Big Blue bets on restructuring to turn ship around

Ireland will not be immune from the impact of jobs cuts announced by IBM in the wake of a poor sales performance across Europe, writes Jamie Smyth, Technology Reporter

IBM's decision to cut up to 13,000 jobs in Europe and the US is not surprising, given the poor set of results released last month, which unnerved stock markets.

Despite posting a slight increase in revenue for the first quarter of 2005, IBM's results missed expectations and highlighted weak sales across Europe. And crucially, key rivals such as EMC, which competes with IBM in the data storage industry, did not report the same problems.

"This is more of an IBM-specific issue than an industry-wide problem," says Chris Ingle, an analyst with the technology consultancy IDC. "We forecast that the technology industry will grow modestly in Europe by about 4 per cent this year."

A strategic change in direction by IBM, which earlier this year announced the sale of its PC division to the Chinese firm Lenovo, and extremely tough competition in the firm's hardware market, may have had some short-term impact on IBM.

But structural weaknesses at its European division were already acknowledged by the firm in earlier statements this year.

Yesterday, IBM management alluded to its poor sales performance in the big European markets of Italy, Germany and France when announcing job cuts.

It said it would now remove its pan-European management team and create teams of local staff that could move from country to country to meet client needs better. It hopes this will speed up the time it takes to make sales.

The majority of the job cuts by IBM will be made in Europe, although the firm hopes to achieve most of these through voluntary programmes. Germany, Italy, Britain and France are likely to be the hardest hit regions, with IBM already indicating that it is beginning consultations with trade unions.

In the Republic, IDA Ireland said yesterday it does not expect the job cuts to have any significant impact on IBM's operations, which employ 3,700 people.

But up to 400 positions at the firm's semiconductor testing facility at its technology campus in Mulhuddart on the outskirts of Dublin are likely to become redundant. The jobs, which are mostly in manufacturing, are understood to be moving to the Far East as part of a deal struck by IBM last year with the Singapore- based company Amkor.

IBM would not comment on the future for the division yesterday. However, it is understood that the firm is planning to offer employees retraining and redeployment at the firm's other manufacturing unit in Mulhuddart, which makes server computers.

A voluntary redundancy scheme will be set up by IBM and it is expected that many staff at the plant will take it up.

IBM's decision to outsource more of its microchip testing operations to the Far East follows similar moves by other firms to shift manufacturing-style operations to lower cost locations. For example, the US technology company 3Com shed 650 staff in Blanchardstown in early 2004, and in the process outsourced its manufacturing to China and Mexico.

Similar cost-competitiveness issues are behind the decision this week by Waterford Wedgwood to shed 1,800 jobs in a bid to turn around its business. And most analysts believe the drift of lower skilled jobs toward lower cost locations will continue.

But the highly skilled nature of many of the other functions performed by IBM's Irish staff, which include software development, IT services and treasury functions, should save them from the axe. However, IBM will have to turn around its performance in Europe to safeguard jobs in what is still an incredibly tough technology market across Europe.

"The market in Europe has been pretty tough for the past four years and firms are facing pricing pressure and very tough competition," says Roger Fulton, vice-president of research at the technology consultancy Gartner.

The troubles at IBM's European division were probably masked by a strong euro exchange rate against the dollar over the past year or so, says Fulton, who predicts a rocky ride for the European technology industry over the next few years.

"IT spending is linked very clearly with rises in economic activity, which remains weak throughout Europe," he says. "Also chief executives at companies across Europe are buying technology purely to resolve business problems. It is not the sellers market that it was back in the 1990s and it is not going to return there in the future."

In this difficult economic climate, IBM's decision to cut jobs is understandable. The firm anticipates taking a one-off second quarter charge of $1.3- $1.7 billion (€1.0-€1.3 billion).

But IBM's chief financial officer Mark Loughridge told investors yesterday that the company expected to realise about $300 million to $500 million in savings during the second half of 2005, and $1 billion or more during 2006 as a result of its restructuring actions. This amounts to around 1 per cent of total corporate spending and should help IBM boost its profits.

But if "Big Blue" is to regain its former glory in the European region it will have to prove to customers it can deliver better services in a more efficient manner.