Toughest Job for Deutsche Telekom Is at Money-Burning Tech Fossil

The effort to strike a deal for T-Mobile US has drawn attention away from another Deutsche Telekom unit that needs fixing more urgently: its money-draining computer-services business, according to Bloomberg.

With a T-Mobile deal now on hold, the German giant can focus on reviving the T-Systems tech division that’s struggling to compete with more agile cloud startups and multinational giants. That job will fall to Adel Al-Saleh, an American software veteran with a track record of turning around troubled businesses, who starts Monday as the unit’s chief executive.

The effort is crucial because the division gives Deutsche Telekom access to large multinational clients it can sell other services to, yet it has for years been the company’s problem child. Some of the unit’s contracts have proven loss-making, and it has come under pressure as IT services are increasingly moving into the clouds of Amazon.com Inc. and Google, where they’re available at a lower cost.

The stiff competition has hurt margins and stifled growth at T-Systems, which has accumulated operating losses of more than 1.8 billion euros since 2012. Deutsche Telekom CEO Tim Hoettges wants to see the start of a turnaround next year after having to write down 1.2 billion euros of goodwill at the unit last quarter on declining orders.

Hoettges has said internally that he doesn’t want to rule out anything for T-Systems, including more personnel cuts or the sale of problematic businesses, according to a person familiar with his thinking. Small acquisitions to strengthen promising ventures, such as cybersecurity, are also possible, the person said, declining to be named because the discussions are internal.

Al-Saleh, who spent the first two decades of his career at IBM, wants to push more cost cuts at T-Systems, partly by increasing the offshore share of the business, the person said. Deutsche Telekom declined to comment on potential cost cuts or acquisitions. T-Systems is “undergoing a comprehensive transformation into a leading digital service provider“ and can improve in many areas, the company said in an email.

Selling unprofitable parts of T-Systems is one way to cut costs, yet finding a buyer won’t be easy as many of the division’s employees can’t be easily fired because they retained the civil-servant status of the former state-owned monopoly. Deutsche DT considered selling the outsourcing business of T-Systems’ IT division, people familiar with the situation said this year. So far, no sale has materialized.

There is room for some optimism. T-Systems is creating new growth in areas such as cybersecurity, its cloud business and IoT-related services, CFO Thomas Dannenfeldt said. DT cooperates with Huawei for its IoT offerings and has won clients. T-Systems also built a cyberdefense center that helps corporate clients fend off attacks and developed products including an app that alerts users if someone is trying to hack their mobile phone.