Business Analysis: Can this latest round of blood-letting fix Big Blue?

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The Independent Online

One of the great business clichés over the decades has been that no one ever got sacked for buying IBM, the technology giant that had some sort of solution to all your company's needs.

Sadly for 13,000 mainly European IBM workers, the reverse is now true as they face redundancy from the "Big Blue", which is going through a painful upheaval to restructure itself in the face of growing threats to its business.

It was only in November that IBM hit the headlines after its shock decision to quit its iconic PC business, which it sold to the Chinese manufacturer Lenovo for $1.75bn (£900m).

Three weeks ago it revealed disappointing first-quarter results, well below analysts' expectations, and yesterday the Armonk, New York-based business, left unions angry and confused about how many of the redundancies announced late on Wednesday would come from its 25,000-strong UK workforce.

Coming on top of last week's news from Marconi that cuts would have to be made from its 4,500 UK workforce, after failing to win any business from BT Group's £10bn network upgrade, it has been a black seven days for the country's technology industry.

Peter Skyte, the national officer at Amicus, one of the main unions affected by IBM's job cuts, said: "This announcement is a slash-and-burn approach to first-quarter financial results aimed at boosting the share price and the resulting share options of senior US executives. IBM is behaving like the worst 19th-century farmer ­ hiring for the harvest and firing at the end of the season ­ and treating skilled IT professionals as mere commodities."

It is certainly true that IBM's first-quarter results were poorer than expected. In mid-April it reported a profit from continuing operations of $1.41bn, or 85 cents a share, compared with $1.36bn, or 79 cents a share, a year earlier. Analysts had expected profits of 90 cents a share.

For all of Mr Skyte's understandable concerns, IBM is reacting not to some seasonal or cyclical blip in the world economy but to permanent changes in the way customers do business and, just as important, how competitors do business.

Roger Fulton, an analyst with Gartner, said: "There isn't a rising sun in the marketplace saying 'hey, wait a few months and everything will start to look better'."

IBM has been trying to reinvent itself for years. Wednesday's announcement about job losses and November's sale of its PC business are just the latest elements in a 20-year period during which IBM nearly collapsed, found an unlikely lifeline and was brought back to life. It is now trying to forge a future focused on software, technology solutions and high-value servers.

Its latest redundancy round ­ in 2002, Sam Palmisano, the chief executive, announced 15,600 job losses ­ is a reaction to four themes that continue to dog Big Blue. The company's recent financial performance has been woeful and it needs to cut costs to appease shareholders; its operations have fallen behind some of the best practices it espouses to its own clients about modern, technology-based business behaviour; the company continues to suffer from more competitive but high-quality competition from new rivals based in IT hot spots such as India; and finally, the very software that IT personnel have spent years perfecting is now sufficiently clever to do many of the jobs, such as problem solving, that human beings have done.

While IBM left unions in the dark yesterday about the details of its redundancy programme, it did say most job losses would come from Europe where it has seen sluggish growth in markets including Germany, Italy and France. At its first-quarter results, it warned that big European economies had been slow and job losses were looming. Across Europe it employs 100,000 people, and in the UK, where there will also be serious job losses, it employs 25,000..

Mark Loughridge, the chief financial officer, said the cuts would save $500m a year but the organisational changes, to take effect from 4 July, would pose a one-off cost of $1.7bn. Despite this, IBM's shares rose on Wall Street after a two-week period of consecutive falls.

In a statement, IBM said: "The company plans to realign its operations and organisational structure in Europe to improve the speed of execution and better meet the needs of its clients. The success of this strategy will depend on reducing bureaucracy and infrastructure in lower growth countries and creating teams that can work across country borders, shifting more employees into direct client roles that support the company's plans to deliver higher-value services and products.

"This eliminates the need for a traditional pan-European management layer to co-ordinate activity. As a result, IBM will create a number of smaller, more flexible local operating units in Europe to increase direct client contact."

To some experts this prognosis could have come straight out of IBM's business solutions handbook that it flogs so hard to thousands of clients. Mr Fulton said: "We think they [IBM] are actually in the throes of implementing a strategy that relates to the 'on demand' strategy that they are selling to their own customers. They are taking their own medicine. We see them accelerating a change of business strategy."

What "on demand" means is implementing a way of running a business that involves making use of flexible technology that doesn't cost the earth and doesn't need huge teams of expensive consultants to make sense of it once you've bought it. By getting closer to clients, cutting out its own bureaucracy and boosting its service levels, IBM hopes to sell more of its kit and ideas as and when companies need them. It is the technology equivalent of manufacturers' "just in time" delivery concept.

IBM has been through major upheavals before. In 1993 Louis Gerstner, the former American Express and RJR Nabisco hero, was hired to save it from likely extinction. Although it failed to dominate the global PC market, Mr Gerstner at least recognised its sheer scale could save it in an IT world becoming increasingly complicated and fragmented.

As technology suppliers multiplied, Mr Gerstner and his team correctly predicted that companies would want experts to offer solutions to integrate all this new kit that somehow connected together but came from a plethora of suppliers. IBM was in a position to offer these "end-to-end" solutions.

They also recognised that things were going to fragment further as the internet and digital networks ­developed, which would require larger and more sophisticated servers to manage the ever-increasing flow of digital data. All this played into the traditional strengths of IBM. It was developed into a huge software business, having bought the likes of Lotus, with its famous Notes software, in a hostile bid in 1995.

However, the company is now realising that size is not everything. More nimble, lower-cost rivals such as India's Wipro are eating into IBM's traditional business. The Big Blue needs to slim down and modernise if it is to carry on competing successfully in the global IT business.