April 10, 2006 11:40 AM PDT

Ex-Sun exec lambasts Sun's late layoffs

A former top Sun Microsystems executive has published an article sharply critical of his former employer, saying CEO Scott McNealy should have cut jobs faster in response to the dot-com bust.

John Shoemaker, a 15-year Sun employee who rose to lead the company's server group until his retirement in 2002, also took issue with Sun's spending on Java and its Storage Technologies acquisition, and argued that the company shouldn't have let former President Ed Zander leave.

"Executives at Sun met our greatest challenge when we were unable to convince our top decision maker to take quick action to implement a massive headcount reduction," Shoemaker said. His remarks appear in the January-February issue of Business Horizons, the journal of Kelley School of Business at Indiana University, from which he received a master's degree in business in 1966.

"While other large technology firms like Cisco and Intel bit the bullet to save what they had and to protect the investments of shareholders, Sun's reduction-in-force actions were too little, too late," Shoemaker said. "This single failure to make a tough decision to reduce headcount at Sun was, I believe, the critical event that precipitated Sun's now infamous decline," Shoemaker said.

Layoffs are still a major issue at Sun, which remains financially troubled while server competitors such as IBM, Dell and Hewlett-Packard have recovered their equilibrium and returned to revenue growth. Sun cut more than 13,000 jobs between 2001 and 2005, but expenses remain high: Although revenue dropped 39.3 percent from fiscal 2001 to 2005, operating expenses dropped only 26.5 percent, said Sanford C. Bernstein analyst Toni Sacconaghi.

Sun wouldn't comment on details or Shoemaker's criticisms, but indicated change is in the works with the return of Chief Financial Officer Mike Lehman.

Lehman is "taking a fresh look at everything," Sun spokeswoman Stephanie Von Allmen said Monday. "He's going to be putting together a leaner, more efficient business model that he'll roll out in (fiscal) 2007, starting in the July quarter." Sun's fiscal 2007 begins July 1.

"Since he took over, the stock has gone up 25 percent, so clearly the market...appears to be expecting material cost-cutting, of which I would presume a significant ingredient would be work force reduction," Sacconaghi said.

Justifying Sun's current market valuation would require cuts of at least 25 percent of the company's roughly 38,800 employees, he said. Meeting what Sacconaghi expects is Lehman's minimum goal for fiscal 2007--profitability using generally accepted accounting principles (GAAP)--would require cuts of 3,000 to 5,000, assuming no other material changes to the company's fortunes.

Sun's layoff strategy isn't the only area where Shoemaker took issue. Another sore point was loss of Ed Zander as chief operating officer, a position second in influence only to McNealy and which has been held by Jonathan Schwartz for two years. Zander left Sun in 2002 and became Motorola's CEO in 2003.

"Pivotal among (Sun's) missteps, in my opinion, was the board of directors election to allow Sun's COO, Ed Zander, to leave. Ed Zander is a strong executive leader with a brilliant strategic and marketing mind," Shoemaker said. "When Ed left Sun, an already low morale hit bottom. Sun lost an opportunity to go outside the company and bring in a proven, senior, high-profile replacement for Ed. Instead, they brought in a junior, unproven, internal person to the COO position."

Shoemaker also criticized expensive choices at Sun, such as the Santa Clara, Calif., company's $4.1 billion acquisition of StorageTek, which came to $3 billion once cash is factored out.

"I can't help but wonder why Sun would spend $4 billion for StorageTek when that money could have been used to buy back half of the outstanding common stock and, in parallel, execute a major corporate resizing to better align with near and midterm market revenue potential," Shoemaker said.

Sun's Java software initiative was costly, too, he said, employing more than 4,000 developers to create a product adopted by IBM and other competitors. "The cost burden was staggering: Hundreds of millions of R&D dollars per year, plus the huge opportunity cost of all the highly skilled technical people who could have been working on direct revenue-producing products. Had some of these resources been devoted to Solaris, for example, it would have potentially made a big difference."

Sun didn't have it easy during the dot-com bust. "Sparc was never competitive," he said of the company's processor line, but Sun compensated by building massive multiprocessor servers that were useful and that customers snapped up.

Then came the bust, when year-over-year revenue growth--which had been between 50 and 60 percent--then reversed.

"It was like decelerating the Space Shuttle with no tiles, retro-rockets, and no parachute. Because we dominated all the verticals (specific industries) that went belly up, the crash was a hard hit for Sun versus our competitors," Shoemaker said. "We lost 30,000 servers at Exodus alone. Thousands of Sun's new system units were suddenly being sold at fire-sale prices on the gray market."

At the same time, the market shifted to buying large numbers of low-end servers--often running Linux, which become credible in "another unexpected turn of events," according to Shoemaker.

"The market Sun relied upon suddenly began to shift to horizontal architectures, and the long-term weakness in uniprocessor performance of Sparc became a major vulnerability to Sun's competitiveness," he said.

There's still hope for Sun, though, he concluded.

"In spite of all that has happened, I still believe Sun Microsystems has been extremely fortunate in having one of the best and brightest cadres of employee talent anywhere. However, the bottom line is that it's all about quality leadership," Shoemaker said. "Perhaps there will still come a time when the leadership problem at Sun will be effectively and decisively addressed."

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Ed Zander, Sun Microsystems Inc., layoff, COO, Scott McNealy

6 comments

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Arm Chair Quarter Back
There is nothing easier than poking holes in somebody else's strategy. Any advice on how Tiger Woods can improve his swing?
Why is this a story?
Posted by BruceWayneTaylor (2 comments )
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Arm Chair Quarter Back
There is nothing easier than poking holes in somebody else's strategy. Any advice on how Tiger Woods can improve his swing?
Why is this a story?
Posted by BruceWayneTaylor (2 comments )
Reply Link Flag
Sun's Missed Opportunity - maybe still a chance to survive
Sun got it when they went to Opteron, but missed the opportunity to embrace Linux instead pushing Solaris x86 (round 2...).

There is no comparision in price/performance of SPARC vs. Opteron. Sun has a chance, if they would make significant effort to change their old elephant image for servers to promote the Opteron low-end and mid-range server line. They will need to significantly increase their marketing budget in the short-term in order to push the "newer" technology over the older SPARC technology and win back key infrastructure decision makers.
Posted by (4 comments )
Reply Link Flag
Sun's Missed Opportunity - maybe still a chance to survive
Sun got it when they went to Opteron, but missed the opportunity to embrace Linux instead pushing Solaris x86 (round 2...).

There is no comparision in price/performance of SPARC vs. Opteron. Sun has a chance, if they would make significant effort to change their old elephant image for servers to promote the Opteron low-end and mid-range server line. They will need to significantly increase their marketing budget in the short-term in order to push the "newer" technology over the older SPARC technology and win back key infrastructure decision makers.
Posted by (4 comments )
Reply Link Flag
Shoemaker always got it right
This is news is because, while John said many of the same things at the time, no one listened.

Now, Sun's performance has proven him right.

Zander leaving gutted the company.

Patti Ferguson
Posted by learnergal (2 comments )
Reply Link Flag
Shoemaker always got it right
This is news is because, while John said many of the same things at the time, no one listened.

Now, Sun's performance has proven him right.

Zander leaving gutted the company.

Patti Ferguson
Posted by learnergal (2 comments )
Reply Link Flag
 

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