Intel Corp - Paul Otellini's speech - September 6, 2006

CEO Paul Otellini on Tuesday outlined the company’s plans for a major restructuring effort intended to improve Intel’s competitiveness, increase cost-efficiency, and deliver significant savings in the next two years and beyond.

In a Webcast to employees worldwide, Otellini said the recently completed structure and efficiency analysis had examined nearly every area of the company and identified areas of inefficiency and redundancy, ranging from sales and marketing and information technology (IT) to human resources (HR) and manufacturing. The company is putting action plans in place to address those areas, he said.

The changes should generate approximately $2 billion of savings in costs and operating expenses in 2007 and approximately $3 billion in 2008, he said. An additional $1 billion of capital equipment avoidance is expected in 2008 from improved capital utilization and consolidation of operations.

In eliminating redundant and inefficient operations, the company will reduce its employee population to approximately 95,000 by the end of 2006, including attrition and previously announced actions, and to approximately 92,000 by the middle of 2007—10,500 fewer than the company’s employee population at the end of the second quarter of 2006.

Otellini said that wherever possible the workforce reductions would be accomplished through redeployment and attrition.

These actions, while difficult, are essential, Otellini said, making the company “more agile, more competitive, and more cost-effective for many years to come.”

“As I said at the beginning of this project, our goal and our destiny is to refashion Intel now while we have the time and the means to do so, and to ensure that we will remain number one well into the future.”

He thanked employees for delivering outstanding results in recent months as the company went through this process. “At a time when it would be natural for any of us to become distracted by events around us, we have done some amazing things.”

Operational improvements and cost reductions
The changes planned – there are 85 specific projects under way – are intended to improve operations in virtually every area of the company, Otellini said.

Much of the expense reductions will come from efficiency in operations and reductions in variable areas such as merchandizing, he said. A larger proportion of the savings will result from reductions in employees and contractors, made possible by operational changes or scope-of-work adjustments.

Otellini offered examples of the findings and actions planned in several areas of the company, including:

Improving sales effectiveness by better balancing the number of sales people and marketing professionals

Reducing information technology costs by eliminating the duplication of IT services and standardizing application development.

Building larger assembly/test facilities—doubling the standard size to 500,000 square feet—to realize greater efficiencies of scale

Improving cycle time and labor efficiencies in fab/sort manufacturing.

Streamlining design teams and decision-making to speed product design and development.

Consolidating HR functions across the company to eliminate redundant services.

Individual business groups will brief their employees in coming days about their specific plans, Otellini said. Some groups are ready to announce specific structural and operational changes and workforce reduction numbers, and some will require more planning, he said.

The changes will help Intel drive its strategy more effectively, Otellini said. “At our core, we will continue the relentless pursuit of Moore’s Law and innovation.”

He said the company remained focused on five key areas for growth—home, enterprise, mobility, health and emerging markets—and would continue to make “big bets on disruptive opportunities,” such as the company’s ultra-mobile PC initiative and our WiMAX technology push.

Workforce reductions
The structure and efficiency analysis generated specific recommendations for each of the areas studied, and those planned changes combined with previously announced actions will result in the workforce reductions.

The company has already announced workforce reductions of approximately 5,000 employees through previously announced actions – such as the applications and communications processor business sale to Marvell, the 1,000-person manager reduction, other targeted group redeployments, and attrition.

A further reduction of approximately 2,500 employees will occur in 2006, Otellini said, and those actions will be mainly focused in marketing, IT, and HR.

In 2007 the reductions will broaden to other groups as Intel improves manufacturing efficiency and equipment utilization, eliminates organizational redundancies, and improves product design tools, methods, and processes. That will bring the total workforce to approximately 92,000 by the middle of 2007.

Sales and marketing
In sales and marketing, Otellini said that in the past three years Intel’s direct spending, as a percentage of revenue, has increased significantly faster than in the past. After fairly linear growth from 1995 to 2002, the rate of spending growth increased sharply from 2003 to this year.

In addition, Otellini said, the analysis showed that over the years Intel has added too many people to create marketing programs and not enough to take those programs to customers.

The company now plans to reduce and restructure marketing and planning across both the Sales and Marketing Group and the product and platform groups, focusing on fewer marketing programs and adding sales people focused on key local OEMs and additional end users.

“These changes will give us more people facing the customer and fewer people creating marketing programs,” said Otellini.

Information technology
Otellini said that the analysis found a large amount of IT spending embedded inside individual businesses, and at levels out of synch with industry benchmarks. The analysis also found that Intel’s IT development is overly complex, with lots of customization of our applications.

By standardizing Intel’s SAP implementations, Intel can operate with a smaller IT workforce, Otellini said, and this will bring Intel’s IT spending closer to the industry average.

Other support areas will see changes, Otellini said. Human resources will consolidate redundant HR functions around the company. And teams are looking at ways to improve the efficiency of POR and the annual budget planning process.

Assembly/test
While large factories provide economies of scale, Otellini said, Intel’s ATM sites and facilities are smaller than those of its competitors. As a result, he said, Intel misses opportunities that larger facilities provide for better overall tool utilization, spreading fixed costs over more output.

To correct this, Otellini said the company has already announced the combination of the chipset and CPU factory in Costa Rica to allow for a much larger factory. The company is evaluating other factories for similar steps. In addition, he said, Intel is changing its POR for all new factories to be much larger.

