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Cost-Cutting Is No Panacea for High-Tech Growth

In recent years, many high-tech companies have faced enormous challenges as they try to increase sales and profits, meet other financial targets, and satisfy Wall Street's expectations. Because many poor-performing companies have not met these goals, a consulting firm AlixPartners has concluded that if the high-tech industry wants to strengthen its financial position, the industry must cut overhead by up to $50 billion, as well as adopt an asset-light operating model.

While I can agree that finding ways to cut wasteful spending while still maintaining or creating greater efficiency makes sense, the evidence shows that many companies have already tried cutting overhead costs and have outsourced many parts of their business operations, but these measure do not guarantee success.

Instead of viewing cost-cutting measures as a panacea that will address the high-tech's poor sales performance, companies within the industry should focus on the much more salient issues surrounding the need to develop technologies that meet the demands of a consumer market whose tastes, needs, and expectations have changed and continue to evolve.

To my mind, the report's recommendation that slow-growing companies cut their sales, general, and administrative costs by as much as 30 percent simply means more company layoffs, reduced spending on R&D, capital expenditure, and other operational activities that could spark the much-wanted revenue increase.

Let's face it: When high-tech companies don't meet their revenue targets, often because their technology can't compete in the marketplace, the knee-jerk reaction is to lay off workers, shut down parts of the business, outsource or sell business operations, or even sell the entire business to another company.

We've seen this movie before. In May, {complink 2376|Hewlett-Packard Co.} announced plans to lay off 27,000 employees over the next two years, as it seeks to turn around its fortune. These plans will amount to nothing, however, if HP doesn't follow up with a strategy that would help it compete in the tablet market, the enterprise products and services space, or the PC market where China's Lenovo Group Ltd. replaced it in the third quarter as the world's number one vendor.

In June, Finnish phone maker {complink 3847|Nokia Corp.} announced it would lay off 10,000 employees to boost its financial position that has been weakened by lackluster sales of its smartphones, the result of its inability to compete with Apple and Android products. And Google said it would cut 4,000 jobs from Motorola Mobility, a company that it acquired with the objective of growing its market share in the mobile device market.

Other technology companies like Research in Motion, IBM, and Dell have all announced plans to cut operating costs, but no one believes that slashing the number of employees or cutting other overhead costs are the only decisions that will likely lead to a revenue resurgence for each of these companies.

Today, the high-tech industry is moving through an epic transformation — from desktop computers and laptops to tablets and smartphones. Big-data is on the rise, and more sophisticated technology such as cloud computing and advanced business intelligence software is being offered. With regard to tablet technology, mobile applications for business users and consumers alike have made great strides.

What we are witnessing is a more competitive landscape that requires companies to think about what their core business is, how their business should change with the times, and what products will keep current customers happy while luring new clients to new technologies that meet business and consumer needs.

For those companies that have not kept pace with change, the AlixPartners report “The 2012 AlixPartners Global Telecom and Technology Outlook” confirms what we already know. Based on the 1,173 companies across 10 major high-tech sectors that researchers examined, the analysis showed that the high-tech industry's growth rates have fallen to 2 percent during the 12-month period ended June 30. This is a dramatic reduction from the two-year period beginning in 2009 to 2011, during which the average growth rate was 10 percent.

Breaking the numbers down further, the analysis revealed that consumer electronics saw revenues decline by 8 percent, while telecommunications equipment and semiconductors suffered a 1 percent and 3 percent drop, respectively. Together, these three sectors make up 20 percent of the high-tech industry.

However, the one company that stands out from the crowd is {complink 379|Apple Inc.}, according to AlixPartners:

    At first glance, it appears that the high-tech industry as a whole outperformed broad market indices in terms of market capitalization (excluding dividends) this year through August 31. But, if we exclude just one company, Apple, Inc., we see that market-cap for the high-tech industry grew just 6% during that period. That trails both the NASDAQ Composite Index and S&P 500 averages, which grew 16% and 8%, respectively, in the same period.

This bolsters my point. I have not seen any significant cost-cutting measures, such as layoff plans from Apple, during the last five years. If anything, Apple has expanded its sales force and opened new retail stores both in the US and in global markets. Yes, Apple continues to adopt an asset-light business model that involves reducing in-house business tasks and relies on outsourcing opportunities. We agree that Apple is a successful company, in part because it uses Foxconn for its contract manufacturing needs. It should be pointed out, however, that Dell and HP also use Foxconn, so this is not necessarily the answer. What stands out about Apple is that it has continued to develop products that consumers line up to buy.

My takeaway from reading this report is simply that the recommendations fall short of providing answers to the complex problems that the high-tech industry is facing today. Cutting overhead costs and relying on outsourcing business operations to save money is not a cure for what ails the high-tech industry today. If anything, high-tech companies need more investments in R&D, greater innovation, more qualified engineers to develop products that people can find useful, and a better strategy to compete on price. Put all these things together and you'll have not one but multiple companies like Apple.

