Today Citigroup announced it intends to dramatically overhaul operations (see stock chart here).  The company will cut 17,000 jobs as it strives to remove $1.2B in expenses.  Citigroup says it is doing this in order to grow.  Huh?

Setting the stage:  Citigroup is the country’s largest financial institution.  Until the last few years when oil prices drove up profit for oil companies, Citigroup was the most profitable company in the world.  But the last few years it’s profit growth has not kept pace with competitors such as J.P. Morgan and Bank of America (see full article here).  Several stock analysts have charged Citigroup with not keeping up its competitiveness, despite pioneering much of what is most successful in the industry today.  Expenses have risen at a 9% clip, which has been faster than revenue at 6%.  Quotes from Jim Huquet at money manager at Great Companies reflect the consensus view, "They are moving in the wrong direction, and probably going to end up trailing chief rivals…Our concern is that the company really doesn’t have a good sense of where it’s heading..they need someone in charge with a bigger vision…[asset management] is a very profitable.. it provides ocmplexities to management…key rivals have been able to work through those issues…They talk about cost-cutting and stratetgic planning as if they’re coming up with some huge revelations…well-managed businesses do that just like breathing…managing costs and growing revenue aren’t luxuries."

The key player is Chief Executive Charles Prince.  Mr. Prince is a a lawyer, and when he was appointed many people thought his background appropriate for dealing with compliance issues that became very important after 9/11/01 and passage of both the Patriot Act and Sarbanes-Oxley.   But now, Citigroup is facing a serious Market Challenge.  Its competitors have begun copying several of its successful businesses and products, and applying their own innovations to operate those businesses more profitably.  Citigroup needs to adjust to these changing industry forces that have impinged its profits.  Citigroup needs to revitalize the innovation that has been a cornerstone of its long-term success.

What did Mr. Prince and Citigroup do?  Like I said above, announced a 17,000 person layoff.  That’s about 5% of the workforce (across the board, of course.)  Citigroup will ship a lot of this work offshore – with Poland an apparent beneficiary (see article here.)  They also intend to centralize purchasing supplies and services. Now remember, Citigroup isn’t making physical product where purchasing is central to manufacturing.  We’re literally talking about buying paperclips, staplers and computer programmers.  Nonetheless, centralization is a core plank of the plan as they hope to move global purchasing from 65% of spending to 80% by year-end and 100% by end of 2009.  Let’s see, this is the CEO of a DJIA company taking on a significant market Challenge by focusing on how the company buys supplies!?!  The COO said "That’s the kind of philosophical change we’re looking at enforcing throughout the company."  (see full article here.)

Today, financial services is a digital business.  The work is all bits and bytes for traders and lenders, and digital documents for borrowers and lenders.  So, naturally, Citigroup is cutting $375million in technology this year and about $550million additionally each year through 2009.    The company is closing 40 Smith Barney offices and, according to the COO "closing down facilities where we have excess space, closing down some small businesses that we have been in for a long time….Because of the way we were structured internationally, there was a lot of duplication between global product capabilities and capabilities at a sector level and then in a regio an dthen in a country..we were able to take out a lot of those duplicate capabilities."  I’m reminded of Ralph Waldo Emerson’s famous line "needless consistency is the hobgoblin of small minds."

Citigroup has not hit a growth stall, but it has been impacted by rising competition.  The company is at an important junction.  It needs to deal with serious marketplace Challenges being wrought by well-funded, smart and large competitors.  And, it is taking action to Lock-in its old Success Formula! Rather than dealing with the market Challenge the top brass is focusing on The Problem (the earnings).  Instead of addressing the lack of performance in White Space projects, they are cutting costs and killing off these projects.  Citigroup isn’t using innovation to deal with the market and get back on track – the leadership is slashing costs to short-term beef up profits and in the process Locking-in even further the Success Formula which has recently seen weaker results.  They aren’t stepping up to maintain their position as global leader, but instead falling back into Defend & Extend management in hopes they can recapture old profit rates.

Of course, this plan completely ignores the competition.  While Citigroup is busy with cost cuts, BofA and JPM will keep marching forward with their customer acquisition and new product programs.  BofA and JPM will continue to push to lower their costs, greatly nullifying the supposed benefits of Citigroup’s efforts.  In fact Joseph Dickerson of Atlantic Equities believes BofA is likely to hire many of the Citigroup ousted folks to staff its rapidly growing European expansion!  While Citigroup is looking in the rear view mirror and trying to catch past results by whacking away at its old Success Formula, Jamie Dimon at JPM is whacking away at their customer base while matching their cost model – and then some.

Turning to Defend & Extend Management practices is absolutely the wrong thing for Citigroup to do.  The company isn’t in dire straits.  It’s not facing bankruptcy or being attacked like GM.  But Citigroup did take its eye of the marketplace while focusing on the compliance matters (by the way, everyone in the industry had to step up to the same compliance issues Citigroup faced).  This has allowed a re-invention gap to develop.  Instead of turning back to the marketplace with White Space projects, many of which already exist, to rebuild the Success Formula for better results the CEO and COO are turning inward, and slashing costs to Defend & Extend the problematic business.  After this enormous write-off we may see a few quarters of improved results (or maybe not), but long-term this is definitely not a good move for shareholders, bondholders and employees.