T-Systems Looks to Restructuring for Recovery

Deutsche Telekom has unveiled details of another bout of restructuring at T-Systems as it looks to energize an IT business that is still failing to meet expectations.

The German operator today appointed bosses for three new divisions that will handle all of T-Systems' external business henceforth.

The TC (for telecommunications) Division, whose broad remit will be to support the migration to high-speed IP networks and the development of cloud services, is to be led by Patrick Molck-Ude, who was previously head of sales and service business customers at Telekom Deutschland GmbH , Deutsche Telekom's domestic telecom operation.

Deutsche Telekom AG (NYSE: DT) has also poached Anette Bronder from rival Vodafone Group plc (NYSE: VOD) to take charge of its Digital Division, which will work on developing standardized and platform-based technologies for enterprise clients and subsume the intelligent network solutions business.

Bronder appears to have worked for Vodafone since 2010, having previously been with IT giant HP Inc. (NYSE: HPQ), and was most recently employed as director of Group technology enterprise solutions for the UK-based operator.

Finally, Ferri Abolhassan -- formerly responsible for delivery at T-Systems International GmbH -- has the less enviable task of looking after the IT Division. Charged with meeting demand for "classic" IT services, systems integration and outsourcing, the IT Division looks set to account for a diminishing part of T-Systems' external business and may ultimately be destined for obsolescence.

T-Systems was reported to be on the verge of such a restructuring by Germany's Handelsblatt in mid-September but today's announcement represents the first official confirmation of the plans.

Responding to a Light Reading query, a Deutsche Telekom spokesperson said the "new product-related business model" would not lead to redundancies beyond those already announced at T-Systems in late 2013. The operator plans to cut more than 4,000 T-Systems jobs in Germany by the end of this year, having already reduced staff numbers throughout T-Systems from nearly 53,000 in 2012 to about 50,300 in 2013.

Meanwhile, Deutsche Telekom CEO Timotheus Höttges has been working to rekindle the fortunes of an IT business that is supposed to be one of Deutsche Telekom's "growth areas" but has repeatedly failed to deliver.

In April 2014, just several months after taking the reins from René Obermann, who quit as CEO at the end of 2013, Höttges unveiled details of an ambitious restructuring aimed at positioning T-Systems for growth in the related areas of cloud, security, big data and M2M.

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The broad objective is to increase revenues from standardized offerings in those areas from one third of the Market Unit (MU) total in 2013 to nearly one half by 2017 (the MU is the part of the business that mainly handles external work, but T-Systems also generates revenues from selling services to other parts of the Deutsche Telekom Group). That, of course, means that revenues from "classic" services will shrink as a percentage of the total.

As importantly, T-Systems is under pressure to boost the operating profit margin at the MU from a lackluster 3% in 2013 to a respectable 6% in 2017.

Unfortunately, these mid-term aims have been responsible for some short-term pain. New profitability criteria have forced T-Systems to avoid contracts it would previously have deemed acceptable, and MU revenues are expected to fall to €6.7 billion ($7.8 billion) in 2014 (Deutsche Telekom has yet to report full-year results), from €7.3 billion ($8.5 billion) in 2013, before recovering to €7.7 billion ($8.9 billion) in 2017. T-Systems reported MU revenues of €5.1 billion ($5.9 billion) over the first nine months of 2014.

Flat Performance at T-Systems' Market Unit (€M)
Note: The Market Unit refers to business done by T-Systems with external customers, not including work for Deutsche Telekom businesses.
Note: The Market Unit refers to business done by T-Systems with external customers, not including work for Deutsche Telekom businesses.

All of this, of course, implies that T-Systems has effectively given up on its older "growth areas" ambitions of generating €7 billion ($8.1 billion) annually in purely external revenues by 2015, as well as another €1 billion ($1.2 billion) in revenues from intelligent network solutions, which cover a lot of the operator's IT-related M2M activities in the automotive, energy and healthcare sectors.

Because the MU does account for a chunk of internal work, purely external revenues came in at just €4.4 billion ($5.1 billion) over the first nine months of 2014. Moreover, at €200 million ($232 million), revenues from intelligent network solutions in 2013 were a long way short of the 2015 target, even if they were double the amount reported in 2012.

