IBM's Restructuring Blues


By Steve Hamm IBM (IBM) started off the year with a strategy aimed at "lowering the center of gravity." The idea consisted of revamping a 330,000-person workforce to reduce expenses, shift work to lower-cost countries, and strip out bureaucracy. So far, the program has mainly lowered Big Blue's stock price and employee morale.

Workers in Western Europe, in particular, are up in arms over the staff cuts. More than 2,000 positions are likely to be eliminated in France, Germany, and Sweden. Word is hundreds of tech-services jobs will shift from Western Europe to Hungary.

HUGE CHARGE? On Apr. 26 some 600 unionized employees rallied outside IBM's German headquarters in Stuttgart, and similar protests are planned in France. "People are angry about how this is being done," says Gerhard Rohde, a director at Switzerland's Union Network International, a labor coordinating group.

IBM admitted when it reported disappointing earnings for the first quarter (see BW Online, 4/18/05, "Tech's Gathering Gloom") that staffing shifts were a factor in its poor results. Since then, the stock has dropped 10%, to $76. The company, which declined to comment for this story, is wooing shareholders with a $5 billion stock buyback and an 11% dividend increase. Its top 50 executives have also given up raises until they get the locomotive back on track.

Now analysts and investors are waiting for the other shoe to drop. IBM has hinted at a major charge for staff cuts -- which analysts estimate at 10,000 jobs. News on a restructuring is expected before CEO Samuel J. Palmisano's annual analyst briefing in June.

SHOCKING RESULTS. Analyst Benjamin Reitzes of UBS expects the charge to be several hundred million dollars. He estimates that if Big Blue cuts its workforce by 10,000, it will be able to save $1 billion a year on a pretax basis.

He's concerned that disappointing revenue growth in IBM's traditional info-tech services business may signal that the 2002 acquisition of PricewaterhouseCooper's consulting business may not be working out as hoped. And Reitzes believes Palmisano should consider naming a chief operating officer to improve execution.

IBM shocked Wall Street Apr. 14 with first-quarter results that came in well below analysts' forecasts. Big Blue posted revenue growth of only 3%, to $22.9 billion. Earnings per share rose 8%, to 85 cents, in the quarter. Sales of traditional IT services and mainframe computers were disappointing.

MEA CULPA. At the same time, revenues for IBM's strategic growth area of business-transformation services rose by a very strong 40%, to $900 million. The company blamed its own execution, plus economic factors in Europe, for the overall revenue shortfall.

Before the first-quarter miss, IBM said it expected to hire tens of thousands of employees this year, even while pruning the workforce of thousands with less-needed skills. It was all part of Big Blue's strategy to add staff with a combination of consulting, business, and technology skills, as the company continues its effort to boost the value of the work it does for clients. It's unclear now if that planned hiring will go ahead.

During last year's analyst briefing, Palmisano was flying high, buoyed by a series of strong earnings reports. This year, he has a lot of explaining to do. Hamm is a senior writer for BusinessWeek in New York


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