New Skills in Transforming Businesses:

America’s Evolving IT Workforce

An IBM Perspective

“The United States must decide how it will respond to the challenges of today's
economic environment. Rather than accepting lower living standards or erecting
barriers, we believe that we must again raise the bar – to take the steps necessary to
offer the most fertile and attractive environment for innovation in the worldIBM is a
global business. And this is much more than marketing products and services around
the world. This means establishing deep roots locally and leveraging our multinational
presence for operational advantage."

IBM Corporation
 David N. Barnes
Ph: +1-202-515 5036
Email: dnbarnes@us.ibm.com

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Executive Summary

Rapid changes in technology, shifting global trade patterns and dynamic markets reward
U.S. businesses that are nimble and adaptable. Information technology (IT) enables this
flexibility and allows companies to adopt global business models, accessing the best suppliers
and providers world wide and to deploy services offerings across borders.

Business success in these demanding 21st century markets depends on innovation in

offerings, processes and business models. Sustained innovation provides the foundation for
growth and job creation. New jobs are emerging requiring higher skills but American workers
face a challenge to remain employable in a more exacting labor market; more highly skilled and
flexible employees can attract a premium.

IBM’s position - as a technology leader, as a global company, as an employer of a large

professional workforce and as a leader in skills development – uniquely positions us to help
policy makers understand and respond to the challenges of the twin forces of trade and
technology to our workforce.

The U.S. IT employment outlook is positive, and is showing a pronounced shift in

demand for specialized “hot” skills that fuse industry-specific knowledge, IT competency and
business process expertise. Clients want more integrated and customized technology and
services solutions that create competitive advantage and enable innovation.

Efficiencies enabled by the global deployment of service delivery capability will drive
intensified IT investment in the U.S. and growth in new job categories. The diffusion of IT into
sectors like health care now under-invested in IT will also drive job growth and productivity. The
result will be even stronger demand in the U.S. for IT-proficient workers and for better tools to
continuously upgrade their skills.

In parallel, the demand for some IT skills is shifting more quickly from “hot” to “cold”; i.e.
the “shelf life” of many IT skills is growing shorter. Many technical specialties, once leading
edge, are being standardized, automated, or sourced from low cost countries that have invested
in their workforce. These trends, along with the consequences of an aging workforce will
change the workplace or employment experience for many IT workers,

IBM’s own hiring in the U.S. has a growing emphasis on “hot” skills and strategic growth
areas; examples include business consulting, middleware architects and open standards
specialists. We have more, higher-paid consulting services and engineering jobs, and fewer,
lower-paid production and administrative roles. We are also applying supply chain management
principles to our global workforce, to best match skills to client needs.

As a services company our success depends on investing in the skills and development
of our employees, and giving them the opportunity to exercise control over the advancement of
their careers. We therefore invest heavily in learning programs. This year IBM will spend over
$700 million, including $400 million in the U.S. to help our employees build skills.

Companies and policy makers should take the initiative to help U.S. employees build
new, innovation-focused skills to compete in the global economy. IBM is ready to work with
governments to create an environment that encourages dynamic training models and sustains
learning and innovation.

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Today’s Business Environment

Rapid changes in technology and shifting global trade patterns are reshaping U.S.
business and job opportunities for the IT workforce. American companies and their employees
confront unrelenting global competition, dynamic markets, and intense pressure from investors.
The U.S. has evolved from an industrial economy to a creative, talent-based or knowledge
economy, with over 70% of the workforce employed in the services sector.

Too, new jobs are emerging, built on higher level skills that are needed to compete in
today’s more exacting market. Innovation, business transformation and redefined business
models are catalysts. Indeed the class of 2006 will fill jobs that don’t yet have a description.

Success now depends on innovation, which occurs at the intersection of invention and
insight. Sustained innovation - whether by creating newer, better offerings at the most
competitive price, or by developing better and more productive processes, or by redefining
business models - provides the foundation for growth and job creation in the 21st century.

Innovation is now a far broader activity than research and development. Innovators
“transform” their business processes by continuously addressing new capabilities, changed
costs, and disruptive challenges. Doing away with unsustainable meaningless tasks, inefficient
methods, and outmoded skills forces employees to adapt to new opportunities and challenges.

Dynamic markets too create incentives for businesses to be more adaptive, and to
reorganize and restructure. With market niches moving faster from appearance to commodity
status, the pressure to engage quickly is at a premium.

To respond and compete in this new world, contemporary business models adopt a
portfolio approach to flexibly access the best sources world wide of products, services, and
talent to meet clients’ needs. Just as manufactured goods are sourced from around the world,
IT now enables services, business process operations and other knowledge work to be
deployed and delivered almost anywhere.

