Channel Partners: Sun Needs Layoffs, Cost-Cutting

Just increasing revenue won't be enough for incoming CEO Jonathan Schwartz to return the company to profitability, Channel Partners says.

April 28, 2006

6 Min Read
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All “Sun-setting-on-McNealy” jokes aside, Sun Microsystems partners took Scott McNealy’s move to step aside as CEO in stride.

But they remain concerned, in the wake of comments last week by new CEO Jonathan Schwartz, that the company is not going to get back to fighting trim.

On a conference call last Monday, Schwartz said Sun will aggressively seek opportunities with the best upside, including open-source Solaris. He did not commit to substantial cost-cutting. Sun employs 38,000 people and reported a $217 million loss for its third fiscal quarter ended March 31, including $144 million in acquisition and stock compensation charges.

“This is about how to grow. It is not about how to take a whack in head count,” Schwartz said of his plan.

Partners said Sun has to do both.“They need to run their business the way we run ours,” said one longtime Sun solution provider, who requested anonymity. “Cash-flow positive is not acceptable—it has to be profitable. I have no lack of confidence in Sun’s viability, but they have to keep their brand viability and they have to get costs down.”

This partner and others cited the return in February of Mike Lehman as Sun CFO as a positive sign the company plans to do what it takes. But several said they had expected Lehman to get the top job and thus have the power to enact tough changes. Before Lehman left, he had agitated for more cost cuts.

Greg Stroud, Sun’s vice president of U.S. partner and alliance sales, last week attended a meeting of several hundred Sun vice presidents where the hot topic was the leadership change which, he said, will not impact the channel. “We’re all about the channel,” Stroud said.

But partners are waiting for Schwartz to acknowledge their role in Sun’s ecosystem. The lack of coordination between Sun and its partners hurts customer satisfaction, they say.

“This try-and-buy thing is neat, but it’s not channel-ready,” said one partner, referring to a program under which prospects can evaluate and test Sun technology at no charge. “My customers are buying Niagaras from Sun’s site, and I don’t know about them. That means there are prospects out there, and no one’s calling them. A channel partner could help turn this into a real solution sale.”Niagara is Sun’s T2000 eight-core server that sells for about $15,000.

Partners agree Schwartz has his work cut out.

“With the acquisition of StorageTek, there are lots of different deliverables in various silos. He has to make sure they both stand on their own and can be cross-sold as a complete solution,” said John Varel, CEO of Fusionstorm, a large San Francisco-based Oracle partner.

Douglas Nassaur, president of TrueNorth Technology, a Sun software partner in Alpharetta, Ga., said Schwartz could bring sharper software focus to the company.

“Schwartz knows it is not about hardware. It’s not about software anymore. It’s about software services, and that is where Schwartz is going to take this,” Nassaur said.Indeed, some Sun watchers say McNealy’s delay in positioning Sun as a software as well as hardware company hurt. During the boom, McNealy often quipped that Sun’s business was safe since “no one can download a SPARCstation.”

For the past few years, however, few would agree that Sun’s business was safe. Its stock price languished at less than $5 per share as Dell and other hardware vendors undercut Sun server prices with low-cost commodity servers. Even longtime Sun ally Oracle CEO Larry Ellison started singing the praises of cheap blade servers as the best TCO platform for Oracle’s pricey databases. Sun was late with Linux and, adding insult to injury, longtime nemesis IBM stole Sun’s thunder in Java development.

“Jonathan has to take time to get to know the channel and the many ways it adds value, adds to Sun’s revenue and reach in the marketplace,” said Rob Wolfe, president of AvcomEast, a Sun partner in Vienna, Va. “I hope the Sun executive team becomes more aware and involved with the partner council and the entire partner community.”

Even McNealy boosters said it was time for change at the top. McNealy, one of Sun’s four co-founders, remains chairman but relinquishes the top operations job after 22 years.

“From my personal perspective, Scott’s been looking tired,” said Dave Condensa, CEO of Helio Solutions, Santa Clara, Calif.

McNealy’s incessant trash-talking, his infamous top 10 lists and his “Windows is a hairball” comments were entertaining during the salad days of the PC industry, but his antics started to grate as Sun’s travails continued over the past few years, partners and analysts said.“When things are good, having a CEO with a larger-than-life persona is a good thing. When things are going badly, you’ve got somebody in the CEO chair with a very large target on his chest,” said Charles King, principal analyst at Pund-IT, Hayward, Calif.

Jeff Matthews, general partner at Ram Partners, a Greenwich, Conn., hedge fund, said Wall Street’s feelings were clear: “The stock rallied 10 percent on the news he was leaving. What does that tell you?”

But Matthews, who holds no position in Sun, cautioned that “we need to see what the new guy actually does before we get too excited. So far the mainstream press has focused on his ponytail, which is not necessarily very exciting business-wise.”

The 40-year-old Schwartz—who is, in fact, ponytailed—is viewed as vital and very articulate. He puts even pointed comments in a more positive light. “He says some tough things, but he says them in a thoughtful way,” said one solution provider.

After a mere decade at Sun, Schwartz lacks much of McNealy’s baggage. Some say he will preside over cuts, his comments notwithstanding. “Everyone has been calling for Sun to consolidate Sun and StorageTek personnel, and looking at other costs. Scott just doesn’t have the stomach for it,” Condensa said.Tom Kuni, president of SSI hubcity, a Sun partner in Metuchen, N.J., concurs: “McNealy is being put out of the way because he does not want blood on his hands from personnel cuts.”

Kuni hopes money saved will flow to marketing, where he says Sun has traditionally been weak. “A lot of people wonder why Sun spends so much on R&D and yet gives the stuff away. Maybe it’s good as a long-term strategy, but they can’t do it forever,” he said. “I’ll bet Scott regrets not making some of those cuts earlier. [Hewlett-Packard] has shown that taking the appropriate measures can bring a company back to profitability,” Kuni said.

McNealy’s status change had been rumored so long that Amy Rao, CEO of Integrated Archive Solutions, a Palo Alto, Calif.-based partner, said this news is no surprise. “Hopefully, customers will think it’s good for Sun,” she said.

In the near term, Schwartz said the Santa Clara, Calif.-based vendor will review all growth opportunities. Along with Greg Papadopoulos, now executive vice president of R&D, Schwartz will oversee Sun’s nearly $2 billion R&D budget. Anil Gadre, Sun’s chief marketing officer, and Don Grantham, Sun’s executive vice president of global sales and service, will examine the company’s marketing, sales, services, systems engineering and operations both at headquarters and in the field to make sure they target the biggest opportunities, Schwartz said.

STEVEN BURKE & STACY COWLEY contributed to this story.0

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