IBM was supposed to be "a game changer" high-tech anchor that would draw similar ventures to Louisiana's emerging digital economy. In exchange for 800 jobs at IBM's Client Innovation Center in downtown Baton Rouge, the state and city-parish offered an incentive package worth nearly $147 million over 17 years.
Four years and roughly $57 million in grants and tax refunds later, the state and IBM announced recently the company had fallen short at 572 jobs, some of them currently allowed to be stationed in Monroe.
Under an agreement, the shortfall meant IBM owed Louisiana $6,495 for each of the 228 jobs it failed to create — a total of $1.5 million.
Instead of penalizing IBM, the state, which had already paid the equivalent of close to $100,000 for each job created in the past four years, gave the company two more years to reach the promised employment level in 2019 and imposed harsher financial penalties if it doesn't.
"Our goal is to see them grow and prosper in Louisiana," Economic Development Secretary Don Pierson said. "That's what the initial agreement was established to do. It doesn't serve the state or our interests to act with an aggressive foreclosure that closes a business."
Pierson said he still expects the project's economic benefits will ultimately be greater than the incentives IBM will reap, and is confident the company will reach the 800-job mark, all in Baton Rouge in 2019. But neither Pierson nor IBM officials will discuss why the company failed to reach that level in the past four years.
At the same time that it was committed to building up operations in Louisiana, IBM was downsizing its workforce at two similar incentive-driven facilities in Iowa and Missouri. Many of those and other IBM jobs went to lower-cost workers overseas, which experts say helped cushion the company's profitability against declining revenue over the past several years as it changed its business strategy.
Others cited low, entry-level pay at the IBM center here and competition for a shortage of skilled tech workers as potential obstacles to hitting the agree-upon jobs goal.
The state addressed the shortage with a $14 million, 10-year commitment to IBM to beef up university computer sciences curricula, particularly at LSU, that has produced additional graduates. The higher ed funding was in addition to IBM's $147 million, 17-year incentive package.
Whatever headwinds IBM faces, the company will have a motivation to fill the promised Louisiana jobs. It agreed to a stiffer clawback as part of the two-year extension granted by the state. If IBM fails to reach 800 jobs in 2019 based in Baton Rouge, it must pay $10,000 for each job it falls short.
The company also promised to create a "customer contact center" in Baton Rouge, creating several hundred more jobs. IBM said it would begin recruiting for the contact center jobs in 2019. Again, IBM, state and local officials would not discuss any details or the extent to which IBM is obligated to the state for the additional center.
In announcing the original IBM deal, then-Gov. Bobby Jindal said it would have a generational impact on Baton Rouge and the state. In announcing the extension, Gov. John Bel Edwards said IBM has been "a transformative boon for economic growth and investment."
Similar pronouncements accompanied IBM's forays in other states looking to accelerate their tech sectors, only to see those efforts also fall short.
In 2009 and 2010, IBM promised to hire 1,300 people at its center in Dubuque, Iowa, and 600 in Columbia, Missouri, in exchange for up to $81 million in total incentives. But in 2015, IBM fired a combined 1,200 workers in those states, shipping many of those jobs and thousands of others overseas to workers paid a fraction of what their U.S. counterparts receive, both Fortune and Bloomberg reported.
Unlike Louisiana, those states did not build financial clawbacks into their IBM incentive packages. Their recourse was to simply stop making incentive payments to IBM.
Stock analysts say IBM has struggled in recent years to shift its focus from traditional businesses like computer hardware to cloud-based solutions via the internet. The company's revenue has fallen in each of the last five years. But offshoring to lower-cost workers helped cushion profits while revenue was declining, said Peter Greulich, who spent 30 years at IBM as a salesman, manager, systems engineer, brand manager and worldwide product/market manager and is the author of three books on the company.
The New York Times reported in late September that IBM now employs 130,000 people in India. That's nearly double the level 10 years ago and a higher number than in any other country.
IBM won't say how many U.S. workers it has fired since 2013.
Jan Moller, head of the Louisiana Budget Project, a nonprofit that advocates for low- to moderate-income families, said the failure of IBM to hit its job mark here points to the problems with government offering financial incentives to lure companies.
"Everyone shares the desire to bring high-tech jobs, but I think this speaks to the folly of simply trying to pay companies to locate in a particular place as opposed to the much harder work of developing the kind of workforce that's needed to attract these companies organically," he said.
There are a number of obstacles facing IBM as its strives to reach its 800-job goal at the Client Innovation Center in Baton Rouge.
For one thing, 55 of the Baton Rouge center's employees work at IBM's center in Monroe. The original agreement with the state allows IBM to include up to 240 Monroe workers in the Baton Rouge total, but that exception ends next year.
IBM also will have to overcome the same hurdles facing other tech firms in Louisiana and the country: a shortage of skilled workers in a rapidly growing industry.
In 2015, Louisiana had 365 computer science graduates and 2,165 open computing jobs — roughly six times as many open jobs as there were graduates, according to figures compiled by Code.org, a nonprofit dedicated to increasing women’s and minorities’ participation in computer science.
Brandon Reeves, CEO of EtherMon, a Baton Rouge-based cybersecurity firm, said skilled workers are being pulled to high-tech centers on the West Coast, as well as to Austin, Texas, and Nashville, Tennessee.
