Here’s Why Cisco Systems Inc. Is Cutting 6,000 Jobs

Often when businesses say they're cutting 8% of their workforce, the companies are going through a major internal transition or desperately need to cut spending. And while Cisco Systems' (NASDAQ: CSCO  ) experienced a little bit of both over the past few years, its latest round of job cuts -- totaling 6,000 -- may not be the same type of slashing it's done in the past.

The company's CEO, John Chambers, said the new round of cuts -- on top of 11,000 in 2011 and 4,000 in 2013 -- come as the company faces headwinds in emerging markets and increased competition. But despite the cut, Cisco's also building out new growth areas of the company, and hiring almost as many workers in return.

In the company's earnings call last week, Chambers said, "We will exit this year pretty much with the same number of people we started the year with."

No one enjoys seeing people lose their jobs, and Cisco likely doesn't like cutting them after they've done it more than a couple times over the past few years. But permanently reducing 8% of a workforce isn't the same as creating that same amount of jobs in areas of the business that are actually making money, or will soon.

Forging a turnaround
There's plenty of evidence on whether or not massive job layoffs actually benefit companies. In the case of Microsoft's recent announcement that it's eliminating 18,000 jobs, I question whether the company can carry it out without losing too many skilled workers. Cisco may run into similar problems, but at least it'll be adding to (or maintaining) its numbers, and trying to build up growth areas like its data center, software, security, and cloud computing businesses.

The job changes come as Cisco continues to struggle financially. The company just wrote off a pre-tax charge of $700 million for the cost of restructuring, and though it beat its own fiscal Q4 2014 projections, profit fell 1% and revenues were down 0.5% year-over-year.

Chambers believes the worst is over for Cisco, but thinks revenue will be relatively flat in the fiscal first quarter and growing its emerging market business may continue to be hard.

Competition is particularly hard for Cisco in China, as sales in the country dropped following the NSA spying leaks. China and US already had a strained relationship when it came to Internet devices, with both countries claiming tech companies could use equipment from their home countries to spy on their respective governments.

Chambers said at the end of last year about the NSA spying, "I think if you look at it, it is an impact in China. I think we're all aware of that." And just three months ago Chambers wrote an open letter to President Barack Obama telling him how the NSA hurts Cisco and other companies providing Internet equipment. On top of Cisco's China problems, sales in Brazil, Mexico, India, and Russia have been slow as well.

Even as Cisco transitions to new growth areas, problems with global demand could still plague the company. Though it's a tough decision to cut so many jobs, it appears Cisco could be making the right decision to refocus its talent to the most promising aspects of its business. It'll take several quarters for the company to make the full transition, but as the company faces revenue problems and hurdles in emerging markets, it may be the best road to take right now.

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