Although decisions to change sourcing practices and business models can be disruptive,
primarily they’re creating new growth opportunities as reported in an Information Technology

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Association of America sponsored study1. Benefits are realized through lower prices, better
products and services, and from stronger and more profitable companies that pursue new
investments and deliver higher returns to investors. Disruptions are represented by job losses
and by the economic impact on regions affected by corporate restructuring.

Businesses are also using IT to integrate more closely with their ecosystems of
suppliers, partners, customers and talent. Universal connectivity allows these virtually
connected groups to make location decisions based on where they can best create value;
creative people can be anywhere, forcing businesses to figure out how to reach, how to attract
and how to retain their share of the world’s star talent.

While workforce costs are important, winners and losers are increasingly decided by the
quality of a company’s workforce – the right skill portfolio and the most innovative minds.
Businesses that invest in employees’ skills and that encourage their employees to take
responsibility for maintaining their employability will be better positioned for growth. Shifting
organizational forms and employment relationships also favor high-level cognitive skills as
abstract reasoning, problem-solving, communication, and collaboration. These “knowledge
work”2 attributes assist employees to successfully adapt and cope with the change, ambiguity
and shifting work content and structure that are becoming more prevalent.

1
The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy, ITAA, at
http://www.itaa.org/itserv/docs/execsumm.pdf
2
The 21st Century at Work. Rand Corporation 2004

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 IBM’s GLOBAL BUSINESS MODEL TRANSFORMATION

Global deployment and sourcing is not a new approach to business for IBM, and we’re
transforming rapidly to adopt a global business model. We make deployment and
sourcing choices within countries and between countries because we succeed across the
globe by having the right talent in the right place at the right time. Our success is also
built on sustained investments in the skills and development of our employees, and by
giving them the opportunity to exercise control over the development of their careers.

IBM’s transformation has been underway for several years with dramatic results:

Purchase orders once processed in 300 locations around the world are now
handled in three – Shanghai, Bangalore and Budapest.
Some customer support functions have been moved closer to clients, and the rest
are consolidated into shared service centers in Malaysia, Slovakia, Spain and Brazil.

On the surface these changes could be seen as just about lower labor cost, with only
downside for economies like the U.S. and Europe. But they’re really about doing the right
tasks, with the right skills, in the right places, as illustrated by these examples:

Strategic sourcing for our Business Transformation Outsourcing procurement

practice is centralized in Greenock, Scotland and Paris.
Service operations for Financial Management and Accounting are
consolidated in Tulsa, Oklahoma among other places.
Shipping industry centers of excellence are sited in Scandinavia and New
York City.
Primary software development centers are in Toronto, San Jose, Austin,
Raleigh, and Hursley, England.
Research labs are in New York, Austin, Silicon Valley, Switzerland, Israel,
Japan, China and India.

Lower costs do play an important role in freeing up resources to innovate and invest in
activities that result in more value adding opportunities and new, higher value jobs.
Employees become available for retraining for higher skilled and paid jobs that are in
greater demand with clients.

As businesses adopt more flexible structures and practices, the workplace is changing.
Employees are no longer bound by a set place and time for work, or the notion of a permanent
relationship with employers. In the U.S, over 40% of employees now have access to traditional
flextime3. “Work” now occurs around the clock because our interactions with others are almost
as likely to be across the globe as down the hall.

Just as work times are shifting, so too are work locations. IBM has made mobility an
option for almost all IBM staff around the world. At the end of 2004 approximately 40% of our
U.S. employees worked remotely, and about 30% of our worldwide workforce work primarily
from somewhere other than a traditional IBM office (20% mobile, 4% home, 7% customer
location). The global teleconference is fast becoming today’s team meeting room.

Demographic trends too are in play. Aging of the workforce is accelerating retirements,
with greater risk of skills shortages, and of draining business knowledge and experience. New
challenges are emerging in how to phase retirement and how to extend the useful careers of
mature workers more effectively, using retraining and life-long learning models.

3
When Work Works: Summary of Family and Work Institute Research Findings at http://familiesandwork.org/3w

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 In parallel, technical innovation in IT is having a major impact on some specialist IT
occupations. Interoperable standards permit modular design of systems and reusable program
development that mean less need for one-time development. “Autonomic” computing systems
can heal themselves, and along with utility computing and application hosting reduce IT
operations needs. Higher level programming methods are increasing software development
efficiency. These technology driven cost take-outs and the automation of many IT jobs will have
implications for employees in the U.S. and emerging economies alike.

In our trade-exposed services economy, workers with narrow or highly specialized skills
are vulnerable to technology driven market shifts. Many IT technical occupations that are
oriented to a particular product or technology now face shorter “shelf lives” than historical
norms. Employees in these occupations that are not continuously updating and broadening
their skills are seeing job opportunities disappear along with the market for their outdated skills.
At the same time they forgo the opportunity to take advantage of new and higher value-adding
jobs that are emerging elsewhere.

