Cisco announced Monday that it will reduce its workforce by 6,500 employees in the first half of August as part of its effort to adjust its business to increased competition in the switching and router market.
The reduction consists of 2,100 employees who have elected to take early retirement and 4,400 who will be laid off. Cisco noted that the ranks of vice president and above will experience a 15% reduction in force and the full-time, regular workforce a 9% reduction. Those in the U.S. and Canada will get the word in the first week of August. Other global workforce reductions will occur soon after in compliance with local regulations, Cisco officials said.
Cisco plans to cut $1 billion from its operating expenses through the reduction in force and other measures. The company has attempted to expand into a number of consumer markets as it sought to continue to grow its market valuation. It now must cutback those business initiatives that are proving less profitable than planned.
Cisco has reached an agreement to sell the manufacturing plant of one of the businesses, its set-top box facility in Juarez, Mexico, to the Foxconn Technology Group. The sale will result in the 5,000 employees at the facility becoming employees of Foxconn in the first quarter of fiscal 2012. No job losses are expected from the sale, but Cisco's total employee count will drop by 11, 500 when the results of the sale are combined with the 6,500 reduction in force.
Cisco representatives said the strategic intent of the sale was to simplify Cisco's overall business operations.
Cisco has entered several consumer-oriented businesses, such as set top boxes and Flip, the video camera company it acquired in 2009 for $590 million and then discontinued earlier this year. Another consumer business is telepresence video systems, which includes the acquired Tandberg system.
The reduction in force and discontinuing set-top boxes and Flip video cameras may indicate that Cisco can no longer promote the sale of routers and switches in the enterprise by adding devices that increase the consumption of bits.
Perhaps Cisco's biggest investment has been in its entry into the blade server market with unified computing system (UCS) products, which are geared to work with a network fabric that maximizes throughput to virtual machine hosts. Cisco claimed 5,400 UCS customers at its Cisco Live user group conference in Las Vegas last week. Competing server vendors, such as IBM and HP, would count much higher revenues from their investment in blades.
Art Wittmann, director of InformationWeek analytics, said in a Cisco analysis, Cisco's Conundrum, that, "For many customers, it's simply a bridge too far with a technology that's untested. Cisco's 2010 total sales of just $181 million for UCS show just how far it has to go in that market."
A recent Gartner report disputed a long held Cisco tenet that buying from one networking vendor leads to more uniform operating reliability and less cost. Gartner said multi-vendor networks were less complex than Cisco's and cheaper to operate over a five-year period. New networking competitors, such as HP and Dell have made use of the study, while established networking competitors Juniper, IBM, and Brocade have jumped on it as well.
Cisco said its restructuring costs are not expected to exceed $1.3 billion over several quarters and consist mainly of severance pay and one-time termination benefits. It said it expects to recognize $750 million of the charges in the fourth quarter of fiscal 2011.
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