IBM skeptical about European future, say insiders

Executives at IBM's European headquarters in Paris have an unusual take on the crisis that is gripping the iconic computer giant.

It was announced last week that 13,000 mainly European IBMers - as they like to be known - will be made redundant in a wide-ranging restructuring of the business. This followed news that the company had missed first-quarter profit forecasts last month, partly due to sluggish growth in Europe.

Analysts have criticised Big Blue for operating a bloated and overstaffed European head office - especially when compared with its rivals HP, Accenture and Computer Sciences Corporation. But a spokesman for IBM Europe has a different view of why so many staff now face the chop.

"The problem is that Europe has a low attrition rate," he says. "IBM has always been considered to be the best place to work - so people don't leave. As a result, we have overcapacity."

There is some truth in this. The company pays good wages, promotes the idea of "IBM lifers" and has a relaxed dress code - something that is particularly important to people working in the IT industry.

But the real reason IBM executives in New York have decided to axe their European staff - possibly including up to 2,000 in the UK - goes much deeper than just low staff turnover. The company is shifting its attention from uncompetitive Western Europe to more promising markets in the east.

IBM denies that the move represents a reduced interest in Western Europe. The spokesman says the company doesn't believe the dip in European growth is the start of a long-term trend.

But sources close to IBM's US head office say executives are becoming more frustrated with Western Europe. Take labour costs, for example. Says one source close to IBM: "They simply don't want a European HQ in France. The structure has become bloated and old. The restructuring plans are something they have wanted to do for some time because France is not a good place for an HQ. There's the 35-hour working week, wages are high, they can't get rid of staff easily and they pay Christmas bonuses, for goodness' sake."

Roger Fulton, a vice-president of research at technology research firm Gartner, agrees: "American companies can't believe how well protected jobs are in mainland Europe. They see this as a competitive disadvantage."

IBM said that the cost of its restructuring would be $1.3bn to $1.7bn ((pounds sterling)682m to £892m) in the second quarter of its financial year.

Under its restructuring plans, its European head office in Paris will be dismantled, replaced by "operating hubs" in Zurich and Madrid, each employing around 200 people.

While IBM will shrink in Western Europe, it is expected to grow its operations in emerging markets. The spokesman for IBM Europe says: "We will be focusing our attention onhigh-growth geographic areas, such as Eastern Europe."

IBM already has bases in Hungary, the Czech Republic and Russia. Although the company refuses to say whether it is planning a recruitment drive in these countries, it is understood that plans are now being drawn up for a big push.

Another suggestion is that the company will establish a new base in Berlin to act as a springboard into more Eastern European countries.

There's another reason why IBM has decided to take the axe to its European operation: to give it a competitive edge when pitching for new business.

IBM's history is marked by a series of missed opportunities. In the 1960s and 1970s it dominated the mainframe computer market, where it developed a reputation for building solid and reliable machines. The saying in the IT industry was that nobody ever got fired for buying IBM.

But the company's grip on the mainframe market landed it in hot water with the competition authorities, and as it fought legal battles with the regulators, IBM failed to innovate.

Its monumental mistake was in personal computing. At the beginning of the 1980s, the PC market was there for the taking as IBM was the biggest desktop computer maker. Big Blue needed a new operating system for its machines so it approached a 19-year-old software developer to help it out. That was Bill Gates, the co-founder of Microsoft.

IBM, however, underestimated the growth potential of the PC and handed Mr Gates the property rights over the operating system, allowing Microsoft to become the dominant force in software, at the expense of Big Blue.

IBM closed that chapter in its history in December by announcing the sale of its PC business for $1.75bn to a Chinese company, Lenovo.

Under the leadership of its chairman and chief executive, Sam Palmisano, IBM is today focused as an IT services company - designing, developing and running computers for companies and governments. But the shock of seeing business slow in Europe has jolted it into action to make sure it doesn't lose its market.

Under IBM's plans, individual country teams will be given more authority to deal with customers, instead of the "command" style of management currently operated from the European HQ.

IBM calls this "on-demand computing" and it is, in effect, a realisation that the IT service sector has been slow to respond to clients' needs in the past.

"The idea of on demand is to make IBM more agile - to respond quickly to changes in business cycles," says Mr Fulton at Gartner.

Jamie Snowden, a senior analyst at technology research company IDC, says: "This looks like a move to the future - that IBM is setting itself up for the next 10 years."

With the recent profits warning and the job cuts, it is difficult to view IBM as anything but crisis-hit at the moment. But Big Blue may also be breaking from a long tradition of resting on its laurels and only realising that the world has moved on once it is too late.

- INDEPENDENT