Dell plans pay reductions, product feature removal, and over 8,800 job cuts

Dell, Inc. now plans to cut more jobs than the 8,800 headcount reduction predicted earlier, said CEO Michael Dell, speaking today at a meeting with financial analysts.

Dell's profitability plans also include pay reductions, removal of product features that are "not valued by customers," and "optimization" of the company's global manufacturing network, maintained Donald J. Carty, Dell's vice president and CFO, during the same meeting today.

Prior to this week's meeting with analysts, Dell last week announced plans for a staff reduction of 8,800 positions over the next three years, along with the shutdown of a desktop PC plant.

This week's jump in projected job cuts to more than 8,800 came as somewhat of a surprise. But more layoffs and other future cost-cutting measures by Dell were foretold in a conference call with analysts held more than a month ago to discuss the vendor's financial results for the fourth quarter of 2007 fiscal year.

Today, Lynn Tyson, Dell's VP of investor relations, reiterated the reasoning behind the cuts in a blog entry recounting the discussion at this week's meeting with Dell analysts.

"Dell is strengthening its competitive position and improving profitability by reducing total costs in three ways," Tyson wrote. "First, we will reduce operating expense, including headcount and compensation. Second, we will reduce product and procurement costs by designing for price segments and removing features that are not valued by our customers. Finally, we will reduce manufacturing and logistics costs by optimizing our global manufacturing network."

"We're re-engineering our entire cost structure to be the best in the industry," said Michael Dell, during the conference call in early March.

Carty told analysts during the call that Dell wasn't finished with layoffs yet, even after cutting its head count by 3,800 people over the previous year.

Although 2,100 jobs had been added over the year in "customer-facing" sales positions, 5,300 "non-front-line" jobs had gone away, according to Carty.

Carty also said that the company was "very pleased" with its recent growth rate, "particularly in notebooks and emerging markets and consumer business. But the CFO did not mention desktop PCs in that context.

In a blog posting just after Dell's announcement last week, Lynn Tyson, Dell's VP of investor relations, tried to explain the additional layoffs and the plant closing in Texas to Dell shareholders.

"Improving profitability means just that and this can be achieved by improving our cost position which is embedded in cost of goods sold (COGS) - like designing products that have the right features for our customers - things they want and value. Operating expenses (Opex) is also a part of profitability and we believe we can do a better job of managing these expenses - things like reducing headcount (net of acquisitions) and moving more of our people to front line positions - positions that actually touch the customer," Tyson wrote.

"And when you generate profits - cash flow follows. At least this is the case for Dell. On an annualized basis we typically generate operating free cash flow in excess of net income - so the more net income we generate - the more cash we generate. And at the end of the day it's cash that fuels shareholder value."

Also according to Tyson, Dell is closing its plant in Austin due to a shift in consumer preference from desktop PCs to notebooks.

"Over the last three years, driven by the massive shift in customer preference for notebooks - especially among consumers, industry forecasts for the rate of growth of desktops have declined from 10.8 percent to 3.6 percent. And the desktop to notebook mix in the U.S. has declined from a 70/30 split in 2005 in favor of desktops to a 50/50 split today. Our fiscal fourth quarter of last year reflects this change as we grew notebook units year over year by 37 percent and desktops by 10 percent," Tyson said.