Five things Nortel must do to complete comeback

Its financial restatements concluded and its new management team intact, Nortel still faces some hurdles in completing the turnaround initiated after an accounting scandal three years ago.

Customers, partners and analysts all agree that Nortel can improve – and is working to improve – business relations with users and resellers. The company also has to further rationalize its product line, which observers contend is still confusing and redundant after acquisitions that took place almost 10 years ago.

In addition to products, Nortel must also rationalize its lines of business in order to become a truly formidable No. 2 supplier to Cisco in the enterprise. The company must also partner, purchase or develop its way back into the IP core and edge router space, watchers say, and figure out a way to scale to compete with the likes of Alcatel-Lucent, Nokia-Siemens and other combined competitors formed from mergers and acquisitions.

“They’re a relatively small company in an industry of giants now,” says Zeus Kerravala, an analyst at The Yankee Group. “You really wonder how they can compete long term with some of these larger companies.”

Nortel's priorities

The company's self-described keys to completing its comeback.

Reducing costs or expanding margin by $1.5 billion over the next several years.

Transforming the enterprise business.

Driving next-generation mobility around 4G wireless technologies.

Building a professional services business.

Retooling brand awareness and go-to-market strategy.

Nortel says it continues to build momentum after installing a new management team over the past year and clarifying the markets it intends to pursue with vigor – Enterprise, IP TV, WiMAX, IP Multimedia Subsystem, Metro Ethernet and professional services. Company executives acknowledge though, that the turnaround is still in its initial stages.

“I think there’s very much still things to accomplish,” says George Riedel, Nortel’s chief strategy officer. “I think we’ve built a lot of momentum and a good foundation, but we’re not confused about this being still early in the journey to complete the turnaround.”

Riedel says the top five company priorities in furthering its comeback effort are:

• Reducing costs or expanding margin by $1.5 billion over the next several years;

• Transforming the enterprise business;

• Driving next generation mobility around 4G wireless technologies;

• Building a professional services business;

• Retooling the company’s brand awareness and go-to-market strategy

“Where we do get a shot we do quite well, but the phrase around here is the ‘at-bats,’” Riedel says. “Are we missing opportunities because we just don’t get a shot? Either customers aren’t aware that we have an offering, or we don’t have distribution reach or, whatever the combination of things.”

Customers agree.

“I don’t think that the value of their solutions is in question; the question is, are they using the right marketing and sales strategies to get their products to market?” says Victor Bohnert, executive director of the International Nortel Networks Users Association (INNUA). “Cisco has two very good things going for them: market visibility and a very aggressive sales strategy. Nortel is going to have to develop those two key pieces.”

That will include clarifying its enterprise product roadmap. The current marketing challenge is due to customers getting mixed messages from the company on which product lines Nortel plans to retain or divest as it attempts to increase share.

“We in the enterprise market certainly would like to see Nortel have a clear product roadmap,” says Sheng Guo, chief technology officer of the New York State Unified Court System. “And also stay focused and deliver it. We don’t want to see a shift in mid-stream. If you’re changing things too often, you lose credibility.”

Kerravala says the product ambiguity “gives people a lot of hesitation when looking at Nortel as a legitimate vendor. Product roadmap clarity is their biggest challenge right now.”

Riedel says Nortel has made strides recently to keep customers abreast of product directions, and INNUA officials agree.

“We’ve worked real close with Nortel in order to arrange forums and provide product direction feedback to them,” says Steve Ford, INNUA president. “We’re working on a process right now called the product enhancement pipeline where our members can provide enhancement suggestions to Nortel year round. It is necessary for Nortel to keep the customers up to date on their product roadmap…so they can plan their migration, their corporate roadmap.”

Customers are also anxious to see the fruits of Nortel’s alliance with Microsoft around unified communications, and what impact those jointly-developed and tightly integrated products will have on Nortel’s current offerings, especially in enterprise voice. Last week, the companies unveiled the first fruits of their alliance, which include branch-office gear and offerings that address security and multimedia needs.

“The major thing that I’m looking for is, what’s this whole Nortel/Microsoft thing?” asks Bruce Meyer, director of network services at ProMedica Healthcare in Toledo, Ohio, and a 16-year customer of Nortel and Nortel-acquired products. “How much of that technology that you guys have in your Communication Server 1000 and telephony (systems) are you going to be willing to work with on Microsoft and see port back and forth? Are you going to see more Nortel technology in a more software-based kind of solution? We don’t know. Nobody knows.”

“Everyone believes, in the deal with Microsoft, they’ve basically gotten out of the voice business,” says Frank Dzubeck, president of consultancy Communications Network Architects.

Riedel scoffed at the notion.

“It couldn’t be further from the truth,” he says. “We think we’re redefining the voice business, certainly not exiting it.”