Given that Deutsche Telekom had originally been aiming for €8 billion ($9.3 billion) in external T-Systems revenue in 2015 -- slashing that particular target in its 2012 annual report -- this must all be very disappointing to investors who still feel optimistic about the growth areas program.

Quite possibly, the majority of Deutsche Telekom investors have long since forgotten about growth areas. After all, only two of the five categories -- mobile Internet and intelligent network solutions -- registered any growth between 2012 and 2013. Revenues from the connected home and Internet services were unchanged, while those from external T-Systems business fell from €6.5 billion ($7.5 billion) in 2012 to €6.2 billion ($7.2 billion) in 2013.

Molck-Ude, Bronder and Abolhassan will have their work cut out in trying to stop the T-Systems rot. Otherwise another growth program may become nothing more than a historical record of plans that failed to come to fruition.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

MikeP688 1/31/2015 | 1:38:29 PM
Re: T-Mobile merger with Deutsche Telekom? It seems that D-Telekom needs to mind its' home turf and look at somehow disposing of it..and that's the crux of its' CEO.   I think T-Mobile's long-term viablity has been a challenge ever more (and we've deliberated it here over the past number of months).   One interesting way is how T-Mobile will handle the pending partnership with Google as Google gears up to sell Mobile Services--is that a "harbinger" of things to come?

SachinEE 1/25/2015 | 10:35:21 PM
T-Mobile merger with Deutsche Telekom? The CEO of T-Mobile parent company Deutsche Telekom said in an interview that he thinks that T-Mobile needs a partner for long term survival.

To survive in the tough mobile business marketplace in the United States, cellular carrier T-Mobile has to find a merger partner that will work out in the near future. That's the tough analysis of Tim Hoettges, the CEO.
SachinEE 1/25/2015 | 10:32:38 PM
Re: No growth areas @Ariella: Trade union power has been plaguing many industries of the eastern europe region. Any other businessman may see the trade union as unnecessary but what it really does is protect the employee from a myriad of perils. Some kind of trade union is necessary but I don't know what kind of trade union they are dealing with. May be a nuisance entirely.
Ariella 1/20/2015 | 6:02:08 PM
Re: No growth areas @ianmorris I see, so they negotiate rather like the unions here do.
iainmorris 1/20/2015 | 1:08:36 PM
Re: No growth areas It has been able to push redundancy plans through - it's just been a challenge. Deutsche Telekom has given assurances to labour unions that it will not announce further cuts at T-Systems between the end of 2015 and the end of 2017 and it's also increasing salaries for existing employees.
Ariella 1/20/2015 | 1:01:53 PM
Re: No growth areas @iainmorris, Interesting, you mention, "t's been very hard for the operator to make cuts because of trade union power." How did they get around that for these cuts? Do they have to wait until people retire and just not hire others in their place?
iainmorris 1/20/2015 | 12:46:02 PM
Re: No growth areas I can't comment on the German economy generally but Deutsche Telekom's German operations have long been seen as rather bloated in terms of employee numbers and it's been very hard for the operator to make cuts because of trade union power. Suffice to say that reducing the headcount always seems to be a DT goal. It would also make sense for T-Systems to shed employees if it's going to be giving up much of the "classical" IT services work it's done historically. interestingly, T-Systems had only 46,000 employees on its books in 2009, when it made overall revenues of €8.8 billion, but the number had soared to nearly 53,000 by 2010, when it made revenues of €10 billion. Implication is that revenue per employee fell from €191,300 to €188,700 over that period.
Ariella 1/20/2015 | 12:29:47 PM
Re: No growth areas It sounds like a lot of cuts. Is Germany losing jobs of this sor tin general?
iainmorris 1/20/2015 | 12:19:50 PM
No growth areas Deutshe Telekom will be expected to provide deeper insight into al this as well as an update on growth areas when it reports full-year figures in late February. It's clearly prepared to spend heavily on network rolliout to support its ambitions, but that spending has yet to have any real effect on the top line.
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