Dell: Pulling Out the Pink Slips?

Efforts to streamline operations suggest a round of job cuts could be coming at the beleaguered PC maker

Is Dell (DELL) preparing for a significant round of layoffs? All indicators are signaling yes.

The struggling PC maker has not uttered the actual words "job cuts" or "reduction in workforce." Just after he reassumed the CEO post on Jan. 31, founder Michael Dell did say that the company must "eliminate redundancies" as part of its turnaround. "We want to streamline how we do things," explains Dell spokesman Bob Pearson. "We have not said anything about head count." (See, 3/2/07, "Dell's Doubtful Turnaround".)

Nagging Costs, Declining Sales

Dell, however, is reorganizing in a manner that consolidates several company areas, suggesting that pink slips may not be too far behind. The Round Rock (Tex.) computer maker is combining previously separate manufacturing, supply chain, and procurement operations into a single organization reporting to one executive. Dell also is creating a worldwide consumer business and a worldwide computer-services business, a change from the past practice of dividing up those units by country. Also, product design and development were parts of a separate unit reporting to the CEO; now they're to be folded into Dell's new worldwide consumer group (see, 2/12/07, "Is Dell Too Big for Michael Dell?").

Given Dell's troubles, it's unlikely the company will be able to redeploy workers it finds in redundant positions. In the preliminary results for the most recent fourth quarter ended Feb. 2, operating expenses, which include salaries, crept up to 11.6% of sales, from 9.6% a year ago. Making matters worse, Dell's sales fell 5% from a year ago, to $14.4 billion.

Pearson wouldn't comment when asked if Dell would redeploy workers if it cut jobs. "We don't comment on hypothetical [situations]."

The Street Is Watching

The prospect of cutting jobs is only the latest trouble for Dell. The former top gun in PCs has been losing market share since the middle of last year, and now plays No. 2 to Hewlett-Packard's (HPQ) No. 1. Dell also is under investigation by both the Securities & Exchange Commission and the U.S. District Attorney for the Southern District of New York, which are examining certain accounting issues. Dell is pursuing its own internal probe, but it's unclear when that investigation will be completed. What's more, the company has in recent weeks experienced a management shakeup that included the departure of Kevin Rollins from the Chief Executive spot, the return of Michael Dell to that job, and the exits of other longtime senior executives (see, 2/16/07, "Dell's New Blood: Cannon, now Garriques").

Wall Street already is suggesting that Dell needs to make sizeable cuts in its workforce. What caught the eye of analysts? The company's head count as of the end of the fourth quarter was 82,200 employees, representing an increase of 26%, or almost 17,000 people, from the year-ago level and a jump of 49% from two years prior—growth rates that far outpace sales. "Michael Dell hasn't said he's going to do what HP did (and pursue a big across-the-board cut)," says Cowen & Co. analyst (COWN) Louis Miscioscia. "If he said it and if he did it, the stock would go up."

The drumbeat for streamlining Dell's workforce is getting stronger. On Mar. 6, analyst Toni M. Sacconaghi of Bernstein Research released a report arguing that it's high time for the world's second-largest PC maker to cut its workforce. "We believe a 10% to 15% reduction would be a reasonable goal," the report says.

That reduction "would help bring Dell's revenue per employee closer to historical levels of $850,000 to $900,000," compared with $775,000 for the most recent fiscal year. Sacconaghi points out that Dell's most recent major layoff occurred in 2001, when it had two rounds of cuts that whittled the total workforce by 13.5% and by more than 25% in the U.S. "Comparing that time to the present, Dell's imperative to reduce head count is arguably much greater now," Sacconaghi says. "Head count growth has exceeded revenue growth for 10 straight quarters, operating expense has ballooned, and revenue per employee is at a seven-year low."

Asked about Sacconaghi's report, Dell's Pearson says, "Whether I like what Toni says or not, he knows what he's doing."

New Hires in Emerging Markets

Most of Dell's hiring has been in the high-growth markets of China and India. In China, Dell has hired people in manufacturing, sales, and technical support positions. By at least one measure, Dell's investments in China are paying off. In its third-quarter earnings release in November, Dell says computer shipments in China rose by 33% from the year-ago period; during the prior quarter, unit shipments rose by 37%. Dell, however, does not disclose sales figures for China.

In India, Dell has hired workers into call centers and onto sales staffs. The company has seen a particular need for more call-center workers to help improve customer service and tech support, which in recent years have been heavily criticized for lengthy wait times and excessive call transfers, among other problems. Dell says it has improved the rate at which it resolves questions on the customer's first call.

Dell also has added workers in its assembly plants, including one that's scheduled to open in India later this year. The bulking up in manufacturing turned out to be a poorly timed investment, as they were all occurring just when sales growth was slowing down. "It wouldn't be a shock for them to say, 'We added too much,' " says Miscioscia.

Where to Cut

If Dell were to reduce its workforce, where could it cut? Like most companies, it would likely eliminate midlevel overhead jobs in areas like marketing and accounting. But reducing workers in sales and support is a harder question. "Usually, companies don't like to cut sales, unless they're ineffective," said Miscioscia. Reducing customer service and tech-support staff would also be a tough call because of Dell's recognized need to improve service. And Dell would be hard-pressed to cut jobs in IT services, a people-intensive business that it has resolved to expand.

Dell is likely to look for a reduction in head count in manufacturing. It currently has plants around the world. But the PC maker could move to consolidate more manufacturing in Asia, where it already performs some of that work, says Roger Kay, president of researcher Endpoint Technologies Associates. Mike Cannon, the former CEO of contract manufacturer Solectron (SLR) and Dell's recently hired president of global operations, is particularly "adept with Asian manufacturing," says Kay. "It's my interpretation and speculation that because of his orientation, he may look to shift more manufacturing to Asia."

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