Level 3 claims order bottlenecks resolved

Level 3 Communications claimed today to be making progress in eliminating the bottlenecks in its service-activation processes that clogged its operations last year and led to the departure of Chief Operating Officer Kevin O’Hara last month. And the company is aggressively hiring more sales staff to avoid similar problems in the future.

“We can now say that this problem is largely behind us,” said James Crowe, Level 3’s chief executive officer, on the company’s first-quarter earnings call today. “This does not mean we won’t experience occasional bottlenecks. That’s part of all service-activation processes. But we now have sufficient installation capacity to increase sales to match the demonstrated demand for our services.”

Having set out to diagnose the root causes of its order flow problems earlier this year, Level 3 found that a major source of delays in service activations was incomplete order descriptions sent from the sales staff to those who provision services. Along with changing that process, the company will now routinely forecast future orders by product category, allowing it to plan for future orders and anticipate the resources they will require.

“Phase one of improving our service-activation process is to get back to the kind of sales we enjoyed at the beginning of last year,” Crowe said. “If we had had more capacity, we could have sold more.”

Level 3’s wholesale and business groups, which sell high-margin metro/long-haul “hybrid” circuits, struggled the most with backlogs last year.

Differences of opinion regarding how to address these bottlenecks are what led O’Hara to leave, though on friendly terms, Crowe reiterated today. In fact, O’Hara still works as a consultant to his former employer.

To prevent future bottlenecks from forming, Level 3 is ramping its quota-bearing sales force this year from the 400 it ended last year with to 500 by the end of June, not including 200 additional sales engineers that provide technical support in partnership with the sales force. The company has already hired two-thirds of the 100 salespeople it has planned to add.

Most of the new sales force additions will join the company’s enterprise unit, which Crowe believes represents the biggest near-term market opportunity. Level 3 is targeting medium-sized businesses that are already on its network—a large addressable market, but one whose volume contributed to Level 3’s activation headaches last year. “High-end, complicated managed services, we’ll leave that to other organizations,” Crowe said. “The low-end, 2- to 50-seat enterprise is not our target. It’s in the middle. We sell on-net. That’s our goal. That’s no small part of why we struggled in the second half and the reason we focus so much service-activation effort in this area.”

Level 3 is hoping to avoid the mistakes of last year, when it couldn’t keep up with customer orders and ended up leaving money on the table. The backlog of signed sales orders the company described during its previous quarterly earnings call in February is now gone. “We turned up about half of it, and half of it disappeared,” Crowe said.

Level 3’s wholesale voice business was a particular source of strength in the first quarter. The company can compete based on price in that market, Crowe said—and in fact, its targets there are based on margin, not revenue—because it has a better cost structure than competitors, the benefit of vast interconnections with local exchange carriers established to support its legacy dial-up business.

Crowe stressed that it will take some time for the new sales hires to reach full productivity.

“Last year it took us some time to slow the fly wheel down,” he said. “It will take us some time to speed the fly wheel up.”

The improvements in service-activation Crowe described today are being applied to the legacy systems Level 3 inherited from the companies it has acquired in recent years. The company expects to migrate those disparate systems to a single common system called Unity over the course of this year. Most of Level 3’s business services group has already been shifted to Unity’s management system. In March, the company deployed the “base functions” for a consolidated inventory management system that will keep track of committed and available network capacity.

“By year’s end, two thirds of our high-margin core network services revenue will be handled by the Unity platform,” Crowe said.

In addition, Level 3 expects to lower integration costs this year, citing $100 million spent on integration last year that won’t be repeated in 2008. “This year that integration capex has largely gone away,” said Sunit Patel, Level 3’s chief financial officer.