Government leaders face difficult decisions in this complex environment. From IBM’s
unique vantage point, we look to offer insights to policy makers and other stakeholders on the
skills and workforce trends as they’re shaped by the twin forces of trade and technology.

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 IT Growth and Jobs Outlook

The U.S. IT industry has delivered for America as a major contributor to recent
productivity growth and competitiveness. The productivity dividend was enabled by an open
market for IT trade and investment. The industry can continue to deliver if we maintain the
conditions that will keep this economic engine working for the U.S. economy.

U.S. productivity growth can be further boosted by the lower prices for software and IT
services made possible by world wide sourcing. Lower prices promote broader IT diffusion,
leading to improved processes, greater profitability, and increased investment. Broader
diffusion will also drive demand for IT-proficient workers, particularly in sectors such health care
and education that are under-invested in IT, and absorb some workers displaced elsewhere.

Rapid technology change will continue to propel demand for highly skilled workers;
they’re needed for new product and process development and to deploy and exploit the new
technologies in the production of other goods and services.5 Within the IT industry tomorrow’s
leaders will be pursuing innovations coming from a fusion of several different disciplines -
advanced business integration and analytics; hardware, software and services integrated into
an open computing environment; and fast-emerging technologies such as wireless and
nanotechnology. But the most exciting growth will come from the demand to fuse IT skills and
industry expertise (for example, IT and health, or IT and manufacturing).

IBM’s R&D INVESTMENT

IBM’s own R&D program depends on our ability to draw on the best talent in the U.S. and
from around the world. Our more than $5 billion annual R&D budget creates new
technologies and processes, and services research that push the skills frontiers and drive
new job creation.

Recent innovations include self-managing, autonomic computing systems, power-pooling

computer "grids" capable of predicting weather changes, and industry-specific
technologies that help physicians diagnose and treat cancer patients better and faster. In
2004 IBM earned 3,248 U.S. patents, eclipsing the nearest company by more than 1,300
patents, and extending its 10-plus year leadership in patent awards.

Most employment in IT occupations remains outside the IT sector. The Information

Technology Association of America annual workforce survey4 for 2004 identifies 79% of IT jobs
as being in non-IT organizations. The same survey notes that 89% of new IT jobs were added
outside IT companies.

Official forecasts for job growth in IT technical occupations remain positive. The Bureau
of Labor Statistics’ projections show that over the 2002-12 period, IT related jobs, especially in
software, networks, systems design, computer systems engineers, and database specialists,
are among those expected to show the fastest growth.

Growth (%) of Key IT Jobs 2002-12

5
The 21st Century at Work, Rand Corporation 2004
4
Adding Value: Growing Careers. ITAA, 2004

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Source: Bureau of Labor Statistics, Occupation Outlook Handbook

However within an overall growth trend, many IT workers will see their workplaces shrink
or change to a different employment model. Most industry analysts predict that IT organizations
in midsize and large companies in the U.S. and Europe will shrink by 30% between 2000 and
2010. Changes will likely come about due to growing use of outsourced services and
contractors, and from automation and other productivity improvements.

Workforce and Skills Trends

IBM observes workforce trends from the perspective of the world’s largest professional
services company; our success depends on the skills of our employees. As of July 2005, IBM
has 324,000 regular full time employees and a total workforce of approximately 485,000
including contractors, and other full time equivalents.

Our focus on creating business value and business transformation for clients drives a
growing demand for workers with skills that fuse business insight, IT knowledge, and deep
industry sector experience. These skills foster the innovation that enables our clients to be
competitive and to grow. Over 50,000 employees are now engaged in higher level strategic
consulting and business transformation roles, compared to only 3,500 in 2002.5
5
Business Week ”Beyond Blue“ cover story April 18, 2005

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 An innovation capable workforce has special characteristics:

Innovation Workforce Attributes

• World Class Expertise
– Specific expertise, especially industry expertise, that’s
continually refreshed and up to date
– Articulates expertise well: white papers, case studies, knowledge
management and collaborations systems
– Supported by deep resources
– Scales to offer economies of expertise

• Flexible and Adaptable

– Understands big picture
– Interactive, asks the right questions and listens
• Teams Well
– Partners/collaborates with colleagues and ecosystem to offer the
best solutions
– Deployed globally and fluidly

• Meets/exceed Benchmarks/Standards—an Engaged Workforce

• Diverse on Multiple Levels

• High Integrity, Values-Driven

World class expertise is needed to solve challenging problems for clients, often in more
complex and boundary-less businesses. Success depends on the ability to be flexible,
responsive and quickly adaptable to client needs. Building relationships is highly valued, as
collaboration needs to occur beyond the enterprise and across the extended business
ecosystem, often across the world. Workers with these attributes are highly employable today.

