Lotus Preps Cuts As IBM Calls For Profitability

Lotus Development executives have their hands full this month with deciding how to implement IBM-mandated cost cuts and profit goals.

The software subsidiary has been told by parent IBM to cut costs and to contribute more to IBM's bottom line. IBM informed the company it must contribute $175 million in profits for the year. To do that, Lotus may have to cut up to 1,100 of its 7,500 employees, a well-placed IBM source says.

Lotus spokeswoman Maryrose Greenough says no decisions have been made about cuts. "People are being redeployed even as we speak," Greenough said. "Some will move to IBM, some will be reassigned within Lotus and then, if necessary, some will be cut."

Lotus does not comment--internally or externally--on any profit goals, she says.

But Lotus insiders fully expect cuts to come by the end of this month, and for them to be made quietly.

"There is a lot of room to cut jobs without it really being noticeable to the outside world," one insider says.

In fact, several sources at Lotus say attrition already is under way, and a former Lotus executive agreed. "There's a lot of functional overlap at the company," he says. "[There are] sales and marketing people in product groups, and sales and marketing people in business development. A lot can be cut without really being noticeable."

Lotus CEO Al Zollar already has telegraphed the changes. In an internal memo sent to employees just after New Year's, Zollar said the company must focus on improving profitability. "Nothing less than creating a 'new' Lotus will be required," he wrote.

Zollar took the helm of Lotus in January 2000, the first career IBMer to head the software subsidiary.

There is evidence that cuts are already being made. A weekly e-mailed termination list from mid-January named "regular employees, contractors and assignees" who had left Lotus that week alone.

The changes all boil down to dollars. IBM bought Lotus for $3.5 billion in June 1995, mostly for the company's Notes business. "IBM is saying, we bought you for $4 billion and we need some of that back, not just this B.S. about hardware and services sales," the IBM source says.

Neither IBM nor Lotus break out Lotus revenue, but in answer to questions about Lotus Notes/Domino sales over the past few years, executives said that for every dollar's worth of Notes/Domino sold, IBM sells $6.50 in hardware and services. The former Lotus exec says at its peak in 1994, Lotus logged $989 million in revenue.

"At 15 [percent] to 20 percent pretax margin on $900 million, that's about $135 to $180 million in profit," he says. "That would make $175 million reasonable."

Headcount is a huge issue. Company insiders and former executives say Lotus remains at the billion-dollar mark in revenue, even though headcount has swollen from 5,000 to 7,500 since IBM bought it.

Lotus confirmed the current headcount figure, but again would not comment on revenue.

Analysts say that what is happening is inevitable. "Lotus is not just tightening the belt, it's being absorbed into IBM lock, stock and barrel--and that's a good idea," says Judith Hurwitz, president of The Hurwitz Group.

"It took this long because IBM wanted to give Lotus a chance to work, but Lotus has gotten to be a very bureaucratic and political organization," she says. "You don't see a lot getting done."

Others backed up Lotus' party line that the brand and product lines will remain intact. "They're not talking about developers," says Amy Wohl, president of Wohl Associates, Narberth, Pa. "They seem to be saying that Lotus will continue to have its own developers, product marketing people, etc. Mostly they're rearranging things so they don't have overlaps in areas where IBM already does something."

Hurwitz says IBM faced similar issues with Tivoli, the systems management company it acquired in February 1996. Both subsidiaries had a lot of autonomy--and struggled, she says.

But now, IBM wants to wring more than ancillary hardware and services sales out of its software units.

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