Services shakeup

T-Systems cuts a quarter of workforce

Erweiterung des Cloud-Rechenzentrums Biere
Might not need as many of these. Source: Jens Kalaene / DPA picture alliance

In a massive round of cost-cutting, T-Systems, Deutsche Telekom’s IT services arm, is to shed around 10,000 jobs worldwide. Substantial restructuring has been on the cards ever since Adel Al-Saleh became boss of the unit early this year, tasked with transforming the perennially loss-making Telekom subsidiary.

But the cuts are larger than expected. Just last month, the talk was of €300 million ($348 million) in necessary cost savings. Now Mr. Al-Saleh, a former American IBM manager, has announced cutbacks of €600 million. As the IT sector evolves, Mr. Al-Saleh wants to radically cut dead wood, positioning T-Systems to benefit from a booming global market in IT services, where it competes against Amazon Web Services, British telecoms firm BT and Fujitsu.

The layoffs amount to one-quarter of the company’s staff worldwide and 6,000 of the job losses are expected to come in Germany, with some 200 of the company’s 230 offices expected to close. Several layers of management will be stripped out of T-Systems’ notoriously bureaucratic structure, an inheritance from Deutsche Telekom’s days as a state-owned monopolist.

Telekom’s problem child

The IT division has long been a worry for Deutsche Telekom, its mother ship, losing over €5 billion in the last decade, despite previous restructuring attempts. Now, Mr. Al-Saleh is looking to free up resources for investment in growth areas, including the “internet of things.” He is also promising a return to profitability by the end of 2020.

Whether these measures succeed depends on the way trade unions react. In the past, even labor representatives conceded that reforms were urgently needed. But the scale of job losses shocked officials, and they have condemned the cuts. Mr. Al-Saleh said there would be talks with unions, but insisted there is little room for compromise.

Even more than other sectors, digitization has presented the IT services industry with life or death choices. It makes little sense for companies to retain hundreds of IT maintenance staff when the job can be done remotely from elsewhere in the world.

22 Bleeding Money-01

Unfortunately, labor-intensive maintenance has traditionally been T-Systems’ core business. With the world changing faster than the company, it is time to shift focus, cut costs and refocus, says Mr. Al-Saleh.

He bets that if reforms go through, T-Systems will be well-placed for an unprecedented boom in IT services. Figures from Bitkom, Germany’s IT industry association, suggest revenues in IT will rise 3.1 percent to €89 billion this year. Of this, no less than €40 billion will go on IT services.

T-Systems is already feeling the effect of the boom, with orders up 18.2 percent in the first quarter, to €1.5 billion. The trouble is that T-Systems’ Ebit margin (the ratio of earnings before interest and taxes to net revenue) is negative, meaning its operations actually lose money on new orders, costing Deutsche Telekom even more money as a result.

Sorting out this mess is Mr. Al-Saleh’s job. His diagnosis has been quick and clear: the company’s costs are far too high. Since taking over, he has repeatedly condemned T-Systems’ internal complexity, archaic structures and excess layers of management. This slows the organization and adds unsustainable costs, he says.

Past restructuring efforts have failed, but Mr. Al-Saleh seems determined to transform the chronic loss-maker within two years. He already has voiced plans to spin off T-Systems’ IT outsourcing business. Many observers suspect it may soon go on the auction block. The sale would raise funds for research and development.

22 p7 Booming market, but T-Systems’ sales are down-01

Mr. Al-Saleh has yet to deny these rumors. But selling all – or even some – of a company with a reputation for sluggishness will not be easy. Even unions acknowledge that T-Systems has acute structural problems, which need resolute treatment.

In the last ten years, the company has shed around half of its German labor force and launched several restructuring drives. But none has succeeded in transforming its ingrained organizational culture. With Telekom flush with cash, the suspicion is that past executives have shrunk from tough decisions.

Mr. Al-Saleh has said his own reforms aren’t so different to earlier measures outlined by his predecessor Reinhard Clemens. “But those plans weren’t implemented as they should have been,” he says. The American seems determined to push through radical cuts, although he says the company will try to soften the blow for those laid off.

The hard question is whether T-Systems staff will go along with these sweeping plans. So far, the reaction seems muted and fatalistic, but this may change as job cuts hit home.

Handelsblatt’s Ina Karabasz covers telecommunications, IT and security issues. To contact the author: karabasz@handelsblatt.com

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