"We're seeing the same situation ourselves, just finding people locally and throughout the South to work in technology and cybersecurity," Reeves said. "I think, regardless of the company, finding local talent has been a struggle."
The state's agreement with IBM was designed to help reduce the shortage, and it has, somewhat.
Louisiana agreed to $14 million in higher education grants over 10 years to increase the number of computer science grads, with LSU getting 65 percent of the funding. The state has provided $4 million in grants so far.
The state's FastStart program provides free help with recruiting, screening and training workers for eligible employers. The state has spent about $343,000 through the program so far and expects to spend an additional $630,000 assisting IBM over the course of the agreement.
LSU's number of computer science graduates jumped from 32 in the 2013-14 school year to 91 in 2016-17. Over that same period, the state’s four-year colleges had 581 graduates from computer and information sciences and support services, up from 391 in 2013, according to the Louisiana Board of Regents.
Pierson said the success in building up the IT graduates from the state’s two- and four-year schools is one reason the IBM deal was transformative.
The education infrastructure helped the state land tech facilities by CSRA in Shreveport, CGI in Lafayette, GE Digital in New Orleans and IBM at the CenturyLink campus in Monroe, he said. Pierson wouldn't go as far as saying those deals might not have happened without IBM's Baton Rouge center.
The state would still have pursued those deals, Pierson said, but it helps having a well-known and well-respected anchor as a marquee that other firms can look to as an indication of how they might also succeed in Louisiana.
Landing those IT firms is one reason that Louisiana’s software industry grew by 22 percent from 2014 to 2016, the fifth-fastest mark in the country, according to Software.org, an industry-backed organization.
But that rapid growth means even greater competition for workers and plays into another possible issue for IBM: lower pay.
Under the agreement with the state, a full-time job there must pay at least $35,000 a year, although total job numbers are calculated by dividing IBM's annual payroll by $46,000. State officials referred salary questions to IBM. IBM declined comment.
A report from EconomicModeling.com shows the median pay for software developers and programmers in Louisiana is $67,508, 28 percent less than the national median.
However, Reeves said low pay for entry-level jobs in the industry is pretty standard. People have to start somewhere, he said.
Byron Clayton, president and chief executive officer of Research Park Corp., a nonprofit formed to kick-start the Baton Rouge area's tech industry, said while low pay contributes to Louisiana's tech worker shortage, the state also is well below the national average when it comes to minorities and women in those professions.
Other factors may also have played a role in IBM’s difficulties.
Louisiana universities don't always produce workers as skilled in programming languages, such as Google's Python or R, that developers would like to see, Reeves said. The schools may cover those languages generally, but to work in the "big data" fields of a Google or a PayPal, more in-depth training is required.
Magdy Bayoumi, head of the Department of Electrical and Computer Engineering at the University of Louisiana at Lafayette, believes IBM has missed an opportunity by focusing on computer science graduates and ignoring electrical and computer engineering or even math majors.
The university probably graduates as many people in electrical and computer engineering as in computer science, he said.
Baton Rouge Area Chamber President and CEO Adam Knapp said the 2016 record flood also was a factor. There was less housing available, so it was harder for prospective employees to get into the community, he said. Losing a period of time in the talent development cycle can have a substantial impact.
Still, economic development officials like Clayton say IBM can reach 800 jobs, but it will take hard work within the community.
Economic developers must do a better job of talking to employers, understanding exactly what their needs are and communicating that to universities, two-year community colleges and high schools, he said. Some of that work already is underway.
In addition to the higher education grants, there are local programming boot camps to help students advance their skills and initiatives, like the Futures Fund, Clayton said. The program connects students with professionals who can teach them skills that can help them work toward a career in a tech field.
Knapp said BRAC is working aggressively with the state and IBM on talent tours, talent relocation and recruitment, and on marketing and outreach efforts.
Part of that work involves communicating the quality of life in Baton Rouge to prospective employees, Knapp said, noting IBM has attracted workers to Baton Rouge.
Still, others say the IBM deal's shortfall shows other approaches to economic development, rather than incentive-laden packages, should be considered.
"This question of when and under what circumstances and at what cost and with what accountability measures we offer public subsidies to corporations is, as we see it, the central monolithic assumption that needs to be challenged in order to develop a more effective approach to economic development in this state," said Broderick Bagert Jr., the lead organizer of activist group Together Baton Rouge.
The IBM deal, however imperfect, was better-designed than 95 percent of the incentive packages the state has provided to industry, Bagert said. That's not to say the deal deserves a pass, but the agreement brought a new company to the state, required IBM to meet hiring goals and included a mechanism to claw back subsidies, he said.
Greg LeRoy, executive director of Good Jobs First, a left-leaning national watchdog group, said megadeals like IBM's persist despite low overall unemployment nationally and the budget woes of state governments.
Corporations like IBM know how much states want them and their jobs, he said. The corporations are experts at using that leverage to get a good deal.
Pierson said recruiting information technology firms is highly competitive, and it requires a strong offer to achieve a win.
But LeRoy said states would be better served with a lower-risk approach to economic development — taking what they are already good at and accelerating their advantages in those areas.