Dell: Pulling Out the Pink Slips?

Efforts to streamline operations suggest a round of job cuts could be coming at the beleaguered PC maker

by Louise Lee

Is Dell (DELL) preparing for a significant round of layoffs? All indicators are signaling yes.

The struggling PC maker has not uttered the actual words "job cuts" or "reduction in workforce." Just after he reassumed the CEO post on Jan. 31, founder Michael Dell did say that the company must "eliminate redundancies" as part of its turnaround. "We want to streamline how we do things," explains Dell spokesman Bob Pearson. "We have not said anything about head count." (See BusinessWeek.com, 3/2/07, "Dell's Doubtful Turnaround".)

Nagging Costs, Declining Sales

Dell, however, is reorganizing in a manner that consolidates several company areas, suggesting that pink slips may not be too far behind. The Round Rock (Tex.) computer maker is combining previously separate manufacturing, supply chain, and procurement operations into a single organization reporting to one executive. Dell also is creating a worldwide consumer business and a worldwide computer-services business, a change from the past practice of dividing up those units by country. Also, product design and development were parts of a separate unit reporting to the CEO; now they're to be folded into Dell's new worldwide consumer group (see BusinessWeek.com, 2/12/07, "Is Dell Too Big for Michael Dell?").

Given Dell's troubles, it's unlikely the company will be able to redeploy workers it finds in redundant positions. In the preliminary results for the most recent fourth quarter ended Feb. 2, operating expenses, which include salaries, crept up to 11.6% of sales, from 9.6% a year ago. Making matters worse, Dell's sales fell 5% from a year ago, to $14.4 billion.

Pearson wouldn't comment when asked if Dell would redeploy workers if it cut jobs. "We don't comment on hypothetical [situations]."

The Street Is Watching

The prospect of cutting jobs is only the latest trouble for Dell. The former top gun in PCs has been losing market share since the middle of last year, and now plays No. 2 to Hewlett-Packard's (HPQ) No. 1. Dell also is under investigation by both the Securities & Exchange Commission and the U.S. District Attorney for the Southern District of New York, which are examining certain accounting issues. Dell is pursuing its own internal probe, but it's unclear when that investigation will be completed. What's more, the company has in recent weeks experienced a management shakeup that included the departure of Kevin Rollins from the Chief Executive spot, the return of Michael Dell to that job, and the exits of other longtime senior executives (see BusinessWeek.com, 2/16/07, "Dell's New Blood: Cannon, now Garriques").

Wall Street already is suggesting that Dell needs to make sizeable cuts in its workforce. What caught the eye of analysts? The company's head count as of the end of the fourth quarter was 82,200 employees, representing an increase of 26%, or almost 17,000 people, from the year-ago level and a jump of 49% from two years prior—growth rates that far outpace sales. "Michael Dell hasn't said he's going to do what HP did (and pursue a big across-the-board cut)," says Cowen & Co. analyst (COWN) Louis Miscioscia. "If he said it and if he did it, the stock would go up."

The drumbeat for streamlining Dell's workforce is getting stronger. On Mar. 6, analyst Toni M. Sacconaghi of Bernstein Research released a report arguing that it's high time for the world's second-largest PC maker to cut its workforce. "We believe a 10% to 15% reduction would be a reasonable goal," the report says.