In what could become the largest corporate layoff event in history, International Business Machines Corp. (NYSE: IBM) is expected to drop pink slips on a staggering 26% of its workforce starting next month.
The company currently employs 431,000 individuals worldwide, which means nearly 112,000 workers would be drawing the short straw — a figure that, theoretically, could represent IBM’s entire U.S. workforce (and then some).
The last time IBM reported a worker headcount broken down by country was in 2010. The total number of U.S. employees stood at just 92,000, or less than a quarter of the company’s workforce at the time.
The data may seem slightly outdated, but since 2010, IBM’s global workforce count has remained almost completely static. The company had approximately 430,000 total employees five years ago, just 1,000 less than it has today.
Assuming global proportions have remained intact, it stands to reason that the number of expected layoffs (112,000) by IBM is greater than its total number of current U.S. employees (~92,000).
In other words, IBM could lay off every single U.S. employee without contradicting the figures we’ve been given.
Of course, it would be a major stretch to assume IBM would solely target its U.S. workforce, but the numbers should help put things into perspective: This restructuring announcement would undoubtedly be the single most significant event to happen to the company in over 20 years.
Crisis 2.0
Anyone who knows the history of IBM knows the company is no stranger to major restructuring events such as what we’re seeing today. The company found itself in a similar predicament in the early 1990s as the market began shifting away from mainframes to personal PCs.
In 1993, IBM was facing record annual losses of $8 billion and responded by laying off a record-breaking 60,000 employees at the time. The company’s future was looking dire at best, but despite being in a major tailspin, IBM was able to successfully reinvent itself and come out on top.
In response to IBM’s 1993 layoffs and restructuring, the company’s stock clawed its way out of a five-year downtrend and actually closed out the year up 15%. The question, of course, is whether or not IBM will be able to pull off the same thing again today.
So far, it seems the market is betting that yes, IBM will once again rise from the ashes. The stock opened up nearly 2% on Monday amidst a down market, Greek election woes, and a falling euro.
But just because IBM has pulled off a successful restructuring in the past doesn’t mean it can necessarily do it again. The events surrounding the company’s 1993 transition were vastly different than they are right now, and anyone currently betting on IBM may want to reconsider.
The Good, the Bad, and the Ugly
The good news for IBM is that unlike in 1993, the company today remains highly profitable, even if it has missed earnings in 12 of its most recent 14 quarters.
IBM is expected to report $16 billion on the bottom line in 2014, which is by no means a small chunk of change. Its profit margin sits at a healthy 13%, so it’s not like the company is in danger of going under in the next few years.
However, IBM’s annual revenue is now in its third consecutive year of decline, and the slope has been steep. The company’s revenue is down 12.9% quarter over quarter, and its services segment is in total disarray.
Not to mention the company is deeper in debt ($40 billion) than any other major technology company in the public sector.
The reason for this decline is no doubt the result of a growing trend towards cloud computing. The ugly truth for IBM is that the company’s internal data-center service contracts (which account for up to two-thirds of the company’s current revenue) are becoming increasingly useless as enterprises continue to migrate to the cloud.
No internal data center means no IBM contract. It’s really just that simple.
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With more and more companies opting to use external data centers, IBM has essentially been left with two options: transition itself to become a cloud service provider or fade away into obscurity as Amazon, Rackspace, and Microsoft leave the once-iconic tech company in their wake.
Unfortunately for IBM, it’s a bit late to join the cloud services party. Amazon has taken the lion’s share of the market (nearly 85%), and Microsoft has taken the lion’s share of recent growth (164%).
IBM purchased cloud services provider Softlayer in 2013 to compete, but the company has a long way to go if it’s to have any real significance in this space.
As it stands, IBM controls no more than 7% of the cloud services market share and is a relative laggard on Gartner’s cloud service quadrant:
Further, in a recent study of 15 cloud infrastructure providers, Gartner rated IBM’s product last, behind companies including Microsoft, Rackspace, and Verizon. Not only is the cloud highly competitive, but IBM happens to be one of the worst (if not the worst) service providers on the market
To top it all off, one must consider the effect these layoffs (if they actually happen) would have on IBM’s remaining workforce…
In 1993, IBM’s restructuring involved a slew of positive cultural changes under the wing of outsider Louis Gerstner. This time around, though, there will be no change in leadership and likely no change in culture, either.
Despite consecutive quarters of declining revenue, CEO Ginni Rometty will remain at the helm of IBM while 112,000 of her employees could take the fall for what’s largely been the product of her own misdirection.
No doubt IBM’s entire workforce (minus Rometty, of course) will be spending the next few weeks updating their resumes and browsing LinkedIn for outside opportunities. Even after the layoffs subside, you can imagine the level of animosity that will remain within the company.
Getting a pink slip on Friday is one thing, but picking up the slack on Monday is another. IBM’s brain drain would likely extend well beyond the company’s planned layoffs because if the rumors are true, Rometty has officially made it company policy for shit to roll downhill.
Now, I wouldn’t go as far as to say this is the end for IBM, but 2015 is definitely going to be a do-or-die year for the company. Cost reductions are likely to provide a solid margin boost, but unless we start seeing significant growth on the top line, there’s little reason to like IBM long term.
As has always been the case in this sector, it’s either adapt or be eaten. And as much as I’d hate to see Big Blue go under, I can’t say I like the company’s outlook moving forward.
Until next time,
Jason Stutman
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