NEW MCI FACES OLD CHALLENGES

What's in a name? In the case of WorldCom, everything: associations with bankruptcy, executive malfeasance, unchecked greed, accounting scandal and the largest case of corporate fraud in U.S. history. The name also can turn normally sedate executives at other telcos into mountains of rage.

Recognizing the negative connotations, the carrier dumped its brand last week and revived the moniker of one of its most significant acquisitions: MCI.

News of the change came along with the announcement that MCI, under CEO Michael Capellas, has persuaded creditors representing 90% of the claims against the company to support its restructuring plan, virtually assuring MCI's emergence from bankruptcy this year — possibly as early as September.

But while re-branding and the progress it has made reorganizing are important steps in MCI's rehabilitation, those factors represent perhaps the easier part of emerging from Chapter 11. The company still faces massive challenges related to growing revenue and integrating its complex set of assets cobbled together through almost 70 acquisitions.

In fact, most of MCI's current operational challenges can be traced back to its pre-scandal era in the late 90s, when then-CEO Bernie Ebbers transformed the carrier into one of the world's largest. For years these acquisitions were MCI's primary growth engine, and earned it Wall Street's adulation.

The company now must grow top-line revenue organically. In fact, the new MCI is forecasting about 4% growth in 2004 and a 7% to 8% jump in 2005. That growth will be all the more challenging because of the mess left after its acquisition binge.

“One of the weaknesses of the old WorldCom was they never aggressively made hard decisions,” said Tom Flanagan, MCI's chief information officer. “They never made the difficult decisions to consolidate groups and organizations, networks and back office systems.”

The company plans to tackle these challenges through a three-year business plan that Capellas, who was CEO of Compaq during its acquisition by HP, seems to have played a large part in developing.

“His background in computers leads him to thinking along the lines of the computer as the network,” said Kate Gerwig, principal analyst for network services at Current Analysis.

That likely will lead to a partnering strategy whereby the carrier establishes relationships with a variety of companies that complement MCI's network.

Among the possible partners: a systems integrator, which would allow the paired companies to offer complete outsourcing of back office functions; or a SIP phone software vendor.

While both moves might be considered innovative and focused on future services, much of the work that remains is more basic. The hodgepodge of back office systems, for instance, has made it difficult for the company to provide a solid customer experience on such fundamental levels as billing and customer care — much less on more cutting-edge services such as automated provisioning.

According to Karl Whitelock, OSS Program Director at Stratecast Partners, the company's back office is far behind its competitors'. The new MCI must make significant strides in areas such as automated provisioning just to keep up with the competition, he said.

Recognizing these problems, MCI is in the process of integrating and upgrading its back office systems, moving from 1200 separate systems now to just 200 by the end of 2005, Flanagan said.

In February, the company began moving all of its order input for business accounts to an unmodified version of Siebel Sales 7, Flanagan said. He added that upgrades in other areas such as automated provisioning and billing are also in the works, and should be put in place over the next few years.

Moving beyond OSS problems, MCI must also introduce new revenue-generating services if it plans on holding to its promise not to be simply the lowest-cost player in the market.

The company sees voice over IP as one of its biggest growth engines going forward, and plans on moving most of its traffic — including voice — to an integrated IP backbone by 2005, Flanagan said.

MCI plans on getting much of its traffic onto its IP backbone through the rollout of Internet gateways connecting its existing public Frame Relay and ATM networks to its private IP networks. In addition to helping move the company's traffic on a single platform, the transition helps extend MCI's reach.

“We now add to [our private IP networks] the reach of the public Internet and we can offer our customer base a virtual private network that literally spans all that,” Flanagan said. “We see this as an extension of one of our core assets, which is the global reach that MCI has.”

With this transition, the company also will make a more definitive step into hosted IP voice services. Under the new brand name of MCI Advantage, the carrier is now offering IP Centrex in all 94 markets where it has local facilities, said Barry Zipp, MCI's senior director of enhanced services.

“We can support it anywhere we have Class 5 switching,” he said.

However, the company is slightly gun-shy on moving to a softswitch-based environment and scrapping its Class 5 switches altogether.

“For now, [Class 5 switches are] the best way for us to support 911 and it's still our point of interconnection with the local telco,” Zipp said. “I want to get to a point where we have local market gateways.”

Before reaching that point, however, MCI is working to support some of the same features on its IP Centrex service that customers expect through traditional Centrex. Among the most recent additions is terminated 800 calls, though the company has yet to delve into the ultra-hot call center market.

It also has simplified pricing to include several bundled packages of voice and data.

Perhaps most important from an IP voice service expansion perspective, MCI will announce in the coming weeks certification of Windows Messenger as a client for its voice services.

“By certifying that client, any XP professional can become a customer,” Zipp said.

With this package and others, the company plans to join the growing ranks of large carriers chasing small to medium-sized businesses. The company, Flanagan said, has hired 1500 new sales reps to attack this market, with MCI's consumer group going after accounts that generate less than $3000 a month in revenue while its business group pursues larger customers.

But while the company may look to this market — which Flanagan said is a $40 billion-a-year opportunity — as a significant source of revenue growth, it will face cutthroat competition in attracting customers. ILECs, notably the Bell companies, also have identified the SMB market as an important source of growth going forward, quickly turning an underserved market into a competitive one, Gerwig said.

And while MCI has an upper hand in providing sophisticated IP services and answering the concerns of CIOs and IT managers, ILECs may have a more natural relation with small business, said Pascal Aguirre, senior vice president of enterprise solutions for Adventis.

Given the telecom-intensive nature of WorldCom's current challenges, one might question the ability of a CEO with no telecom background to handle the issues. But according to analysts, that shouldn't be a problem.

Capellas has surrounded himself with enough telecom people that he doesn't need to know the nitty-gritty details of network operations. And according to Seth Libby, an analyst with The Yankee Group, telecom experience might be overrated.

“We had all telecom guys at the helm of many carriers that got into trouble,” Libby said. “It may actually prove to be an advantage to have someone at the top with a big picture perspective who can look at an organization from an efficiency perspective.”