Palmisano May Consider Layoffs to Right IBM

Some IBM employees could receive pink slips as early as this week, sources said, in the wake of statements made by CEO Samuel Palmisano, who last week acknowledged that the company must consider layoffs as a way to improve productivity.

While company officials, in Armonk, N.Y., declined to discuss details of the layoff plans, sources said 10,000 to 20,000 employees could be cut over the next quarter. IBMs hard-hit semiconductor manufacturing facilities—specifically plants in Essex Junction, Vt., and East Fishkill and Endicott, N.Y.—are expected to be among sites affected.

In his first public meeting as CEO with analysts last week, Palmisano, who succeeded Louis Gerstner in March, did not contradict speculation that, because of continued slow spending on technology by enterprise customers, IBM could reduce employee head count by as much as 20,000, about 6 percent of IBMs total employees.

"We need to look at head count," Palmisano told financial analysts last week in a briefing in New York. In answer to a direct question about whether IBM could be expected to cut about 20,000 employees, Palmisano said, "That analysis is a good one. Its absolutely appropriate at a macro level." Palmisano also said, however, that other steps would have to be taken to improve productivity at the company.

Almost one month ago, IBM reported that first-quarter profits had declined 32 percent from the same year-ago period to $1.19 billion. Sales also dropped about 12 percent from the year-ago period to $18.6 billion.

Palmisano declined to specify which parts of IBMs business would be affected most or when the cuts might come. If the company suspended hiring, he said, it could expect to reduce head count by 15,000 over an unspecified period by attrition alone.

He did nothing, however, to dispel widespread speculation that IBMs OEM hardware businesses—specifically its merchant semiconductor operations—would be high on the list of business units subject to cuts. A year ago, said Palmisano, IBM was pushing to increase semiconductor output by 50 percent, and OEM customers were screaming that they couldnt get enough product. Today, in the wake of the recession and reduced IT spending, the semiconductor industry is saddled with overcapacity. As a result, regarding semiconductor operations, Palmisano said, "[We] need to make some adjustments. Short term, we will drive earnings by driving efficiency and productivity."

Some observers last week said IBM should not only consider head count reductions in OEM businesses such as its merchant semiconductor operations but that the company should also consider exiting those businesses. As semiconductors and other OEM products become commodities and as margins shrink, say analysts, its difficult for IBM to make money in these markets.

"The OEM businesses are whats hurting them most," said Bob Djurdjevic, an analyst at Annex Research, in Phoenix. "They never should have been in some of those businesses in the first place."