By contrast, for some IT technical professionals, the remainder of the decade portends
uncertainty and increased competition. Certain technical skills are shifting quickly from being in
high demand, or “hot”, to commodity-like or “cold”. Occupations that are highly structured and
standardized, and jobs based on “cold” skills with little customer interactions are often relocated
to lower cost countries, according to RONIN7. In general, the shift follows market demand
moving away from skills needed to automate single processes, and toward broader
transformational skills with industry understanding, and to deeper technical skills. Jobs at risk
include application coding, software package support, and application maintenance along with
generic system hosting and Web services. Other non-IT specific categories include transcription
services, contact and call-center staff, and business process outsourcing services.

Economist Catherine Mann of the Institute for International Economics found6 that
among high wage technology workers ($74,000 on average), there was a job gain of some
425,000 jobs for professionals with higher “integration” skills (network engineers, software
engineers, database specialists etc). In the same period, programmers who work primarily with
non-networked applications ($64,000 average) lost some 125,000 jobs in the U.S. between end-
1999 and November 2003. While the ITAA notes a decline of 30,000 programming jobs

7
RONIN Corporation, Offshore/Nearshore Outsourcing Syndicated Research, Dec. 2003
6
This is Bangalore Calling: Hang Up or Speed Dial? Catherine L. Mann at
http://www.iie.com/publications/papers/mann0105.pdf

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between their 2003 and 2004 employment surveys7, Mann determines that high-wage
technology professional jobs have increased 11% from the 1999 IT employment peak

The rise of IT modular development and reuse, system automation, standardization,

worldwide labor sourcing, and new service delivery models sustain the trend to reduce
opportunities in areas of cold skills. Automation is disrupting job markets in software
development, testing, remote system monitoring, operations centers, technical support, data
storage and networking. Gartner forecasts that the number of operations jobs in data centers
will be halved over the next 10 to 15 years.8 IBM too has less need for people to manage
infrastructure assets such as data centers, parts inventories, tools and the like due to new
systems capabilities.

With standardization, processes that support common business operations can be more
easily outsourced to suppliers using global delivery models and automation. However the rapid
growth in external sourcing and the spread of business ecosystems also creates new job
opportunities in relationship and sourcing management, where technology expertise is not
essential. These jobs include business and service provider relationship management, demand
and supply analysis, vendor management and process partnering.9

The characteristic knowledge economy work of information sharing, learning,

collaboration and virtual work settings is creating opportunities for people who can effectively
leverage information resources to solve business problems. IBM sees growing demand for IT
architects, security specialists, and system/application integration specialists. Opportunities are
also intensifying for information specialists in corporate performance management, business
intelligence, customer and supply chain management and distributed decision making.

Given these trends, IT professionals must either broaden their expertise beyond
traditional, narrow technical domains or develop higher level technical capabilities. Those with
discrete technical skills without grounding in industry practices or core business processes will
be competing against equally equipped IT professionals elsewhere, often losing that contest.

7
ITAA ibid p9
8
IT Workforce Management. Gartner, March 2005
9
The IT Professional Outlook: Where Will We Go From Here? 2004. Gartner

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Market Valued Skills

The flux in the skills market prompted IBM to identify “Market Valued Skills”; the skills
that most contribute to our clients’ business goals and which they most value. Setting priorities
for skills aligned to client needs allows us to stay focused on what clients truly value, to measure
demand and to adjust our workforce as necessary. Our employees can also better focus on
acquiring competencies most critical to their jobs and to their future employability.

(1) Technical Jobs

IBM’s assessments of market data allow us to group the technical jobs that are in
demand in the U.S. alongside those that are “cold” and more likely to be sourced in lower cost
locations. :

Hot and Cold IT Jobs – IBM Assessment

The fastest growing job family in IBM 2004 was “IT Technical Services”, growing at 10%
in the U.S. and globally at 26%. This job family includes knowledge architects, network
specialists and security specialists. Foote Partners (quoted in SearchVB.com) suggest that
security, Web services and Linux jobs will remain among the hottest technical job areas in 2005.

The rise in demand for these “hot” IT jobs stems from demand for more integrated and
customized technology and services solutions that create competitive advantage. These needs
are best met by local, experienced client-facing employees. Intensified investment in such IT
solutions and further diffusion of IT throughout the economy will lead to growth in these job
opportunities. Employees with high-end IT skills as well as business insight will be the
intellectual engine behind the successful implementation of the new systems.

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 Going forward, IT professionals will be well placed to understand and master business
realities such as industry dynamics, core business processes, customer bases, regulatory
environment, culture and strategy. Successful IT professionals will identify themselves not just
by technical occupation, but also by the industry, process and markets in which they participate.

