Can Citi shrink its way to transformation?

That whopping reduction that Citigroup announced Monday — 50,000 jobs, representing 20% of its work force — turns out to be the biggest cut by a corporation in 15 years. So say the job-trackers at Challenger Gray & Christmas. The largest reduction before Citi’s: IBM , which set out to eliminate 60,000 jobs in 1993.

Vikram Pandit’s shrinking of Citi — part of “one of the greatest transformations in history,” as he labeled it at the company’s town hall meeting Monday morning — is the best proof yet of how bloated the company had become. If you scan this year’s Fortune 500 issue, which we did today, you can see the evidence right there: Citi had, at the end of 2007, 380,500 employees. Bank of America , the second-largest bank, had 209,718. Citi’s revenues per employee — a rough measure of productivity — was $418,473. BofA’s were $568,334. Meanwhile, JPMorgan Chase , where CEO Jamie Dimon has sailed through the credit crisis more smoothly than his competitors, has the tighest ship: $644,019 in revenues per employee.

Now JPMorgan’s economics should change with its acquisition of Washington Mutual and, to a lesser extent, Bear Stearns. As should BofA’s with its purchase of Merrill Lynch . BofA’s productivity will improve in  part due to Merrill’s $1 million in revenues per employee. Securities firms tend to have higher productivity, but Citi does house one of those. Any way you look at Citi, it’s clear that Pandit has to cut, and cut big.

So he is, aiming to lower expenses 20% from their peak — across the board, he told employees today. Meanwhile, he is overhauling risk management as well as outsourcing and selling big pieces of Citi’s troubled IT operations. Pandit also is shoring up the company’s balance sheet to the tune of $75 billion in new capital, including $25 billion from the U.S. Treasury. These moves are right. But one has to wonder if Pandit, just past his first anniversary as CEO, is losing some of the wheat with the chaff as he remakes Citi. Senior talent has left so steadily that only two top-level executives remain from the era of Sandy Weill, who built Citi and oversaw the start of its decline.

One hanger-on is Citi chairman Win Bischoff, who, if you believe press reports, is doing just that — hanging on. The Wall Street Journal reported last week that the Citi board was considering replacing Bischoff as chairman with Time Warner chairman Dick Parsons. The Citi board released a statement denying that. The other survivor is Bob Rubin, the former Treasury Secretary who appears to be distancing himself from the fray. In August, he relinquished his title, chairman of the executive committee, and made himself senior counselor.

The other survivor of the Weill era was Sallie Krawcheck, CEO of Citi’s global wealth management. She announced her departure in September. Sunday’s New York Times profile of Krawcheck, a classic write-around done without Krawcheck’s on-the-record cooperation, rehashed some of what I wrote on Postcards the day she decided to exit: She and Pandit clashed over many things, but critically over how Citi should compensate clients who invested in hedge funds and auction-rate securities gone bad. Krawcheck argued that Citi needed to pay clients back for losses. The company’s multi billion-dollar auction-rate securities settlement, announced in August, fortified the rift. After Pandit moved to take away her CEO title and operating responsibility, Krawcheck decided to quit.

Two weeks later, Krawcheck came to Fortune‘s Most Powerful Women Summit and spoke on two panels, in fact. Those sessions were off the record, and she’s still not speaking publicly. So I can’t tell you much more about Krawcheck’s future except to say that I know she is actively looking for a new job in financial services, while finding time to run in Central Park once, and sometimes even twice, a day. Meantime, Pandit has one less challenger in his inner circle — and, with Citi’s stock trading below $9, its lowest level in 13 years, no time to waste en route to that transformation.

P.S. As he vies to pull off what he contends is one of the greatest transformations since IBM, Pandit has gotten advice from that company’s CEO, Sam Palmisano, and its former chief, Lou Gerstner. Pandit won’t say what he learned from those guys, but for a bit of what Gerstner might have parlayed, read Five Tips from IBM’s Turnaround Champ.

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