T-Systems Looks to Restructuring for Recovery

Deutsche Telekom's IT business has named the heads of three new divisions charged with turning around its performance.

Iain Morris, International Editor

January 20, 2015

5 Min Read
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.

Want to know more about cloud services? Check out our dedicated cloud services content channel here on Light Reading.

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.

Figure 1: Flat Performance at T-Systems' Market Unit ( euro 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

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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