The cuts are in line with the Street’s expectations, so the company will not be faulted for not cutting deep enough. IBM had about 329,000 employees as 2004 came to a close, and it says it will use a mix of voluntary and involuntary layoffs to reduce its payrolls by between 10,000 and 13,000 employees. That works out to between 3% and 4% of its current payroll.
The immediate cause of the layoffs was the shortfall in sales and profits that IBM had as the first quarter came to a close. IBM’s sales in the quarter were $22.9bn, up 3.3%, and the company brought $1.4bn to the bottom line, an increase of 2.9% over last year’s first quarter. That worked out to 85 cents a share, and because of IBM’s share buyback and other financial engineering, earnings per share increased by 7.6%. However, analysts polled by Thomson/First Call had been expecting, on average, for IBM to rake in 90 cents a share on sales of $23.65bn.
But IBM’s problems in Europe, which it has not discussed, apparently go deeper than one quarter. The fact that the U.S. dollar is so weak has helped IBM Europe post decent growth in sales and profits in dollars, but at constant currency (mostly in pounds and euros), growth has been a lot less than IBM would like. So IBM is restructuring to get more people selling and fewer people managing–or, at the very least, fewer people managing.
IBM said it was going to restructure its European operations, where each country has had its own Baby Blue fiefdoms for decades and where IBM Europe (commonly called IBM EMEA, for Europe, Middle East, and Africa) had what amounted to a top layer of upper management akin to that in its U.S. headquarters. This organization is a legacy leftover from when Thomas Watson, IBM’s founder, had to give his two sons, Tom and Dick, more or less equal pieces of the business to run.
IBM said it plans to reduce the bureaucracy in slower growth countries in Europe and create management and sales teams that can span regions, which obviously makes sense for an IT vendor that sells products across a unified (at least economically) European Union. IBM also said it would be consolidating the centers from which it provides services.
Prior to the European Union, IBM and other transnational companies often had to have complete operations in each country, for political, cultural, and economic reasons. No one who wants IBM service in one European country is going to make a fuss if that service is derived from another country these days. IBM no longer manufacturers computers or creates software in every country, either. Neither does any other IT vendor.
Because the European operations of Big Blue will bear the brunt of the layoffs, it is tough to nail down an exact number of layoffs and their cost. In European countries, there are still strong trade unions, and it is more difficult for IBM to make layoffs. There are rules and processes, and it cannot be done quickly or easily. Nonetheless, IBM said it plans to record a pre-tax charge of between $1.3 billion and $1.7 billion in the second quarter to cover the restructurings, and it expects the benefits of that restructuring to start affecting its numbers in a positive way during the second half of this year.
IBM will host a conference call with analysts at 8 a.m. today to discuss the restructuring it plans to undertake.
