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6/2/2006
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No Honeymoon For Sun's New CEO: First Task Is Job Cuts

It couldn't have been an easy task for Schwartz, who replaced company founder Scott McNealy as CEO in late April and immediately insisted he wasn't slipping into an executioner role--even while Sun's investors were clamoring for job cuts.

Jonathan Schwartz said he didn't plan to "take a whack to head count" when he stepped into the CEO role at Sun Microsystems, but that's before he walked a month in those shoes. Sun will reduce its workforce by 4,000 to 5,000 people within six months, Schwartz said last week, as part of an effort to cut costs by at least $480 million a year and restore profitability.

What a difference a month makes for a freshly minted CEO

What a difference a month makes for a freshly minted CEO
It couldn't have been an easy task for Schwartz, who replaced company founder Scott McNealy as CEO in late April and immediately insisted he wasn't slipping into an executioner role, even while Sun's investors were clamoring for job cuts. Schwartz's partner in the decision--maybe even its mastermind--is Michael Lehman, who served on Sun's board of directors and returned as CFO in February after a four-year hiatus from that job. The reduction represents 13% of Sun's 37,500-strong workforce, including those working in research and development.

Sun needed to do something. It lost $563 million in the first nine months of fiscal 2006, which ends this month.

Sun's strategy for growth hinges on selling more systems that run on standard x86 chips and finding a way to turn its hardware and software expertise into a method for delivering computing as a service over the Internet. While doing this, the company must grapple with declining sales of its high-margin systems based on the UltraSparc chip and the Sun Solaris operating system.

Sun's goal is to have operating income reflect 4% of its revenue by this time next year, Schwartz said. The longer-range goal is to return 10% operating income, but no specific time frame has been set. He expects the company to have positive cash flow next fiscal year.

Brain Drain?

The choice of profitability over people is a new attitude. "Sun has always tried to protect its brain trust," Gartner analyst Paul McGuckin says. He believes the planned reduction will give Sun the boost it needs and rejects the notion of some financial analysts that the cuts should go much deeper, into the 10,000 to 12,000 range, which would risk product delays and customer relations.

Mary Rich, manager of IT solutions delivery at Houston utility CenterPoint Energy, says she's a committed customer of Sun's Java middleware and identity management software. But in terms of its plans to make cuts within R&D, she says: "Would the cuts affect those products? I'd want to know that."

Sun's storage unit, for one, needs trimming, Schwartz said last week. The company has four storage teams, including its core storage team, the Storage Technology group it acquired last June, a project oriented around Advanced Micro Devices' Opteron-based servers, and high-end storage devices it's develop- ing with Hitachi. Sun's plan going forward is to pare that down. "We can build any product we want out of the high-performance components that we have today," Schwartz said. "The net result is the cost of R&D goes down."

Schwartz pointed to an Opteron storage R&D effort, code-named Thumper, as an example of using existing technologies to make money. Thumper, expected to be available this summer, will combine a four-way Opteron server with 24 terabytes of storage, packing a lot of smarts into a mere 4 U of rack mount space.

Sun doesn't necessarily need to reinvent the wheel to be successful, as Schwartz implied. But in a changing IT marketplace, it will need to find that fine line of producing must-have systems and technologies while keeping costs down.

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