24 comments on “Cost-Cutting Is No Panacea for High-Tech Growth

  1. Barbara Jorgensen
    November 16, 2012

    Nicole–this whole blog is spot on. I particularly like your point that Apple, HP and Dell all use Foxconn, but only Apple is thriving in this market. It's clear that it is the OEM's strategy that either succeeds or fails, not the EMS

  2. The Source
    November 16, 2012

    Dear Barbara,

    I'm glad you agree with me.  Companies competing in this new high-tech environment owe it to themselves, their shareholders and their customers to think about developing innovative products and services that will take their company's revenue to the next level.  I think that we are getting to a tipping point where some companies may not survive the current technology changes.  For sure, cutting operational costs alone is not the answer and should not be seen as a winning formula for poor performing high-tech companies.

    Thanks for your comments.

    Nicole

     

     

  3. _hm
    November 17, 2012

    Cost cutting is generally prudent step. As company grows at rapid pace, many unnecessary, unproductive people get in to organization. This also reduces ratio of technical/engineer to non-technical people. This is not good omen for hi-tech compnay. For hi-tech company hard core engineer to total employee ratio of 75% is indication of its good health and bright future.

     

  4. mfbertozzi
    November 19, 2012

    @_hm:that's the point, I agree with you in the sense, theorically speaking, there isn't an universal ratio for evaluating “unproductive people”, it depends on the market we are speaking about; despite that, I am quite curious to know how many companies (which are evaluating jobs cut) have implemented and are using  “charge back” model for mapping internal productivity/unproductivity.

  5. _hm
    November 19, 2012

    Whe CEO is technocrat, he understands this very well and controls organization to great height. However, when marketing person or account/finance guy takes over, company generally go down drastically. They generally do not understand long term future of organization and importance of good engineers.

     

  6. The Source
    November 19, 2012

    _hm,

    You say that cost cutting is generally a prudent step.  I'm not so sure.  It depends on what is being cut.  Is it the money spent on a company's private jet?  Do the cuts involve laying off engineers who may come up with the next innovative product?  Is it cutting costs for training workers?  Or is it cutting expenditures that go toward a company's bonus program? It all depends on what the cost cutting measures are for, how much will be saved, what will be lost as a result of these measures, and how will these cost cuts impact the company's ability to grow. 

    Thanks for your comments.

    Nicole

     

  7. mfbertozzi
    November 20, 2012

    @_hm: good point; not to say I am right, but it appears you are describing a very valid picture, generally. It happened, in my eyes, also at the time of the “bubble”; once start-ups have gained first results in the market, tech people (companies' founder) have left their seats to others coming from the sectors you have mentioned. Quite easy to understand the mass of failures and “shutdown”.

  8. _hm
    November 20, 2012

    @mfbertozzi: Yes, I have seen it many times. With one innovative product from some Dr/PhD candidate, organization thinks they have achieved everything. They expnad organization, pushing Dr/PhD in one repmote corner room. They do not treat him properly and he departs getting dejected. In 2 to 5 year time, orgnization sees downturn. Again they remember him, alas it is too late and ther is no point of return.

    Another point is non technocrat leader, do not understand and do not invest in future technology, advance tools and manpower. These very important points.

     

  9. The Source
    November 20, 2012

    _hm & mfbertozzi,

    Both of you have raised a very relevant point which is that is it is often the case that talented people are fired from a company.   These individuals can make a worthy contribution to the firm, but their talents are not tapped and in the long run the company suffers. One famous example of this is Steve Jobs who was forced to leave Apple Inc. before he returned to make it the company it is today.  

    Sometimes I wonder if the pressure from Wall Street investors to meet revenue targets forces companies to make rash decisions, like firing hundreds or thousands of workers to cut costs while improving the company's financial position in the short-term.  This  action is often taken at the expense of a longer, well thought out plan that keeps employees longer, hones their skills and creates the environment in which they can develop the strategies that can turn the company around.

    Thanks for your comments.

    Nicole    

     

  10. mfbertozzi
    November 21, 2012

    @_hm: well, I totally agree with; I am wondering who is able to plan properly (from a strategy perspective) investiments if he doesnt' achive and consolidate a strong competence in the sector, especially for high-tech companies.

  11. mfbertozzi
    November 21, 2012

    Thanks to you Nicole, I have really appreciated your editorial; speaking for myself, it is really timely. Coming back to the point you have raised, I agree on the matter: in fact, one of the most important task in charge of talented people which are managing a company, should be to allow professional growth of knowledge and experience, based on the “life lesson” that they can teach.