(2) Non-Technical Jobs

In this category, opportunities exist in business process transformation, project

management, security analysis, system integration, core business and financial skills, and
industry sector specialty consulting. Gartner and other industry analysts anticipate that non-
technical competencies will take on greater importance going forward. They highlight the
premium placed on merging business value and technical execution. Non-technical
competencies that have importance in technical environments include:
 Project management
 Communication
 Business analysis
 Business management and acumen
 Specific business/company or business process knowledge
 Collaboration and team building
 Industry knowledge
 Multi-tasking

Sources: Foote Partners LLC. www.footepartners.com. 10/21/04 presentation to IGS; ITAA – Adding Value…
Growing Careers, September 2004

Reflecting client demand, IBM has created new job designs to target candidates with a
broader mix of business and IT backgrounds. For example

Security Consultants and Logistics Consultants support project engagements in IBM’s

Business Consulting Services (BCS) practices. The responsibilities of these positions can
include: application development, research and analysis, and as-is process documentation.
These jobs can draw upon a variety of educational backgrounds, including bachelor and
master’s degrees in business, math, engineering and information systems.

IBM has also identified three broader areas of specialty that are growing rapidly as a result of
changes in client demand and technology:
 Middleware (software that acts as the “glue” that holds systems and networks
together): Opportunities exist for software engineers and IT specialists who have
additional training in the nuts and bolts of how computers and software of different
kinds communicate and share data.
 Open Standards Software: Most opportunities are for software engineers who
combine general programming and IT skills with knowledge and insight of the legal,
intellectual property, and industry practices in the open standards arena.
 Business Transformation: IT experts with expertise in business operations are
needed to creatively apply IT innovations to boost business performance across
many industry sectors.

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 

We already have hundreds of employees working in these areas, and we also expect
their ranks to grow strongly outside IBM.

Our Procurement practice is a good example of how we leverage world class capability
and create different and higher skilled jobs. Historically, some 70% of our procurement
resources were in clerical positions – “order takers” focused on administration and transaction
processing. Today, 85% of our Procurement employees are performing high value tasks, like
international trade and risk analysis, strategic supplier relationship management. intellectual
property law, and the delivery of commercial procurement outsourcing for our clients.

o
o
o
for jobs

IBM’s Workforce

IBM’s workforce strategy is tied to the restructuring and global integration of our
business. Global integration is what we’re doing to tie together the operations of our company
and create global processes that eliminate redundancies and achieve better responsiveness.
Advances in technology and open standards have made it possible to share work across
borders, and we can now access vast new pools of intellectual capital around the world and do
things in the right place, at the right cost.

Establishing global business process has allowed us to reduce duplication and

overhead, remove layers of hierarchy and deploy more people to positions working closer to our
clients. The multinational model where each country subsidiary has its own headquarters,
support infrastructure, and in many cases its own R&D labs and manufacturing plants is no
longer sustainable.

Just as companies are now organized to allocate and control financial capital, we’re now
working to best manage human capital in order to develop and diffuse intellectual capital. A key
competitive objective is to be able to quickly identify needed skills and to deploy the right people
in the right location in a constantly changing environment.

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 To meet this challenge, IBM developed an adaptive workforce program for our services
business called Professional Marketplace10. In essence the program is an application of supply
chain management principles to the workforce in order to best match resources to client
demands across the world. The multi-million dollar effort integrates strategy/policy, process,
organization, and technology to ensure that supply and demand information is available
throughout the business to match critical skills to client needs, on demand. Approximately 65%
of our workforce (primarily technical, client facing) are in the program.

The program will allow IBM to significantly improve rebalancing of our skills by replacing
sub-contractors with available IBM employees, and by matching available skills with openings
across business units and across countries. For example we can locate and source low cost
programming expertise in northern China for a client in Japan, or find a U.S. specialist in
telecommunications customer care systems to support a client in India. We will also be better
equipped to channel learning budgets to support growth areas, and to reduce restructuring
costs. Our labor cost structure will become more flexible, and have a greater emphasis on
market valued skills.

Our workforce strategy is also responding to the “Age Wave” challenge. We’re looking
to implement the right mix of
 retention efforts for critical, hard-to-replace talent;
 skills transfer and training programs to ensure availability of market valued skills;
 new employment models that respond to employee lifestyle needs;
 recruitment of older workers;
 building alumni relationships that contribute to a variable labor force; and
 ensuring an inclusive culture to support multi-generational diversity.

In the U.S., IBM’s workforce at the end of 2004 was approximately 133,000, some 41%
of the global total and more than five times larger than the next largest IBM country. IBM’s
workforce in any location depends on business performance, market conditions, and on
acquisitions and divestitures.

