IBM says it's reaching for the 'moon' with Watson Health. That hasn't stopped layoffs.

Three former managers say IBM fired them because they spoke up against cutting a black software-sales rep’s commission.
Three former managers say IBM fired them because they spoke up against cutting a black software-sales rep’s commission.

IBM has acknowledged that its latest round of layoffs rippled through its Watson Health division, a unit its CEO has said is part of "our moon shot" to make history in the health-care arena.

The division is focused on using artificial intelligence in health care, and has several offices around the country, including near IBM's campus in Research Triangle Park, involved in the project.

Social-media postings on Facebook and Reddit indicate that employees in several offices involved in the IBM's Watson Health project received layoff notices just before the start of Memorial Day holiday. Many of the anonymous reports said the affected workers received 90 days' notice and the promise of a month's severance pay.

The layoffs targeted a quartet of formerly independent operations IBM bought in recent years to bolster Watson Health. One of them, Truven Health Analytics, has an office near RTP that apparently suffered cuts along with the rest.

Company spokesman Doug Shelton confirmed the layoffs but refused to say how many people lost their jobs, saying only that it "affects a small percentage of our global Watson Health workforce as we move to more technology-intensive offerings, simplified processes and automation to drive speed."

The precise extent of the layoff remains unclear. In North Carolina, IBM hasn't filed a mass-layoff notice under the federal Worker Adjustment and Retraining Notification Act, which kicks in when a layoff affects more than 50 people amounting to a third or more of the staff at a "single site of employment."

Similarly, there haven't been any recent WARN Act filings related to IBM in Texas or Ohio, two states social media reports indicate have Watson Health offices that were also hit by the late-May layoffs.

The layoffs are not the first at IBM this year. In April, Chief Financial Officer Jim Kavanaugh said the company had taken "about a $610 million [job] action" in the first quarter of 2018 to "continue repositioning our business," but did not say how many employees were affected.

In the company's first quarter earnings call, Kavanaugh ducked questions about whether the company was "done with the workforce rebalancing charges for the year."

Layoffs initially show up as a debit in IBM's financial reporting because the company has to give out severance and other "contractually obligated payments" to the workers it has fired.

Watson Health is one of IBM's key projects because it's trying to combine artificial intelligence, machine learning and big-data analytics to help researchers and physicians solve medical problems.

IBM's CEO, Ginni Rometty, in 2015 said she believes the company's future "moon shot will be the impact we have on health care" via Watson Health and other initiatives.

The company invested accordingly, in 2015 buying of Dallas-based Phytel, Cleveland-based Explorys and Chicago-based Merge Healthcare, and then in 2016 spending $2.6 billion to buy Truven Health Analytics and bring that company's 2,500 employees on board.

All told, once the Truven deal closed, IBM had "invested more than $4 billion to acquire and build an unparalleled array of cognitive healthcare capabilities," it said, having previously stressed that each of the acquisitions came with client lists and databases.

The databases were certainly among the most important components of the deal because machine-learning systems like Watson rely on having a large number of cases to comb through in their search for analytic breakthroughs.

Kavanaugh didn't say anything about Watson Health during April's first-quarter earnings call, but he noted that the "cognitive solutions" arm of the company that the division is part of part had bounced back from a weak fourth-quarter performance in 2017.

But the project has encountered skepticism outside the company, most notably from Jefferies Financial Group analyst James Kisner.

He published a 53-page report last summer that questioned whether the investment in Watson will ever pay off for IBM, mostly on the grounds that competitors like Google and Amazon seem better-positioned to win what he called "the A.I. war."

In that battle, the primary "sources of competitive advantage" are data and talent, and on the hiring front IBM "is not likely to win" given how aggressively companies like Amazon and Apple are recruiting A.I. specialists, he said.

Kisner said Jefferies' behind-the-scenes checks suggest that in healthcare, "Watson remains largely a research project," one that could see trouble because of privacy concerns.

An aborted relationship with the MD Anderson Cancer Center in Texas also supports perceptions that potential customers consider Watson "a bit of a Cadillac option that is very expensive," he said.

The MD Anderson project, an attempt to apply the technology to oncology diagnosis, foundered in the fall of 2016 after the center had paid IBM $39.1 million for it, an audit for the University of Texas system said.

There were management irregularities on the cancer center's end, auditors said, stressing they weren't offering an opinion on the "scientific basis or functional capabilities of the [IBM] system in its current state."

But a switch of health-records software at Anderson and other problems had hobbled Watson, to the point that at the end it was "not in clinical use," they said.

The situation illustrates that the "demand for consultants and data architects, to prepare the data and teach Watson" will "likely be the largest hindrance to widespread adoption," Kisner said, noting that IBM and its customers have different financial interests.

The MD Anderson misstep aside, IBM is forging ahead with Watson Health. Just before implementing the layoffs, the New York-based company announced that it'd made a deal with Apollo Hospitals, a private healthcare system in India.

The Apollo tie will place Watson in 10 hospitals, for use in oncology and genomics work.

Ray Gronberg: 919-419-6648, @rcgronberg