Sun Microsystems: Redefining Business Model
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Authors
Authors: Pradip Sinha,
Associate Consultant,
ICMR (IBS Center for Management Research).
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Will Sun Pull it Out? Contd...
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In fact, Milunovich goes to the extreme, saying, "Although you have disagreed with our views that `Sun could be the next SGI' and that Sun risks becoming `irrelevant,' recent events support these concerns. If Sun doesn't change, the company will go farther downhill." He writes further, "A large installed base and strong balance sheet will act as brakes on that slippery slope, but the bottom of the ravine is filled with carcasses such as DEC, Data General, Compaq, and others." He advises Sun to fire some employees and pare the company down to a size that it is reliably profitable. A comparative analysis shows that major technology companies like IBM, Hewlett-Packard Co (HP), and Dell have expense-to-revenue ratios that are lower than that of Sun. IBM, excluding its services unit, spends 35.3% of revenue on expenses (that's SG&A plus R&D), HP spends 20.8%, and Dell spends 10%. In contrast, Sun has a figure of 45.8%. As per Milunovich's calculation, Sun needs to cut 12,000 people or about a third of its workforce to get the expense-to-revenue ratio down to 35%, matching IBM, but he says that a more reasonable headcount reduction (beyond the 17% reduction Sun has done piecemeal since reaching its peak headcount a few years ago) would be between 5,000 to 7,000 employees. |
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He analyzes that if Sun axed 10,000 people and had no revenue increase in fiscal year 2004, Sun would still show earnings per share of 21 cents.
His analysis shows that if Sun doesn't cut headcount and sees a 20% reduction in revenues for fiscal year 2004, it will lose 21 cents a share. He also wants Sun to prioritize. He wants Sun to cut out the whole middle process and focus on its core competency. Specifically, if it doesn't have to do with reliable, scalable computing on the Solaris operating system, Milunovich essentially says ditch it. That also means de-emphasizing Sparc, which consumes $200 mn to $300 mn in development costs a year, but is not dumping it. Other things that Milunovich says have to be jettisoned are the "Mad Hatter" Java Desktop System, which makes rival Microsoft Corp look jumpy, but which does not make Sun any money.
Ditto for Java, which Milunovich says should be spun off because Sun doesn't make any money on it. Sun could create a Java consortium to further develop Java, or spin it out as open source. Finally, he says that Sun needs to be a better partner by picking its battles. Once close partners such as BEA and Veritas have become rivals as much as friends. "Sun cannot fight a ten-front war. As Sun disengages from some efforts, it needs to re-engage with potential partners. Sun's one of the smaller guys on the block and needs a gang to take on the bullies," comments Milunovich.
Nonetheless, all may not be lost for the beleaguered technology behemoth. There are signs that technology spending is improving, after a lull of three years. According to a report by the US Commerce Department, corporate tech expenditures rose 3.2% in the second quarter of 2003, the largest increase since spending began to inch up last year. And, Sun may be sewing its strategy at the right time. By simplifying cost and complexity Sun could hope to cut through the confusion in a industry where pricing can be based on anything from a server's processing speed to the number of people using the software over the Net. If McNeally plays his cards well, there may yet be a way out of the woods for Sun and hence for him as well. He has a solid strategy in place. All would depend on how effectively he makes it work. If he fails, barbarians of Wall Street would be baying for his blood.