Most new hires in the U.S. had market valued skills such as professional expertise in
business transformation, industry and marketplace trends knowledge, fluency in on demand
strategies, and insight into emerging computing technologies. Our business strategy and
market opportunities are driving greater hiring in consulting and software positions, and we have
fewer people in lower paid manufacturing and administrative roles as the table below illustrates:

IBM New Hires: Top Job Categories

2000 % 2004 %

10
Wall Street Journal: July 14, 2005

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 Sales 16 Consultant 25
Software Engineer 12 Software Engineer
18
Production Ops 12 IT Specialist 13
IT Specialist 10 Sales 11
Other Admin 9 Specialty Sales 6
Technical Services 7 Engineer in Development 5
Engineer in Development 6 Accounting 3
Other 4 Planning/Pricing 2
Consultant 3 IT Architect 2
Product Services 3 Research Staff 2

Consistent with growing numbers of higher-skilled positions, IBM’s average U.S. salary
has grown by 6.9 percent on a compound annual basis since 2000. Average starting salaries
for new hires increased by 8.2 percent on a compound annual basis over the same period.

Many states where IBM has a large presence (for example Arizona, Kansas,
Massachusetts, Oklahoma, and Virginia) have seen double-digit growth in IBM employment
over the past five years. In absolute terms, New York, Texas, North Carolina, California and
Georgia have been IBM’s top five hiring states over the past five years; we’ve hired over 22,000
people in just those five states since 2000.

IBM is also expanding its workforce in growth markets like India, China, Brazil, and
Russia, where a leadership position contributes to our continued success in the U.S. and
elsewhere. The reality of IBM’s business growth of 25% in 2004 in these developing markets is
underlined by investment growth of 40%, and workforce growth of 30% over the last two years.

Our fastest growing job categories in India include business process outsourcing staff,
programmers and other software development occupations, particularly in U.S. cold skills
categories. In parallel our client facing staff has grown there as India’s economy has opened to
global trade. In fact Indian companies are contracting with IBM and others to take over IT and
other back office processes in their quest for global competitiveness. India and other emerging
markets also have strong talent bases for more advanced scientific and technical occupations
that have the potential to play a growing role in research and development programs.

Despite our strong growth in emerging economies, less than 1,500 full-time IBM
positions were relocated from developed nations to emerging countries in 2004. Considering
this number against other measures of changes in employment gives a better perspective. For
example, in the U.S. in 2004, IBM’s voluntary attrition at less than 5% (one of the lowest rates in
the industry) far outpaced the number of outsourcing jobs eliminated or shifted to emerging
nations in response to client demand.

IBM’s Investment in Employee Skills

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 Highly-skilled employees are central to IBM’s success, and we invest heavily in their
professional development. The investment is framed by our analysis of Market Valued Skills so
we can direct learning programs around specific expertise areas we know are in demand. Too,
IBM managers can be more effective in guiding employees in career development decisions
that align with IBM’s business direction and with market demand.

Learning: In 2004 IBM invested some $700 million to help employees build needed
skills; over $330 million of the total was spent in the U.S. More than $400 million was
designated for market valued skills; e.g., business process transformation, service oriented
architecture, standards-based IT architecture design, wireless and security. IBM’s learning
investment is:
- More than Harvard University spent on instruction in 2003.
- Nearly double MITs expenditure on instruction in 2004.
- Seven times the 2004 student education budget of Paris Hautes Etudes Commerciales.

In 2005 we’ll again spend $400 million on helping IBMers develop new market-valued
skills in areas such as Linux-based software development, services-oriented architectures, and
industry expertise in emerging fields such as life sciences, wireless networks and digital media.

Around the world our employees spent approximately 15 million hours honing skills and
acquiring new market-valued capabilities. Employees can access occupation and skill specific
learning suites including 20,000 courses and other learning assets on IBM’s Intranet via the
Learning@IBM portlet.

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 IBM Intranet Page View: Market Values Skills Learning Access

This new e-learning resource gives each IBM employee initial recommendations on
courses or learning modules based on their job and experience level. Delivering learning in the
context of employees’ work is one of the foundations of IBM's strategy to provide content
efficiently and effectively.

New employees receive approximately 109 hours training in addition to a half-day

orientation. Formal leadership and manger training for 2003 averaged 26 hours per manager;
these programs are complemented by significant informal e-learning training programs. We
also support external coursework by our employees. Company-wide we spent over $22 million
on tuition reimbursement in 2004.

IBM’s learning programs were recognized by the Award for the second consecutive year
of number one ranking in Training Magazine’s 2005 “Training Top 100”.

