Earlier this week I predicted the demise of conventional IT caused by the wide adoption of SD-WAN and SASE, accelerated by the emergency demands of everyone working from home. Now that Congress has passed a $2.2 trillion COVID-19 bail-out, let’s throw-in the implications of that legislation to see what effect it is all likely to have on what used to be IT. The short version is to expect an even bigger bloodbath as IT employees at all levels are let go forever. Please understand that some version of this bloodbath was going to happen anyway. What matters right now is how we respond to it.
While my previous column was generally about turning lower-level IT nerds into Uber drivers, this one goes a little further up the food chain to include IT contractors and consultants. Yes, I’ll be using IBM as an example, not because Big Blue is anything like a bellwether anymore, but because I just know it so well.
My IT labor death scenario now extends to process experts (generally consultants) being replaced with automation. In a software-defined network, whether that’s SD-WAN or SASE, so much of what used to be getting discreet boxes to talk with one another over the network becomes a simple database adjustment. The objective, in case anyone forgets (as IT, itself, often does) is the improvement of the end-user experience, in this case through an automated process. With SD-WAN, for example, there are over 3,000 available Quality of Service metrics. You can say that Office 365 is a critical metric as just one example. Write a script to that effect into the SD-WAN database, deploy it globally with a keyclick and you are done.
In the world of IBM process experts, doing the same thing seems to require three people in the USA and 30 more in India along with three months of trying and testing, now replaced by a single database entry and pushing the enter key. This is good for the customer and bad for IBM or any IBM competitor you care to name. It’s slowly dawning on IBM that they have to get rid of all those process experts and replace them with a few subject matter experts.
Here’s the big lesson: with SD-WAN and SASE the process no longer matters, so knowing the process (beyond a few silverbacks kept on just in case the world really does end) isn’t good for business.
All of those process people are presently barricaded at home, of course. IBM will shortly layoff or furlough thousands of American workers, relying on the government financial support passed the other day. Most of those workers are never coming back.
What process work still needs to be done will come from India, where costs are dramatically lower. Note that this is effectively a way to get around a number of job protection laws for U.S. workers. Clever, if sad, and ultimately bad for the economy.
But wait, isn’t the point of the bail-out to keep these very people on-salary so they can come back to work? To keep the economy revved-up and ready for when that happens? This isn’t severance pay, right?
It isn’t severance pay… yet.
We’re still talking about IBM, but this could apply in varying degrees to any IBM competitors. They are all in a bind to some extent with IBM especially so, because of events taking place in the bond market.
The other day Ford Motor bonds were downgraded from BBB to BB, meaning Ford bonds are now junk bonds. This matters because junk bonds generally aren’t allowed to remain in the portfolio of most U.S. pension plans. So every pension plan that has Ford bonds must sell those, reducing their exposure. That raises Ford’s cost of borrowing and will do the same for IBM. Worse still, Ford is a great company and IBM, well IBM isn’t.
IBM, with two awful quarters behind it, will go the way of Ford. Now, this won’t cause immediate pain because IBM already had to stop its practice of buying-back shares due to their possible effect on their deal to buy Red Hat (that was a term of the deal for all those investing pundits now telling their readers that all is well because Big Blue will just buy even more shares at this lower price because now they can’t). On the other hand, who needs to borrow in the bond market when President Trump has $500 billion to lend directly? Remember the terms of those bail-out loans also prohibit share buy-backs. But none of this helps IBM’s business, which is still likely to be abysmal.
What fresh hell will happen next?
Maybe an activist hedge fund will buy a position and start pushing IBM around. Maybe the inherent confusion of taking money to keep people on-staff whom you know you can’t continue to employ will lead Ginni Rometty to a brainstorm (or has already). Either way, it suggests to me some kind of IBM sale or spin-off. Either they sell the parts that don’t make money, which is to say everything except Red Hat and mainframes, or they sell the whole darned thing, which is what I expect to happen.
It isn’t clear what company would even buy IBM at this point, but my stalking horse is HP Enterprise, which is hurting just as much as IBM but doesn’t have Big Blue’s crushing debt load. HPE could buy IBM, throw away the bits they don’t need, then hope to make money on economies of scale.
They really have no better option at this point.
And what of all those IBM layoffs? Well, the rules change if there is a sale of the company. If IBM lays-off people then sells the company, it is HPE (or some other acquirer) who doesn’t ever bring those workers back.
The bail-out legislation doesn’t address this possibility so they’d probably get away with it, effectively turning a bail-out meant to save jobs into an insidious technique for getting rid of them.