AT&T pegs future hopes on business division

AT&T: The reorganization continues.

The face of AT&T  is changing . . . most observers say for the better. The company is on the verge of divesting its debt-ridden cable division and is putting its future in the hands of a business services division that has its own problems but shows signs of life.

AT&T is living through falling revenues quarter-over-quarter, as is its division AT&T Business, which offers enterprise users voice and data services. Nevertheless, you'll still hear "it's a good time to be at AT&T," from executives such as Bill Archer, vice president of sales.

An initial glance at the company's financials might call into question that optimism. AT&T is carrying $30.7 billion in debt and posted a 6.2% decline in revenue in the second quarter of this year compared to the same quarter the year before. And if you look specifically at AT&T Business, you'll see a 3.8% decline in revenue during the same period.

AT&T attributes the declines to tight voice profit margins and the slowed economy. But the company says it's seeing growth where it counts: with its data, IP, Web hosting and managed service offerings. The company says IP services including VPN and Web hosting increased by 26% from the second quarter of 2001 to the same quarter this year.

AT&T executives are optimistic about those results, but know that the company's future depends on the success of major structural changes that are still in the works. The first major change is that AT&T Broadband's merger with Comcast is expected to close this quarter. The cable division is a drag on the rest of AT&T because of its huge debt load. The parent company is expected to cut its debt in half once the deal is final, says Scott Shiffman, a financial analyst at Lehman Brothers.

AT&T also is in the process of building revenue in a changing competitive landscape. AT&T (which will report its third-quarter earnings this week) and Sprint, the carrier's closest competitor that's not in the midst of bankruptcy, are expected to post higher business service revenues as a result of WorldCom customers jumping ship.

"It seems that both Sprint and AT&T are winning business from WorldCom, but I need to see that quantified in financial results, and we need to see if it's a sustainable trend," he says.

AT&T Business also has worked internally to strengthen its focus on customers, while streamlining its business processes, says Hossein Eslambolchi, CTO and president of AT&T Labs. Eslambolchi says AT&T Business is investing in four strategic areas:

• Improving customer care, order provisioning and billing.• Making internal processes more efficient.• Growing and scaling network capacity.• Offering new features and functionality.

AT&T has been overhauling its front-end systems, including its CRM and enterprise resource planning (ERP) systems. "We've realized that a strong broadband infrastructure is a necessary condition to succeed, but it's not sufficient," Eslambolchi says. "We have to have more brain power in the network where we connect to customers."

By improving its internal processes AT&T says it has reduced the number of days it takes to provision its services. For instance, it typically took 45 days to provision a frame relay customer; now it takes 31 days, he says. Customers looking for a T-1 typically waited 110 days for that line to be provisioned; now it takes 61 days.

"These are improvements in terms of revenue and customer satisfaction," Eslambolchi says.

The carrier also is moving toward using its integrated Global Enterprise Management System (iGEMS) for all of its services, including Web hosting and frame relay. IGEMS is AT&T's homegrown network management platform that it has used exclusively to support its AT&T Solutions' custom-managed service customers. This platform will be used for AT&T data customers to simplify support for users with hybrid networks, which are more common today.

"There is a big change in our approach. We are trying to move away from technology silos as a way to talk to customers, to instead talking about what problem the customer is trying to solve," Eslambolchi says.

The carrier says it is in the process of moving to an all-optical network. While he would not commit to a time frame, Eslambolchi says AT&T will have 1,000 intelligent optical switches deployed by year-end. The all-optical network will let the carrier more efficiently support customer traffic and merge various backbones such as frame relay and IP for customers with hybrid networks.

"We're focusing significantly on managed data and hosting services where there's a huge growth opportunity," Eslambolchi says.

However, managed services are typically a hard sell for most carriers during economic downturns, says Lisa Pierce, an analyst at Giga Information Group. Users tend to steer clear of the additional costs associated with a carrier managing their networks, and instead bring that management in-house, she says.

Robin Young, AT&T Business' senior vice president of managed services, says those perceived additional costs are deceiving.

"If you look at what it takes to do the same functions in-house, such as deploying new technologies and bringing in new talent to manage these technologies, and you consider total cost of ownership, managed services offer more flexibility," she says.

Pierce doesn't agree with this explanation.

"It's easier to cut a budget in-house than it is to terminate a contract with an outside firm," she says. "Managed services make sense when your company is growing and when your company can't handle that growth internally." But the reality is fewer companies are in that position, she says.

Yet AT&T expects managed services to continue to grow. Young says AT&T doubled its managed frame connections in the past year, which includes global IP Enabled Frame Relay service lines, she says. "In reality we've seen 20% year-over-year growth in managed services," she says.

While AT&T Business is planning changes to streamline its business operations and offer users network efficiencies, AT&T's sales department also has been busy making changes. In the past two years the company has been trying to move in sales people with IP and data experience while phasing out legacy service sales experts, AT&T's Archer says.

"There is a strong bias toward delivering results and satisfying consumers with clear metrics associated with performance management," Archer says.

In the past year, AT&T has brought in 700 new sales associates, but it hasn't increased its salesforce. These are experts in complex data networks, Archer says.

"The customer population is evaluating the current state of the industry and are concerned about the stability of several providers, he says. "In response to that, there is a genuine flight to quality occurring, and that's creating a significant amount of opportunity and activity for us."

AT&T is looking at 1,000 new pieces of business that range from existing customers adding circuits to new customers looking at major network transitions, Archer says.

But it's hardly a "slam dunk" for the carrier. New business coming from failing service providers will bring in only so much new revenue. AT&T needs to slow the erosion within AT&T Consumer and drive up market share growth within AT&T Business, Lehman Brothers' Shiffman says.

That strategy can only be proven over the long haul, he says.

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