Redeployment and retraining: Restructuring and layoffs can be an unfortunate and

unavoidable consequence of dynamic markets. When possible, IBM looks first to redeploy
affected employees within IBM by matching against internal openings. In some cases we avoid
a lengthy external hiring process for these positions. Successful redeployments reduce
separations and are a win-win for IBM and our employees.

In situations created by global resourcing, IBM successfully redeploys over 40% of 
employees who become available after their jobs are made redundant.  55% of employees 
whose jobs are in danger of elimination are retrained compared to an industry median of 25%. 

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 Where skills shortages exist, an effective solution is to retrain employees for new roles,
thereby reducing the delay and expense of recruitment and the opportunity cost of lost
business. In 2004 retraining was provided for 56% of employees whose jobs were in danger of
being eliminated. Additionally, we have self-service tools available for our employees to review
all internal opportunities and apply to move within the company.

Employees that aren’t redeployed are provided with a wide range of assistance including
career transition services for 120 days, financial planning services, reimbursement for retraining
of up to $2,500, subsidized post-employment medical benefits (IBM helps defray COBRA costs
for a period of time), and subsidized group life insurance during a period of transition.

Building the Skills Base

IBM takes seriously its role in contributing to the national skills base and to growing the
supply of talented people in the U.S. We invest in a range of programs to this end:

(1) The IBM Academic Initiative (“in demand skills for an on demand world”)

The IBM Academic Initiative is an innovative global program where IBM collaborates with
educators at more than 160 leading academic institutions in teaching students the open
standards skills necessary to compete and keep pace with market changes. In 2005, IBM
expects that it will reach more than 9,000 faculty members around the world, support 4,500
institutions and help educate 280,000 technical innovators of the future.

Our goal is to better educate students for a more competitive IT workforce. IBM is
seeking to advance open standards among the next generation of IT professionals while helping
to reverse the troubling lack of enough qualified science and technology students with skills to
help create the future of the U.S. IT industry. IBM provides curriculum materials, free software
and free or discounted hardware to help train students for the new kinds of jobs required in IT –
including programming, architecture and certifications in various technologies.

A key benefit is IBM’s assignment of a technical team to assess an institution's IT

curricula and provide technical training and skills transfer for faculty and staff. There are over 50
IBM-developed course materials on software and hardware technologies, along with a wide
array of information resources available via the Scholars Portal11 and developerWorks12,
including newsletters, community forums, education roadmaps, whitepapers and brochures,
workshops and technical events.

11
http://www.developer.ibm.com/university/students/
12
http://www-130.ibm.com/developerworks/

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 Participating universities are better positioned to have the most current, relevant
curricula that map to the kinds of jobs that are expected, so they can be attractive for enrolment,
funding and other growth opportunities.

IBM’s Academic Initiative has also announced a new and unique academic curriculum to
help improve innovation in the burgeoning services sector. The Services Sciences,
Management and Engineering curriculum uses case studies of real businesses and scientific
programs, particularly in IT and business services and focuses on the effective alignment of
people and technology to generate value for service providers and their clients. The curriculum
is targeted at the graduate level but can be tailored for undergraduates. The course brings
together work in computer science, operations research, industrial engineering, business
strategy, management science, social and cognitive sciences, and legal sciences.

The new curriculum will help universities keep pace with, and be more relevant to the
largest part of the U.S. economy. Universities involved include the University of California at
Berkeley, Stanford University, Massachusetts Institute of Technology, and Georgia Institute of
Technology.

A recent AI project involved the $7 million donation of IBM technology to the University of
Arkansas involves software, course materials, systems and technical support and will enable
students to develop workforce relevant skills in the classroom. Other US schools involved
include:
 Duke University
 Northface University
 Texas State University
 University of Houston at Clear Lake
 University of Wisconsin
 Worcester Polytechnic

IBM also participates in industry efforts to improve the supply of critical IT skills in the
U.S. A recent example is the Semiconductor Industry Association “Stay’Tech” program that
provides grants to leading engineering schools to address a high drop-out rate among
engineering students. Approximately 50% of electrical engineering students drop out of their
major before completing their studies at a time when concerns exist that the supply of qualified
electrical engineering graduates will be inadequate to meet workforce demands.

(2) Extreme Blue

Extreme Blue is one of the industry’s premier internship opportunities. Each summer,
175 of the brightest MBA students and elite rising juniors join IBM to engage in some of our
most technologically advanced research and product development projects. Interns have first
hand experience of hot technologies in a high performance environment.

Since 2002, Extreme Blue interns have filed over 200 patent disclosures, with more than
50 patent submissions expected this summer. Grouped into teams, these interns drive
impressive business results – for example, creating a new pricing model for utility companies to
save billions of dollars – while becoming prospective innovators for IBM.

