more on IBM, colleges: More top students needed

[David Farber <dave () farber net>]

Begin forwarded message:

From: "John F. McMullen" <observer () westnet com>
Date: May 20, 2005 3:50:23 PM EDT
To: johnmac's living room <johnmacsgroup () yahoogroups com>
Cc: Dave Farber <farber () cis upenn edu>
Subject: Re: [johnmacsgroup] IBM, colleges: More top students needed
Reply-To: johnmacsgroup () yahoogroups com


From the Wall Street Journal --
http://online.wsj.com/article/0,,SB111661590470639414,00.html? 
mod=home_whats_news_us

IBM Is 'Back on Track,' CEO Says
By CHARLES FORELLE

International Business Machines Corp. Chief Executive Samuel
J. Palmisano said he was confident that recent layoffs and
restructuring actions will get IBM "back on track" after the
company "hit a bump" in the first quarter.

Mr. Palmisano's comments came at IBM's annual meeting with
financial analysts Friday in New York, during which he and
other top executives sought to reassure Wall Street that an
abrupt shortfall in first-quarter earnings was a one-time
hiccup.

Mr. Palmisano made no new broad strategic pronouncements at
the meeting, which is held each spring and normally devoted to
Big Blue's long-term outlook. Several of Mr. Palmisano's top
lieutenants dissected the technology giant's first-quarter
performance, offering their most detailed comments yet about
what went wrong. The meeting was closed to the public but was
simultaneously broadcast on the Internet.

John Joyce, head of IBM's giant services arm, which shouldered
the brunt of the blame for the weak results, said that the
second quarter appears to have opened fairly strongly for IBM;
he cited several large new deals, but cautioned that "we've
got to have a good finish."

In the first quarter, Mr. Joyce said his unit suffered from a
sudden fall-off in deal-signings in the middle of March,
particularly in Western Europe and Japan. A particular
surprise was a 14% decrease in signings of contracts to
install or design technology infrastructures, a core area. In
Japan, Mr. Joyce said, he saw particular weakness in the
original-equipment manufacturer business, in which IBM resells
other vendors' equipment and tacks on a services arrangement
to help the customer figure out how it should be used.

Heads of IBM's other units -- including hardware and software
-- reported similar symptoms: Trouble in Europe that appearedsuddenly  
in mid-March. That laid bare how critical services is
to IBM. Services deals, which run the gamut from simple
equipment installations to more complex business-consulting
arrangements, tend to bring in hardware and software sales.
When services sees a shortfall, IBM's other businesses also
often take a hit.

William Zeitler, the hardware chief, said Dell Inc. and other
competitors selling computer servers pounced on IBM's low-end
server business and "we didn't respond quickly enough." He
also cited problems with a long-delayed data-storage machine
and weaker-than-expected mainframe sales.

Mr. Joyce also noted that his division is signing fewer of the
giant, long-term deals that IBM has depended on to deliver
steady growth. Instead, he said, the company is focusing on
short-term deals that come with higher profit margins but tend
to be more volatile. Services revenue was about $46 billion in
2004, about half of IBM's total sales.

Profitability in the services business was hurt in part
because of high "fixed costs" in Western Europe, particularly
Germany, Mr. Joyce said. The services business's largest cost
is labor, and an ability to rapidly add, subtract or move
people in response to changing market conditions is critical
for success in the business.

"Those results showed that even IBM wasn't immune to the
difficulties of managing the peaks and troughs of a
people-intensive business," says Joel Wagonfeld, an analyst at
First Albany Capital.

Mr. Joyce added that IBM was reconfiguring its
incentive-compensation program so that sales representatives
will pursue small deals instead of "hovering over the large
megadeals," which aren't materializing as quickly as they once
did.

"We need to be able to handle and cover smaller transactions,"
Mr. Joyce said.

After the first-quarter earnings shortfall, IBM said it would
eliminate a layer of pan-European management; lay off between
10,000 and 13,000 workers, mostly in Europe and mostly in the
services group; and take a pretax charge between $1.3 billion
and $1.7 billion this quarter to pay for the moves.

Mr. Palmisano said IBM was continuing on its strategy of
seeking high-value deals, getting out of slow-growth or
low-margin businesses, and aiming to make the tech giant a
one-stop shop for companies looking for big-picture plans for
the use of technology in their businesses.

That strategic shift, he said, "can lead to short-term
performance issues."

Write to Charles Forelle at charles.forelle () wsj com

Copyright 2005 Dow Jones & Company, Inc.
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    "Always make new mistakes" -- Esther Dyson
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                           John F. McMullen
    johnmac () acm org johnmac () computer org johnmac () m-net arbornet org
                   johnmac () tmail com johnmac () echonyc com
            jmcmullen () monroecollege edu johnmac () alumni iona edu
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                   http://www.westnet.com/~observer
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