replacing an A player’s salary with a C-level H1-B salary may enable you to stay within budget, it could also lead you to missing your revenue numbers. This is the sentiment I read repeatedly from IBM staffers: IBM got rid of too much A-level talent for the sake of shareholder value and it will pay for its expedience down the road in lost business, to say nothing of its moral obligation to treat its employees fairly.

In this respect, unions are like human resources auditors. Independent auditors and unions make sure that the company is not bending to pressures from investors and others whose motivations are expedient. If auditors and unions do their jobs right, they ensure long-term success of the company. Like auditors, a few bad unions don’t invalidate the need for unions. In a sense, they prove how important good unions are. Now I can lay this topic to rest and get back to covering the IT story of the week.

James Mathewson is editor of ComputerUser magazine and

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