(3) Levin Global Talent Index

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 Our global economy is increasingly skills based and the ability to access and deploy
talent is a crucial competitive differentiator. However there is no comprehensive, accurate and
reliable information source available for tracking skills on a global basis, nor more importantly
where those skills may be needed. To meet this need, IBM is working with the Levin Institute13
on a country-by-country guide focused on skills supply and the macro forces that affect the
supply settings, with data initially covering 20-25 countries.

Issues for Further Consideration

Forecasting demand for jobs and skills is imprecise; in the IT sector there is extreme
volatility and sudden shifts in technology and markets. When considering strategies to improve
our ability to better equip employees for the future, a number of important questions deserve
further consideration:

• Where can government best focus?

Governments need to enhance the ability of their economies to innovate and transform. Futile
efforts to impede transformation are not only doomed, they may calcify the sectors that don’t
change. Efforts to redirect or re-channel product development, sourcing and supply chains will
lead to unintended results, hindering future innovation, productivity growth, job creation and
U.S. economic leadership. U.S. companies’ ability to move quickly and flexibly in dynamic
markets would also be constrained, putting our businesses at risk of becoming sclerotic
laggards in the global race for leadership.

Maintaining flexibility in labor markets is a an important pre-requisite for an economy to create

new and higher value adding jobs that drive productivity growth and wealth creation.

• How does employer engagement impact skills development programs?

There have been efforts in the past to upgrade incumbent and displaced workers skills that
have proved ineffective because the programs did not involve the employers with first hand
knowledge of the skills needed. Programs giving training benefits directly to employees often
encourage training choices of trendy or fashionable job skills rather than what employers need.
Reinforcement of employer directed programs would overcome this outcome.

• Given that many opportunities for skills development exist, how can we convince
workers to take greater personal responsibility for their own careers by continually
developing their skills?

Workers need both encouragement and guidance to help them pursue their professional
development. Most major corporations offer an array of learning opportunities such as tuition
reimbursements. For example, at IBM, we have the Academic Learning Assistance Program
(ALAP). Through ALAP, IBM pays for an employee’s education at eligible institutions
(accredited colleges and universities). It is an opportunity to develop skills and enhance career
opportunities within the company. Employees are eligible to participate in ALAP as long as they

13
http://www.levin.suny.edu/index.cfm

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meet program criteria, agree with the management team on the selected education, and it is
overall a good investment for the employees and the company.

Guidance can be provided by experienced management and supervisors, and by providing

access to commercial and government data sources with relevant trend data.

Building new skills takes time and effort as skill development is a continual process of
improvement. On the one hand, employees need to recognize that the opportunities for
improvement exist. In many cases they are free, or heavily subsidized. On the other,
employers need to make a marketing effort to improve perceptions of skills development as an
ongoing process that provides job security for the individual and improved productivity for the
firm and the country. Yet, the effort needs to start with individual employees recognizing that
they are not just passive participants in the economy.

• How can we learn from previous government sponsored job creation programs?

The New Jobs Tax Credit of 1977 was one of the more effective job creation programs of the
past half century. The concept should be revisited in the context of the proposal for the Human
Capital Tax credit that’s being supported by the National Innovation Initiative, various business
groups and economists.

• How can we better identify the skills that will be hot in the future? How can we
partner or work with educators to help them identify and build curriculums to grow
the skills that the IT industry will need?

Skills are too numerous and too specific to particular industries and processes to have a
centralized authority such as government; or even a corporate center dictating which skills are
in demand and will continue to be in the future. Deep knowledge and insight on skills is
decentralized, residing with managers and entrepreneurs who are closer to the development
cycle and business processes. This decentralized group should be seen as thought leaders
and trusted advisors on the direction of business, and of future skill needs.

Certainly, research conducted by experts and government provided economic and occupational
statistical data will give us some sense of direction. In addition, some policy incentives to make
real the declared importance of life-long learning should be explored. A partnership between
the private sector and government should be created to assess how we can improve education
and training of the U.S. workforce – including “mature” workers, build ”dynamic”
training/upskilling models, focus on next generation technology and services, and provide
incentives for U.S. companies to further invest in "hot skills." Yet, above all, personal
responsibility and willingness to develop new skills in order to ensure job security will drive the
best results.

• How do we better prepare students to become the technology leaders and innovators
needed by the U.S.?

An important curriculum reform is to achieve creative and integrative instruction through the
development of Problem Based Learning, especially in the engineering and technical
professions. PBL is especially helpful in the development of scientific, mathematical and
technical talent. It focuses on ill-structured problem solving, and provides deeper meaning,
applicability and relevancy to classroom materials and the development of crucial analysis skills
that are needed in the workplace. An education system designed to support curriculum focused

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on acquiring discrete skills and memorizing information will not produce the leaders and
innovators that we need.

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