IBM’s Procurement Head moves to Hungary – WHY????

In what is perhaps the most unfortunately timed  re-location in history, IBM’s Chief Procurement Officer, John Paterson, has relocated the firm’s Procurement Head Office from Shenzhen in China to Budapest, just as Hungary crashes into financial strife (with a bond market borrowing rate of 10%), falls out with the EU and the IMF, imposes undemocratic new laws, puts Government supporters into key roles, and generally seems to be moving back to the days of authoritarian Government.

Now, as  Procurement Leaders report here, IBM has a major shared services centre already in Budapest, with existing procurement staff, so it’s not a totally random move, but the reasons given don’t hold up to much analysis. IBM claim it is to be closer to growing markets for them in Eastern Europe, as well as in Africa and the Middle East.

Well, they may be growing, but it’s hard to imagine they have the potential that Asia must have for the firm.  IBM's full-year results are out very soon so it will be interesting to see how the different markets look.   And the economic conditions in Eastern Europe just at the moment are not improving. “Forint Drops as EU May Restrict Hungary Funds on Deficit Breach” was a typical headline this week from Bloomberg.

Moving on to physical access issue, if you want to be somewhere convenient for markets (and suppliers) in areas such as the Middle East and Africa, surely a large part of that is about the transport links? I’d suggest London, Frankfurt or Amsterdam have far more connections to Africa and the Middle East than Budapest.

Choosing three major destinations at random – Accra, Abu Dhabi and Jo’Burg, and five minutes on Expedia tells us that you can’t fly direct from Budapest to ANY of those three destinations.  London – yes to all three. Wikipedia suggests that Budapest has only literally a handful of direct flights to anywhere in the Middle East or Africa.

One suspects therefore that there are unspoken reasons for the move; was it hard to attract procurement people with the right skills in Shenzhen, or to retain them in the volatile Chinese jobs market? Were there personal reasons for the senior team wanting to be back in “the West”?  Are there cost savings in terms of utilising existing space or resources better in Hungary? It may be that Paterson (who is Scottish) didn’t have a free choice of location - if it was Shenzhen or Budapest, I know where I would go!

It’s none of our business of course, and it may be an issue that contains elements of competitive advantage for IBM.  But they are such an iconic firm, with a highly rated procurement function and leadership, so it would be interesting and useful for the profession to understand the real thinking behind the move.

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Voices (8)

  1. Paul:

    When I was doing an annual training day with HP, they were looking at Hungary for production of tape drives. Really they were looking at Ukraine and Belarus, but Hungary was a bit more of a known quantity until they settled in east of the EU. The line of argument was that the speed of access to Europe from Ukraine more than makes up for any higher cost of production compared to the far east. Next day delivery is pretty valuable in ICT, and the long shipping from the east was seen as a problem. Now how that fits in with IBM (which I tend to think of as a services company now) I am not sure, and you will have noticed the lack of hard figures in this hand waving argument – but it might be part of the story.

  2. Final Furlong:

    Perhaps, quite simply, it generates ‘tax-related supply chain efficiencies’ for the IBM when the team is based there.

    For example, for many multinationals, intellectual property is a major profit-driver in respect of the goods and services they produce. Shifting this IP – and the associated profits – to a low-tax jurisdiction, while avoiding anti-deferral rules relevant to the multinational’s parent, can generate significant direct cash tax savings. Or they may have implemented a ‘contract manufacturing’ model (where ‘subsidiaries’ become ‘contracts’).

    Or, perhaps, he just likes goulash.

    Or, perhaps, he was given a very harsh choice: “it’s either you go to Budapest, or to Somerset…”

  3. Erik the Reader:

    Have you read the Hungarian laws? There is nothing undemocratic about them. Viktor Orbán has a popular mandate and has a majority of 2 thirds in the parliamant. What you have in the papers about Hungary is just leftist propaganda. The right wing governmant of nowadays is just repairing the mess created by the previous eight year of socialist rule and also has to pay back their huge borrowings.

