Novell Names President, Cuts 10 Percent of Workforce

by Timothy Prickett Morgan

The expected restructuring that Novell was rumored to be undertaking this week has indeed come to pass, but the layoffs are not as deep as many had been fearing. The rumor mill had it that Novell might cut as much as 20 percent of its 5,800-strong workforce, and some Wall Street analysts and investors in the company were calling for the company to divest itself of a number of business units to get on more profitable footing. Novell announced after the market close last Wednesday that it is laying off a little more than 10 percent of its workforce and is exploring the sale of one of its consulting units--one that it was already mulling divesting itself of.

After the market closed on Monday, the first part of the restructuring took place. Novell announced that it had promoted Ron Hovsepian to the role of president and chief operating officer, giving him one of chairman and CEO Jack Messman's titles and a much more prominent role in the running of the day-to-day operations at Novell. Since the beginning of the year, Hovsepian has been widely expected to eventually take the reins of Novell from Messman, the outside exec who was brought into Novell as chairman and CEO from Cambridge Technology Partners, an IT consulting firm located outside of Boston. After Eric Schmidt, the CEO of Google left Novell to take that job--and you can't blame him for that--Novell needed a new chairman and CEO, and it got one by acquiring Cambridge Technology Partners for $266 million in July 2001. Chris Stone, Novell's vice chairman and chief technology officer, left the company in November 2004 after moving Novell into the open source markets and spearheading the acquisition of Ximian, the creator of the Gnome interface and the Mono .NET development environment for Linux, and SUSE, the German Linux distributor. The SUSE acquisition happened in November 2003 and cost Novell $210 million in stock.

Hovsepian has been credited with turning around Novell's North American sales operations. When Richard Seibt, the former CEO of SUSE who was named president of Novell Europe after the acquisition, left Novell in May (of his own accord according to the rumor mill), Hovsepian was named executive vice president of Novell and president of worldwide field operations. Like Seibt, Hovsepian is an ex-IBMer, and he spent 17 years in various positions at Big Blue, including a stint as worldwide general manager of industry solutions for the retail and distribution industry sector. After leaving IBM a few years ago, Hovsepian worked at Internet Capital Group, a publicly traded investment company that bought up B2B and e-commerce companies as the dot-com boom was bursting. He came to Novell is June 2003 as president of its North American unit.

At the end of July, Novell announced a restructuring in its European operations that matched similar cost-cutting maneuvers in the Americas region. Specifically, Novell said that it would cut between 120 and 150 positions by the end of the current fiscal year, which ends in February 2006, and that this restructuring would cost between $10 million and $12 million and would reduce quarterly operating expenses by between $3 million and $4 million. Novell has also hired new executives to be presidents of two operating units: Susan Heystee, a former Baan executive, is president of the Americas business unit; Thomas Francese, a 30-year veteran from IBM's Software Group, is president of the EMEA unit. Rhonda O'Donnell, of Cambridge Technology, has been president of Novell's Asia/Pacific unit since 2001.

The European restructuring announced in July and the changes to the sales force have not been sufficient to appease Wall Street, which has little patience for the difficult transitions that Novell is trying to make from a vendor of proprietary, licensed software to open source programs that are sold for considerably less money and on a support basis. And that is why Hovsepian is being promoted and why Novell will be cutting an additional 600 people from its 5,800 employee base.

According to Bill Hewitt, chief marketing officer at Novell, the layoffs did not come easy. "It has been a very difficult day," he said in an interview after the market closed. "But this is something we have been working on for quite some time, and we looked everywhere we could to cut costs before we reduced headcount." Novell just finished its fiscal 2006 on October 31, and is currently in a quiet period, so he cannot elaborate much about the restructuring plan. But he did say that Novell would be focusing its energies more intensely on Linux and open source software and identity and resource management, which means Linux and Open Enterprise Server, ZENworks, and Identity Manager. Having delivered Open Enterprise Server to the market this year, which allows Linux services to run on a NetWare kernel and NetWare services to run on a Linux kernel, it is reasonable to assume that this restructuring is pretty much the end of the line for NetWare as a standalone product. OES will allow companies to preserve their NetWare investments and move them over to Linux, but it doesn't make a lot of sense to continue pumping money into NetWare. Hewitt didn't say that, but the fact that NetWare was not on that list of focus areas speaks for itself.

Whatever decisions are to be made in the coming weeks about products, Hovsepian and Messman are making the calls. Hewitt says that Hovsepian will be in charge of product development, marketing, and sales in his new role as president, while Messman will remain chairman and CEO and control the administrative functions of Novell and be in control of the overall strategy for the company. Both will be relying on the presidents of the Americas, EMEA, and AP regions to handle field sales, channel sales, and services in their regions; these presidents will report to Hovsepian. One of the things that Novell is expected to do is push Linux and related software more aggressively and rely less on trying to get renewals for NetWare, GroupWise, and other non-strategic, non-open source products.

The layoffs announced last week are expected to be completed by the end of Novell's first fiscal quarter, which ends on January 31, 2006. Novell said in a statement that the 600 layoffs would reduce the annual run rate of expenses by more than $110 million, adding to the $10 million to $12 million already slated from the July layoffs in Europe. Novell figures that the restructuring will require charges ranging from $30 million to $35 million, and that these charges will be taken in the fourth quarter of fiscal 2005 ended October 31.

Hewitt could not be specific about where the layoffs would be in terms of product lines, and he said that in terms of geographies, the layoffs were more or less proportional across the main areas where Novell has offices (the main ones being in Provo and Boston in the United States, the United Kingdom, and Germany). He did say that he wanted to step on one bad rumor running around out there that Novell was drastically cutting back on the SUSE development teams. "The SUSE Linux team has been relatively untouched," he said. Which stands to reason, given Novell's more intense focus on Linux going forward.

In a statement, Novell also said that it was exploring the sale of its Celerant management consulting business, which is a former Cambridge Technology unit that still operates as a wholly owned subsidiary back in the United Kingdom. Celerant is not a strategic business for Novell, and it has said that for quite some time. It has about 400 employees and brings in between $140 million and $150 million in sales a year, according to Hewitt. Novell's board of directors has authorized the company's top brass to engage Citigroup's corporate and investment banking arm to "explore strategic alternatives" for Celerant, which means find a buyer or spin it out. Novell made no guarantees it could find a buyer.

Novell is expected to provide more details on its restructuring when it reports its financial results for 2005 in a few weeks.