Other changes in Intel’s ATM operations include reducing the number of overall product types, handling fewer types of products in a given facility, and implementing a series of projects to reduce materials costs.

Fab/sort manufacturing
In fab/sort manufacturing, Otellini compared Intel’s performance on several metrics to that of AMD and chip foundry. While Intel leads these companies on microprocessor yields, the company lags behind on chipset and CPU cycle time (the time required to get products through the fabrication process), labor efficiency (headcount per wafer produced), and test silicon.

Intel will focus on equipment uptime as the biggest opportunity for improvements in cycle times and labor efficiencies, Otellini said. He said the company is also considering other changes, including streamlining procedures to allow faster ramping of new process technology, improving tool utilization, eliminating redundancies in how fabs are managed, and building larger factories.

Product and platform development
Otellini said the results of a broad survey of employees across the platform groups demonstrating that Intel’s clarity and speed of decision-making were below that of average companies and far below high-performing companies.

Otellini said the efficiency actions beginning now will improve decision making by assigning “a single expert decision maker” to each of three to five newly identified “mega-tasks,” such as security, manageability, and virtualization; removing veto power or the need for consensus from people who see themselves as stakeholders in a decision; and reducing the numbers of stakeholders in meetings to experts or representatives who can make decisions for their general managers.

The company will also do more to more closely locate projects and key skills within given sites; move more quickly to terminate programs that aren’t meeting business or design goals; and improve design methods through greater reuse of design elements, standardized design methodology, and more consistent path-finding and prototyping of processes across the company.

The result of these improvements will be that as new designs are undertaken, smaller design teams will deliver faster time to market, Otellini said.

Improving communications and decision making
Otellini said that improving communications and decision making at Intel continue to be a high priority, as both employee inputs and the structure and efficiency analysis supported.

The company will reduce use of the “two-in-a-box” management structure across Intel by 50 percent by the end of this year, he said, with a long-term goal of eliminating most instances of the approach.

In addition, the company will work to increase managers’ spans of control from the previous average of seven per manager, past its current level of eight per manager, to a target of nine per manager. This would help reduce layers of management and increase the speed of decision-making.

Tough decisions for a strong future
“I know this has been a difficult time for all of you,” Otellini said. He noted that in many cases the changes beginning now are revamping elements of Intel that have been in place for a decade or more.

He also said that the most challenging time is still to come as we identify the large number of individuals to be redeployed.

“These are difficult but necessary actions,” he said. “Our responsibility to our shareholders and to our employees is that we operate as efficiently as possible with the agility to respond and capitalize on changes in the industry.”

As the company reduces layers of management and simplifies decision-making, all aspects of our operation will improve, Otellini said. “Our goal is not to simply reduce our spending, but to improve our performance and the work environment for Intel employees.”

Relentless pursuit of Moore’s Law
Many strong foundations of the company’s DNA and its direction will not change, Otellini said.“At our core, we will continue the relentless pursuit of Moore’s Law and innovation,” he said.

The restructuring and operational changes are just one part of a long-term process that is intended and structured to continuously review and monitor our efficiency “long after we complete these actions,” Otellini said.

‘Thank you’
Otellini thanked Intel employees for their diligence, persistence, and outstanding results in recent months as the company went through this process.

“At a time when it would be natural for any of us to become distracted by events around us, we have done some amazing things,” he said, listing several examples:

Entered strategic relationships with Sprint and Clearwire, “putting WiMAX on a strong path to success”

Ramped the most advanced silicon process technology in the world at yields and ramp rates that are the best in the history of the industry.

Shipped tens of millions of 65nm microprocessors before any competitor has shipped a single production unit.

Launched, in the past 60 days, five new microprocessors and associated chipsets, “allowing us to regain the performance lead in most of our key markets”

Provided a leadership foundation for platforms such as Intel® Viiv™ technology, Intel® Centrino® Duo mobile technology, and the upcoming Intel® vPro™ technology desktop platform for the enterpriseAddressing new market realities

The company launched the structure and efficiency analysis because the marketplace is changing rapidly and presenting sharp new challenges, Otellini said. Intel needed to address growing competitive pressures on pricing and margins, the growth of emerging markets and the related pressure on average selling prices, and the critical need for a cost structure that would allow the company to pursue such new opportunities as ultra-mobile PCs and consumer electronics devices.

The structure and efficiency effort is not quick-fix effort but rather a “long-term project focused on getting Intel ready for 2008 and beyond,” said Otellini.

The effort was a comprehensive, data-driven analysis of every aspect of Intel’s operations, he said. “In true Intel fashion, the teams used hard data and external benchmarking to ground ourselves in the reality of how the rest of the world operates—particularly our competitors in the semiconductor industry.” As many employees had suggested, the effort examined every area with a focus on improving decision-making and agility in operations.

Otellini said that with the diagnostic phase of the efficiency effort completed, the company could move forward on a significant restructuring, “with the goal of making us better and more competitive over the rest of this decade.”

Ensuring Intel’s future strength
“Looking forward, I think it is important to note two things,” Otellini said. “First that we have entered into a process that is intended and structured to continuously review and monitor our efficiency after we complete these actions.

“Secondly, we need to remember that at the completion of these actions we will still be the largest, most profitable and most respected semiconductor company on earth. We of course are that today. The actions that we are taking are meant to ensure that we remain in that position.”

Hat tip Anonymous Reader