Nortel to lay off 10 per cent of staff

Nortel Networks Corp. will cut 10 per cent of its workforce, or around 3,500 jobs, to reduce costs.

The cuts will mainly affect middle management, president and chief executive officer Bill Owens said Thursday in a conference call with journalists.

The staff cuts and cost savings relate to the consolidation of management and administration functions as the company combines its optical, wireline and wireless networking products to build converged networks, Owens said.

The staff cuts will cost between US$300 million and US$400 million, and should result in annual cost savings of US$450 million to US$500 million, the company said in a statement. The cuts should be complete by the end of the year, it said.

Although the Brampton, Ont., company is cutting management posts now, it will add sales people going forward, Owens said. Cost savings will come from other areas too, as the company consolidates its internal software systems to eliminate some of the 100 or more applications it uses today, he said.

“We will be installing SAP across the company, which should in itself add to the efficiency and cost reduction at Nortel,” Owens said, referring to SAP AG, which makes applications for managing a variety of business operations.

Improved efficiency and reduced costs are by no means inevitable with such endeavours: Hewlett-Packard Co. recently reported poor financial performance in its enterprise servers and storage business unit after sales took a hit due to problems entering orders into a new SAP system.

Owens announced a restructuring of senior management, giving him tighter control of the company. The president of federal systems, a business unit focused on the government sector, and the chief information officer will both now report directly to him, he said.

Nortel will also recruit a chief marketing officer reporting to Owens, giving greater emphasis to the marketing function, he said.

The company also announced preliminary estimated financial results for the first half of this year. Estimated revenue for the half year totalled around US$5.1 billion, split evenly between the first two quarters, chief financial officer Bill Kerr said in the same conference call. He estimated net earnings per share for the half-year at between zero and US$0.02, split evenly between the two quarters.

In the first two quarters of 2004, around 51 per cent of Nortel’s revenue came from wireless networks, and 10 per cent from optical networks, the company estimated. The share of revenue from enterprise networks rose from 21 per cent to 22 per cent between the two quarters, while that from wireline networks slipped from 18 per cent to 17 per cent, the company said.

Nortel expects to file full reports for the first two quarters of 2004, and restated quarterly reports for the whole of 2003, by the end of September, it said. The company is being investigated by the Ontario Securities Commission and the U.S. Securities and Exchange Commission regarding restatement of results as far back as 2001.

“We are not simply restating the numbers,” Owens said. “We are putting systems in place to ensure Nortel’s financial accountability is as good as any in the industry.”

While Nortel seems confident that it will be able to surmount all the challenges it is facing to continue to serve its customers, one industry pundit is not so sure.

“Senior management, although…they said they won’t be won’t be, I think they are still going to be very distracted by the financial focus compared to growing their markets and new products — I can’t see how they can’t be,” said Robert Fox, president of Fox Group Consulting in Markham, Ont. “They still have to go through a lot of things, They are not finished, and I think that is going to take a lot of time and effort.”

She added all of this means Nortel’s competitors will be given time to fill in the gaps — something enterprise customers may start to take advantage of, according to Fox.

“From a customer perspective, this news…raises the Nortel concerns about their long-term stability and viability, and even some of the die-hard Nortel customers are looking at alternatives. Some of our clients that only have Nortel are saying, ‘Well, we want to do our three-year planning for where we are going with voice over IP, but are they going to be around in three years? Maybe we should look at some other companies.'”

According to Nortel, however, enterprise business only constitutes approximately 20 per cent of its revenue. So what about the carriers?

“I think the carrier markets would maybe not be as willing to make changes and look at alternatives,” Fox noted.

As for the layoffs, Fox said she thought that announcement “was very disturbing, because they had made comittments before that they were done [with layoffs].”

Nortel has also announced that a class-action lawsuit has been filed against it in the Ontario Superior Court of Justice, claiming damages of $250 million. The lawsuit claims alleged breaches of trust and misappropriation of corporate assets relating to payment of cash bonuses to executives, officers and employees in 2003 and 2004, based on falsely reported financial performance.

Another suit, asking the company to recover damages arising from unlawful conduct by certain directors and officers, and certain former directors and officers, was filed July 30 in the U.S. District Court for the Southern District of New York, the company said last week.

As previously reported by IT World Canada, The Royal Canadian Mounted Police on Tuesday announced that they were launching an official criminal investigation into the financial accounting practices of the network gear maker.

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