At IBM, a smarter way to outsource

Each Monday, Taft awakes before dawn at his home in Canonsburg, Pa., heads for the Pittsburgh airport and flies to Houston for the week.

He is one of dozens of IBM services employees from around the country who are working with a Texas utility, CenterPoint Energy, to install computerized electric meters, sensors and software in a "smart grid" project to improve service and conserve energy.

Taft, 51, is an engineer fluent in programming languages and experienced in the utility business. Much of his work, he says, involves being a translator between the different vernaculars and cultures of computing and electric power, as he oversees the design and building of software tailored for utilities. "It takes a tremendous amount of face-to-face work," he said.

What he does, in short, cannot be done overseas. But some of the programming work can be, so IBM employees in India are also on the utility project team.

The trick for companies like IBM is to figure out what work to do where, and, more important, to keep bringing in the kind of higher-end work that needs to be done in this country, competing on the basis of specialized expertise and not on price alone.

The debate continues over how much skilled work in the vast service sector of the American economy can migrate offshore to lower-cost nations like India. Estimates of the number of services jobs potentially at risk, by economists and research organizations, range widely from a few million to more than 40 million, which is about a third of total employment in services.

Jobs in technology services may be particularly vulnerable because computer programming can be described in math-based rules that are then sent over the Internet to anywhere there are skilled workers. Already, a significant amount of basic computer programming work has gone offshore to fast-growing Indian outsourcing companies like Infosys, Wipro and Tata Consultancy Services.

To compete, companies like IBM have to move up the economic ladder to do more complicated work, as do entire Western economies and individual workers. "Once you start moving up the occupational chains, the work is not as rules-based," said Frank Levy, a labor economist at the Massachusetts Institute of Technology. "People are doing more custom work that varies case by case."

In the field of technology services, Levy said, the essential skill is "often a lot more about business knowledge than it is about software technology--and it's a lot harder to ship that kind of work overseas."

The offshore specialists in India are learning that lesson. As they increasingly compete for higher-end work, the Indian companies are hiring thousands of workers this year in the United States, adding an odd twist to the offshoring trend. Tata alone plans to recruit 1,000 workers in America, said Surya Kant, president of the company's American unit, for "the near-shore work that requires regular contact with clients in person."

Automating services, tapping the global labor pool
For IBM, the world's largest supplier of technology services, moving up to more-sophisticated work is not the only step in its strategy to address the rising global competition. Labor represents 70 to 80 percent of the cost in traditional technology service contracts, and the traditional work of maintaining and updating software and data centers for corporate customers is still a large part of IBM's services business.

So IBM has moved aggressively to tap the global labor pool, and it is increasingly using software to automate as much traditional services work as possible. Today, IBM employs 53,000 people in India, up from 3,000 in 2002; in India, the salaries for computer programmers are still about a third of those in the United States. Over the same span, the company's work force in the United States declined slightly, to 127,000 at the end of last year.

IBM is also one of the world's largest software companies. And its software development work, bolstered by dozens of acquisitions in the last few years, is more and more being done with an eye for use in its services business--to substitute software automation for labor. Smarter, more customized software can automatically handle some programming chores. IBM employs 200,000 people worldwide in its services business, and if growth means constantly having to add more people, the business is in trouble.

"We couldn't keep building out labor," Samuel J. Palmisano, the chief executive, said. "The long-term strategic answer was not to have a half a million people working for IBM."

Today, the company's global work force is organized in clusters of business expertise and connected by high-speed communications links. Project managers can search worldwide for the right people with the right skills for a job. One tool is Professional Marketplace, a Web-based database of people and expertise.

The idea is to build networks for producing and delivering technology services much like the global manufacturing networks that have evolved over the last couple of decades. Look inside a computer or automobile and the parts come from all over the world. High-end technology services projects increasingly will follow that formula, combining skills from across the globe and delivered on-site or remotely over the Internet.

The next big shift
Over the years, IBM has been challenged by disruptive waves of technology, from the minicomputer to the Internet. Palmisano sees the globalization of services as the next big shift in the business landscape, and IBM is moving to adapt. "We're reinventing IBM once again," he said. "We're reinventing it by moving up to the higher-value portions of our industry and creating this globally integrated enterprise."

The utility project IBM is doing in Texas offers a glimpse of the global formula. The far-flung work team includes research scientists in Yorktown Heights, N.Y., and Austin, Tex.; software developers in Pune and Bangalore, India; engineering equipment and quality-control specialists in Miami and New York; and utility experts and software designers like Taft that have come from Philadelphia, San Francisco, Los Angeles, Chicago, Raleigh, N.C., and elsewhere.

IBM plans to use the skills learned and software written for the smart-grid project in work with utility clients around the world. In the services field, these are deemed "reusable assets," reducing costs in the future.

Ron Ambrosio, a senior IBM researcher, has been down to Houston a few times, attaching sensors to power lines and collecting gigabytes of data on electricity flows. He and others at IBM are studying how to predict and prevent power failures, optimize performance, reduce costs and conserve energy. "We're looking at this as part of a worldwide opportunity," he said.

Dennis Hendon, an account executive, and Rob Calvo, a senior services consultant, lead the IBM team in Houston. Hendon is an engineer by training, while Calvo has a business degree, but their real skills lie in years of on-the-job training--what labor experts call "passive knowledge" and "complex communications," observing, listening, coordinating, negotiating and persuading. The two men say they think of themselves as orchestra conductors, getting all the human parts working smoothly together, inside and outside IBM "We aren't mounting the poles, but our subcontractors are," Hendon said.

CenterPoint considered trying to do the smart-grid project itself, but not for long, said Thomas Standish, a senior vice president. "We don't begin to have the kind of Internet and technological sophistication we needed for this," he said. CenterPoint talked to other large technology services companies, Standish said, but soon settled on IBM as the one with the breadth of research, software and services capability needed for the ambitious project.

In Pune, Dheeraj Gupta, a 34-year-old software engineer, said it was IBM's breadth--and thus the range of opportunity for him--that prompted him to join the company in 2000. After earning a master's degree at an elite technical institute in India, Gupta worked at four software and services companies in India before being recruited to IBM.

At IBM, Gupta began as a Java programmer, but later moved to higher-end work, personifying the strategy for success in the evolving global services economy.

Today, Gupta leads a team of four developers writing software for utilities like CenterPoint. "I'm a technical guy," he said. "And now I'm moving higher up the ladder. I know various software technologies but now I'm gaining business and industry expertise as well."