Less than a year into her tenure as IBM’s chief marketing officer, Michelle Peluso prepared to make an announcement she knew would excite some of her 5,500 new employees, but also, inevitably, inspire resignation notices from others. She had already briefed managers and the leaders of small teams on the news, which had been set in motion before her arrival in September. The rumor mill had already informed most other employees. All that was left to do was to make it official.
“It’s time for Act II: WINNING!” read the subject line of Peluos’s blog post on the company intranet.
In a video message, Peluso, formerly CEO of fashion startup Gilt, explained the “only one recipe I know for success.” Its ingredients included great people, the right tools, a mission, analysis of results, and one more thing: “really creative and inspiring locations.”
Despite the upbeat delivery, that last point struck many as devastating news.
IBM had decided to “colocate” the U.S. marketing department, about 2,600 people, which meant all teams would now work together, “shoulder to shoulder,” from one of six different locations—Atlanta, Raleigh, Austin, Boston, San Francisco and New York. Employees who worked primarily from home would be required to commute, and employees who worked remotely or from an office that was not on the list (or an office that was on the list, but different than the one to which their teams had been assigned) would be required to either move or look for another job. Similar announcements had already been made in other departments, and more would be made in the future.
At IBM, which has embraced remote work for decades, a relatively large proportion of employees work outside of central hubs. As early as the 1980s, the company had installed “remote terminals” in several employees’ homes. And by 2009, when remote work was still, for most, a novelty, 40 percent of IBM’s 386,000 global employees already worked at home (the company noted it had reduced its office space by 78 million square feet and saved about $100 million in the U.S. annually as a result). IBM’s marketing department had also acquired small startups without relocating their employees to central IBM offices.
By early February, when Peluso made her announcement, it was not uncommon for every member of a small team in her department to dial into conference calls from a different location. (IBM declined to comment on how many employees would be impacted by the co-location announcement.)
“Everyone I know is very upset,” says one employee, who like most interviewed asked to remain anonymous while discussing an employer. Some workers furiously began looking for new jobs. Others say they have stopped contributing to long-term projects because they aren’t sure whether they’ll be around in the future. A theory among some employees is that IBM is using co-location as a downsizing effort. One referred to the colocation move as “the massacre.”
IBM has had many layoffs during a transformation attempt that has involved 19 consecutive quarters of declining sales, but executives say the colocation effort aims to achieve something more difficult: a complete revamp of how the company—which has a workforce the size of Cleveland—quite literally, works.
The March Back to the Office
“Is it possible for a company the size of IBM to have the innovation and pace of the best small tech companies, of the best small teams, but have the scale of IBM?” Jeff Smith, IBM’s CIO, asked at a conference in 2016. He said this was his goal for IBM, to make it “agile.”
At this point, “agile” describes so many different work systems, it’s become an almost meaningless term, but it broadly refers to small teams that constantly iterate on projects and use data to make decisions. A feature of Smith’s particular “agile playbook” for IBM was that “the leaders have to be with the squads [his word for small teams] and the squads have to be in a location.”
Before the marketing department, IBM’s design department, security department, procurement department, large parts of the IT department, and teams that work on Watson, Watson Health, Watson Internet of Things and Cloud Development had already been colocated, among others. Some of these teams have worked together in offices from the start, while other departments, like marketing, called employees together from distributed locations.
Though not every department at IBM will be colocated, many will. One employee who had been asked by IBM to work from home decades ago while the company had been busy cutting down on expensive office space said he was surprised to recently receive a mandate to come into the office. Why change the policy now?
Remote work, at this point, has become mainstream. About 25 percent of all U.S. employees work remotely all or most of the time, according to a Gallup poll. Email, chat apps like Slack, and video-conferencing have moved to the cloud, which makes it easy for remote workers to stay in touch. Research suggests remote workers are more productive and log more hours than employees who work in the office, and for many companies, offering an option to work remotely helps recruit employees who are seeking better work-life balance or who want to live in a location where the company has no office.
But IBM needs more than better productivity right now. As some of its core businesses, like technology services and systems, face challenges from cloud-based vendors, the company’s strategy has been to reinvent itself around new businesses like artificial intelligence and its own cloud-computing operations. Though these businesses are growing quickly and now comprise 41 percent of revenue, they still don’t compensate for losses in other areas of the company. IBM has been keeping its profitability afloat by unloading offerings with relatively low profit margins and aggressively cutting costs.
At least according to the public markets, hope is on the horizon. The company’s stock price rebounded last year after several years of decline. IBM’s R&D investments are producing new technology: In the process of building Watson, a cognitive intelligence system, and figuring out how to store data on a single atom, the company collected 8,088 patents last year, more than any other company. But IBM is still very much in the process of turning these new technologies into profitable businesses.
The company is a ship changing direction, not one that merely needs more horsepower.
What IBM should value most, says John Sullivan, a professor of management at San Francisco State University who specializes in HR strategy, are better ideas.
“It turns out the value of innovation is so strong that it trumps any productivity gain,” he says, pointing to companies like Apple and Facebook that make around $2 million per employee (IBM makes about $200,000 for each employee). “[Remote work] was a great strategy for the '90s and the '80s, but not for 2015.” He thinks working together in person is one key to innovation.
Team proximity appears to help foster better new ideas. One Harvard study found researchers who worked in close physical proximity produced more impactful papers. Another report used data from badges that collect data on employee interaction to argue that employees who have more chance encounters and unplanned interaction perform better.
This idea, known as the “water cooler effect,” has been embraced by the most successful technology companies. Steve Jobs was obsessed with creating unplanned meetings, going so far as to propose building all of the bathrooms in Pixar’s offices in only one part of the building to encourage them (luckily for Pixar employees, someone vetoed this idea).
