IBM: Restructuring Will Save Up to $2 Billion

The company says its plans to cut 10,000 to 13,000 jobs-mostly in Europe-will save it $300 million to $500 million in the second half of 2005, and up to three times that in 2006.

IBMs restructuring plans, which will include 10,000 to 13,000 job cuts, will save the company $300 million to $500 million in the second half of the year, and two to three times that in 2006.

Speaking to analysts and reporters Thursday morning, Mark Loughridge, IBMs senior vice president and chief financial officer, said the amount of savings this year will depend on how quickly the job reductions occur. The cuts will represent a more than 3 percent reduction in IBMs 329,000 global workforce.

Most of the job cuts—as much as 70 percent—will happen in Europe, and IBM currently is working with various labor groups there to implement the workforce reductions. Loughridge said he expects most cuts in Europe to happen through voluntary programs, though many outside of Europe will come through involuntary job cuts.

IBM in March laid off about 500 employees in Sweden, and during his talk with analysts and reporters, Loughridge pointed to England, France, Germany and Italy in particular as countries that will experience job cuts.

Officials with IBM, of Armonk, N.Y., warned the industry last month—when announcing disappointing first-quarter earnings results—that it would undertake significant restructuring plans. "Yesterdays announcement lays out our plans," Loughridge said. More details will be released when IBM announces second-quarter earnings in July, he said.

He added that the restructuring—which will focus primarily on Europe but also touch other regions, including the United States—was not simply a reaction to the first-quarter financial results, but also part of a larger push by IBM to focus more on high-margin, high-end parts of the business, such as enterprise hardware, services and software.

That focus was most recently highlighted by IBMs decision to sell its Personal Computing Division to Chinese computer maker Lenovo Group Ltd., a $1.75 billion deal that closed on Sunday. IBM got out of a highly-commoditized, low-margin business, Loughridge said. It also shifted about 10,000 jobs from IBM to Lenovo.

The restructuring also has to do with making IBM—in particular its services business—more responsive to customer needs and competitive demands, he said. It will eliminate many of the higher level management jobs in the services business, especially in Europe, and put more focus on jobs closer to customers, Loughridge said.

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"We are driving the decision-making authority much lower in the organization and bringing it much closer to our clients," he said.

As such, there is less need for a "pan European" management layer, he said. There will be few changes among the employees who work most closely with customers, he said. Its that those people will have more control over such issues as pricing, marketing and sales. In addition, IBM will consolidate much of its services support into more local centers around Europe, with the idea of bringing that support closer to the "client-facing" employees. IBM also will prepackage more of its low-end services offerings, fueling the need for fewer people.

"Less hierarchy and a more streamlined process will create efficiencies," Loughridge said.

While he said that the restructuring was not entirely in response to the first-quarter earnings, those results did play a role. IBM missed financial expectations by 5 cents a share, which CEO Sam Palmisano blamed in part on slow sales in Europe and the inability of the company to close some deals.

IBM later announced that 50 of its top executives would not receive raises until performance improves. The restructuring is aimed at aiding that improvement. However, it also will mean a charge of $1.3 billion to $1.7 billion in the second quarter, primarily due to the job cuts.

Most of the restructuring changes will be put in place after the second quarter ends in July, Loughridge said.

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