    Rethoric question: Those who criticize Hungary why were silent in 2006 when democracy was nulled down?
    I answer you: Cause west loves leftist government in Hungary even if they meddle with the Central Bank. Because the leftists in Hungary are corrupt to the bone and they never have done anything which was in the interest of the Hungarian people.

    Read some British opinions:

  4. Watcher of the Skies:

    Maybe he was simply feeling a bit peckish?

  5. David Orr:

    “It’s none of our business of course, and it may be an issue that contains elements of competitive advantage for IBM. But they are such an iconic firm, with a highly rated procurement function and leadership.”

    Peter: If the above statement is true, then why didn’t IBM ensure that SW1 benefited from that asa 75% shareholder in SW1?

    IBM’s apparent Global reputation impressed the Councillors and Senior Officers in Somerset and they thought that they were buying into that expertise & reputation when they signed up (in good faith).

    So, how did SW1 procurement “get off to a bad start” if IBM had put in their own staff with the procurement reputation you say they are known for?

    Once SW1 had started to recover from a disastrous SAP implementation (said to have been largely assembled by IBM India in Bangalore) coupled with an iffy scanning solution said to be from Xerox (Forest of Dean), they then recruited a new Head of Procurement Ian Conner. He had come not from IBM but from the Post Office – not an organisation known for “world class” leadership, management & industrial relations.

    Perhaps Ian Conner can accept your invitation to explain the massive shortfalls in IBM-predicted savings in Somerset County Council & now reported by Taunton Deane District Council.

    Or how SW1 won an award (CIPS?) for their Category Management plans before the first £100K had been saved?

    The Avon & Somerset Police were harder nosed in their contract negotiations and set a much more sensible savings target & influenceable spend than the absurd figures IBM estimated for Somerset County Council.

    Even so, Police admit that if you take into account all of the contract setup costs, SAP, maintenance & support charges, cost of client etc that they will only break even, despite a huge effort and lots of unwelcome controversy and bad PR.

    You said I was on a “personal crusade”. In fact, I am a local taxpayer to all three public bodies in the controversial SW1 joint venture. When I see the losses in “assured savings” (IBM term) and the sheer scale of the waste of money, time & effort and then see cuts to local services going ahead in Libaries, Buses, Care etc it simply angers me.

    It surely represents at some fundamental level a breach of contract and would in my ordinary life have me reaching for Trading Standards or the Small Claims Court to bring the supplier to account.

    SW1 was supposed to be a solution to budget constraints amidst rising care costs with an ageing population (they all said so). Not part of the problem with additional debt and costs, with just 4% of predicted £192m “assured savings” delivered after 4 years (10 year contract).

    Is the simple truth that large/multinational companies are simply way better at getting profitable deals struck (frontloaded to assure profits), than local Councils and the Police are at negotiating true value for money for the taxpayer.

    SW1 was externally audited by the Audit Commission for 3 years pre contract and 4 years post contract. They appear to have failed to change the outcome or help assure that the “assured savings” (promised by IBM) materialised. Is the failure of the external Auditor to change the outcome equal to the failure of the elected Councillors and Senior Officers to deliver value for money to taxpayers?

    Do we then conclude that we have a “light touch” regulation issue in Councils and the Police, as we do in the FSA and the banks?

    As they do say “The operation was a complete success, but sadly the patient died”……

  6. Dan:

    The move was probably on the cards since the shared service centre was set up in 2004 and they finally ran out of excuses not to go…

    Cynic? Moi?

    1. bitter and twisted:

      Or, the shared service centre isnt ‘saving’ what is should, and moving procurement there will make the figures look better.

  7. Jason Busch:

    Gundel, he must really have a thing for Gundel. That, or he needs to replenish his collection of 5 puttonyos Tokaji … with d’Yquem where it currently is thanks to the Chinese (no need to mix with coke, unlike Lafite), this is a logical personal procurement decision! Also perhaps a more subtle back-turn on China if you follow the wine logic 😉

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