Meyer says product line clarity has actually improved over the past few years.

“There was a period of time, around 2000, it was almost like a stagnation: ‘OK, we got this great 450 and Business Policy Switch.’ ‘Well, you’ve had that for two years now, what else have you got?’ ‘Well we got these Wellfleet routers,’” he says. “They discovered that, with the telecom boom and then drop, those loyal customers that have been buying enterprise stuff have kept buying it. ‘Maybe we didn’t a lot of attention to enterprise data, but it chugged right along. What will happen when we pay attention to it?’ I think that’s real evident in the last few years.”

Product line clarity will also allow Nortel to better compete with Cisco in the enterprise, observers say. It will allow Nortel to focus on a defined set of products to develop, market and enhance and upgrade more aggressively.

“In the enterprise business, I still have not seen a No. 2 emerge,” Dzubeck says. “If Nortel assumes that it’s No. 2 because it has large a portfolio, it isn’t showing it in the marketplace. So they have to accomplish breaking into becoming a No. 2 or they should get out of the enterprise space. It’s as simple as that.

“The question is, are you in the business or not?” Dzubeck adds. “If you’re in the business, go for the gold – get the best people, build the best product line, and build the best price structure and best sales force in order to do it.”

Riedel offers that Nortel is a strong No. 2 with plans to become stronger.

“We’ve got a breadth of portfolio – data, voice and applications,” he says. “And relative to other players in the industry – (not including) Cisco – one of the larger sales forces in the world. We invested a lot more in terms of R&D in the portfolio in enterprise last year to bring a new set of products out. It’s an area where we know it’s a multiple year effort in terms of investments. We’re not confused about what we have in terms of the road ahead of us. But part of what we have to demonstrate is, we’re back in the enterprise, we’re back engaged, we’ve got a competitive portfolio, we’ve got a set of sales and marketing resources… and frankly, we need to execute that.”

Much of that execution will depend on resellers. CXtec in Syracuse, N.Y., is a long-time Nortel reseller – going back to the days of LAN hub and switch maker SynOptics, which merged with router vendor Wellfleet to form Bay Networks, which was acquired by Nortel eight years ago.

Through it all, CXtec has dealt with some interesting back-and-forth with its manufacturer – most of it negative.

“The partner program has been in disarray through the years, especially looking at it from the data side,” says Frank Kobuszewski, vice president of CXtec’s Technology Solutions Group. “There’s absolutely room for improvement.”

CXtec is seeing some already under the current Nortel regime of CEO Mike Zafirovski. Zafirovski has laid out a clearer vision on channel and strategy, freed up some marketing funds, and made its executives and information more accessible to channel partners, CXtec says.

Still, things can improve. Kobuszewski echoes concerns about lack of product clarity and focus; and Nortel has just instituted an unpopular service and support fee structure that allegedly charges partners technical support fees of tens of thousands of dollars, in addition to hundreds of dollars per incident, with a minimum pre-purchase of scores of incidents.

“It does send the wrong message to the channel of, ‘As we’ve also decreased other levels of support, you’re also going to have to pay to access technical (assistance),’” says Lisa Belodoff, director of strategic marketing for CXtec.

Adds Kobuszewski, “It’s a step in the wrong direction, quite honestly. It’s not a great idea for Nortel overall.”

Riedel says Nortel’s been offering freebies for too long and has to make up some ground.

“The principle was to go out and communicate to them the new changes we’re putting in place,” Riedel says. “In part, what we were doing in the past was giving away a lot of services. And it was tough for us to support the investment and economics of that.”

Nortel says it was offering technical service for voice for free, and that the fee structure aligns voice technical services with Nortel data and with the rest of the industry. Nortel says the fee structure is part of a bigger program that will actually net the reseller more money overall.

As Nortel’s comeback evolves, Riedel doesn’t find it incumbent upon the vendor to reengage in the carrier core router market as the barriers to entry are too high given the dominant positions of Cisco and Juniper. He is also comfortable with Nortel’s current Metro Ethernet offerings at the edge.

Nor does Riedel find it incumbent upon the vendor to merge with another large player in order to match the scale of its combined rivals. The company believes it can forge ahead and be successful on its own.

“There’s a big scale challenge, particularly on the carrier side of the business,” he says. “The question is, though, do you believe you can drive an agenda with some disruptive technologies – very targeted, very focused – can we build successful positions there? We think we can.

“You have to pick your battles,” he concludes.

Winning some would be just fine with customers.

“Nortel needs to get over with the negative press coverage,” says Guo. “It puts doubt in the customer’s mind.”

Learn more about this topic

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Nortel: Why Cisco should be worried

Nortel: enterprise key to rebound

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Copyright © 2007 IDG Communications, Inc.