Facebook offers workers a $10,000 bonus if they live near headquarters. Famous tech office perks at Silicon Valley companies, like free food and laundry service, are at least partly designed to keep workers in the office, and the office designs themselves are sometimes created to optimize interaction.
“The surprising question we get is: ‘How many people telecommute at Google?’” Patrick Pichette, then-Google’s chief financial officer, said in a 2013 talk. “And our answer is: ‘As few as possible.'”
Even as remote work becomes normal, IBM isn’t alone in placing an emphasis on working together in person. Yahoo made headlines in 2013 when Marissa Mayer made an abrupt decision to end Yahoo’s remote work policy, and companies like Reddit and Best Buy have, like Yahoo, formally colocated their teams within the last several years.
It’s not that remote work didn’t have benefits—Best Buy, for instance, reported in 2006 productivity had on average increased 35 percent in departments that shifted to working from wherever they wanted, whenever they wanted. Rather, it’s that working together, in person, has a different set of benefits. Like Best Buy and Yahoo at the points at which they decided to colocate, IBM is a business that needs to do something new. Doing what it has always done, but better, won’t cut it.
A Big Change for Big Blue
In the office Peluso works from in New York City, table-style desks have been pushed together in clumps throughout wide open rooms to create small pods. White board pillars denote team names in purple and blue markers. A noise-canceling sound system attempts to keep conversations throughout the open office from distracting other teams. If you were going to create a sitcom version of an “Agile office,” this would be it. IBM says it has similarly designed about 4 million square feet of office space in cities such as San Francisco, New York, Austin, Armonk, Boston, Atlanta and Raleigh.
“Speed, agility, creativity and true learning experiences within your team,” Peluso says, are just some of the benefits of working together, in-person, from an office like this one.
Before coming to IBM, Peluso worked at goliath companies (she was Citi’s global chief marketing and internet officer and is a Nike board member) as well as startups (in addition to Gilt, she was CEO of a startup acquired by travel search site Travelocity and then CEO of Travelocity). She says the evolution of marketing into a practice that involves technology, data and real-time responses warrants rethinking the workplace.
“We don’t have time for innovation to happen in 6-month campaigns,” Peluso says. “The pace of it all, and the changing nature of work—I think that has changed a lot in the past five years.”
In addition to documenting “the water cooler effect,” studies have shown benefits of physical proximity such as more effective communication, better understanding between coworkers and more collaboration. These results jive with common sense.
“When you’re playing phone tag with someone is quite different than when you’re sitting next to someone and can pop up behind them and ask them a question,” Peluso says.
Not all IBM employees see it that way.
Workers at IBM have become accustomed to cost cutting. Last March, the company reportedly laid off about 5,000 people. Two months later, it laid off an estimated 14,000 more. It completed a third round of layoffs within the year in November.
Part of the reason for these layoffs is that IBM is investing more in certain strategic areas and divesting in others, which is why the company came up with the term “workplace rebalancing” to describe them. Though the company’s total employment numbers have declined only slightly throughout the last five years, employees say many jobs that used to be in the U.S. are shifting to other countries, where pay is lower (IBM recently pledged to create 25,000 jobs in the U.S.).
It’s unlikely IBM employees, as they centralize in office hubs, will reap the lavish office benefits and constant supply of free gourmet food that companies like Facebook and Google use to keep employees on-site. They won’t even receive raises after moving to expensive cities like San Francisco and New York.
But labor and HR experts say colocation wouldn’t be a practical way to cut costs. For one, even if IBM expected people to quit rather than relocate, it wouldn’t know which employees would do so. Is it the older, better-paid employees, who are more likely to have families? Or the best employees, who can most easily get new jobs? Second, IBM wouldn’t have known how many employees would quit.
“It is not a predictable, rational strategy [for reducing headcount],” says Michael Marra, a partner at labor and employment law firm Fisher & Phillips in New York. “You can say, we think the acceptance rate will be x percent. But if it ends up being 42 percent or 80 percent, you better be able to live with it.”
IBM is paying for moving costs and trips to the cities to which each employee has been assigned. It will also pay severance to employees who decide not to move. It is giving them 90 days after they make that decision to look for another job either at IBM or elsewhere. According to an internal document reviewed by Quartz of frequently asked questions about the move, the severance payment will be equal to one month’s base salary, the standard at IBM. Peluso says she plans to recruit replacements for those employees from the six co-located locations—not abroad.
“If what I were trying to do was reduce headcount,” she says, “there are much simpler and easier ways to do that, which would be less disruptive for everyone, myself included.”
Some employees agree working in person is a better option.
“I think that getting everyone in a room, hashing it out, throwing it up on a whiteboard is my preference rather than doing share screens,” says one worker who was asked to move. “People pay attention so much less when on the phone.” She plans to quit rather than move, regardless.
When the colocation effort is complete, Peluso will have a different team than the one with which she started (she declined to comment on how many employees IBM expected to accept transfer offers).
“Some people were excited,” she says. “Some people were already in offices, they love working in offices, they like having their peers here. For other people it was a very, very tough decision. And for some it will be right and for some it won’t.”
Workers made their decisions this month. Those who have accepted the offer to relocate will do so by summer. I ask Peluso where she’ll begin from there.
“I will say they’ve made an investment,” she says. “By making the choice they made, they made an investment in IBM, an investment in marketing and an investment in our clients. We know that it takes a lot from them and their families, and my job is to honor that commitment and that decision with the best spaces, the best skills, the best tools and a clear sense of mission and great colleagues—and then get out of their way and let them do great work.”