  12. The Source
    November 21, 2012

    mfbertozzi,

    Executives at high-tech companies want positive financial results instantly. I think this approach to business is hurting the high-tech industry especially now that a transition is taking place from PCs to tablets and smartphones.   A company whose revenues have fallen because their products can't compete must rely more heavily on their engineers and other talented employees to come up with new products and sound strategies that advance the company's prospects in the years ahead. That takes time.   Cutting employees may only lengthen the time it takes for a company to turnaround its fortunes, and that's a problem.

    Again, thanks for your comments.

     

    Nicole

  13. mfbertozzi
    November 21, 2012

    Well, I guess several C-level managers will have the opportunity to consider your great and transparent analysis in order to adopt your wise idea and approach of the matter. Thanks for allowing EBN community to be aware of.

  14. _hm
    November 22, 2012

    One recent example can be EETimes. Junko put in great effort to develop EETimes community. She had a vision and tempo. However, she moved out and person in charge implemented cost cutting. It looks this may have decimated EETimes community.

     

  15. Ashu001
    November 22, 2012

    Nicole,

    For comparison and reference sake can you please supply us with the following two pieces of Information-

    1)Total Marketcap of the High-tech sector today &

    2)Total Annual sales of the entire High-tech sector today.

    50 Billion Dollars is a Huge amount of Money for the entire world economy to lose in a stretch and just for the High-tech Industry it will be catastrophic!!!

    The High-tech industry as we know it will no longer exist if this cuts become reality.

    As for adopting an Asset light model-This consultants belong in the dustbin of history today.

    More and more companies are choosing to bring back IT in-house[Like GM];similarly many other firms are adopting similar criteria.

    I am sure you also must have heard that Onshoring is picking up massive steam today primarily because cost differential(with low cost alternatives is narrowing considerably) and also you can get skilled professionals easily in the US today.

    To summarize I think this Report is all a bunch of over the top Nonsense and should not be given any traction.

    Regards

    Ashish.

  16. Ashu001
    November 22, 2012

    Mfb,

    Could'nt agree more with you. Blindly cutting costs is no solution for what Ails the High-tech industry today.

    Especially once we realize that the Biggest problem they face is a lack of demand because most consumers in the West are already over-saturated with Electronic Gizmos today.

    And if it were'nt for cheap credit available from Central Banks(and super-low interest rates);they would not have been able to sell half as me Gizmos as they have sold so far.

    Get used to it folks-Demand has permanently cratered in the Over-indebted west!!!

    Regards

    Ashish.

  17. Ashu001
    November 22, 2012

    Nicole,

    Very true! Unfortunately Short-termism rules on Wall Street today!!!

    Regards

    Ashish.

  18. bolaji ojo
    November 22, 2012

    The other problem we face is that companies are expected to grow at double-digit rate each year. I don't know how that can be possible in any industry and in any economy but it's expected and companies are forcing themselves to deliver on it.

  19. Ashu001
    November 22, 2012

    Bolaji,

    What are you basically referring to is the exponential function of Growth.

    Yes,it cannot and will not be maintained consistently forever.

    Reversion to Mean is a difficult process to handle but has to be expected after unbelievable growth for the longest period of time.

    Regards

    Ashish.

  20. mfbertozzi
    November 23, 2012

    Thanks Ashish, your post fits very well what happened and is happining for several tech companies (big, medium or small, it doesn't matter); in my opinion, current financial crisis is still present (partly) for a lack of vision in making good strategy from managers, then the only way for trying to preserve the economics of the company is cutting jobs. But it is only a “stand-alone” approach that brings very limited benefit in the present and neither else in the future.

  21. Ashu001
    November 23, 2012

    Mfb,

    What is a better solution?

    I prefer keeping employees on the Company roster[With reduced Salaries];atleast until they find a new job.

    In the event they don't find a new job immediately;atleast they have something to fallback on temporarily.

    Also the Company manages to hold onto that expertise (instead of retraining someone new from Scratch when demand picks up).

    What do you think?

    Regards

    Ashish.

     

  22. mfbertozzi
    November 24, 2012

    Well, it is a crucial question to answer properly. That said, in case I would try to make a long story short, I believe right steps to consider from top managers are: 1) who we are, 2) where we are in terms of business/market position, 3) where we would like to be in X months from now 4) what should be a credible plan  – based on 1st step – for doing that, including trends' from competitors. After that, I would say that salary's reduction sounds good in case it is a part of the above summarized approach and plan, sounds bad if performed as “stand-alone” action.

  23. Mr. Roques
    November 25, 2012

    I have to agree with you. If companies are trying to get “green numbers” by reducing costs instead of increasing revenues, they are doing something wrong. 

    RIM, Nokia, HP are not doing bad because their costs are high, but because their products don't compare to the leading products. 

  24. mfbertozzi
    November 26, 2012

    @MrRoques: great analysis, products' quality is a key point for planning a good recovery of the company, but it requires from top manangement a clear strategy; on RIM, for example, EBN community has discussed a lot about and till now it seems recovery's path didn't achieve positive results.

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