Surviving the Recession: Tough choices in R&D

[Note: This is Part 5 of a 5-part series exploring how service providers can best navigate the slow economy. The other parts in the series, including a focus on residential and wireless markets, can be read on our economy topic page.]

Telecom vendors are much leaner and meaner today than they were the last time we entered an economic downturn. Back in the go-go days of the Internet boom, vendors had built up monstrous research and development operations and unprecedented numbers of employees as they all rode the edge of what appeared to be an ever-expanding bubble. When that bubble popped, vendors found themselves decimating those operations, many cutting research budgets and staffing levels in half.

Now, as the economy heads south again, vendors find themselves in an equally precarious situation, though their starting point is far different. In the ensuing years, vendors haven’t returned to the free spending days of the 1990s. In fact, many of them have continued to cut costs throughout the decade. Ciena has moved much of its R&D overseas to India, where it can get more bang for the research buck. Nortel has moved to exit some industry sectors entirely, eliminating huge categories of sustaining R&D investment from its budget so it can focus on future technologies with the most promise such as long-term evolution (LTE). Alcatel-Lucent’s Bell Labs is no longer the research behemoth it once was. Gone are the inquiries into astrophysics, miracle plastics and economics as it focuses on core—and hopefully profitable—communications technologies going forward.

If the global recession continues for a sustained period or worsens, vendors will continue to feel pressure to reduce spending. The difference between the current crisis and that of 2001, though, is that vendors don’t have a lot of room cut, said Grant Seiffert, president of TIA. Most of them are already focused on their core competencies—there isn’t any extraneous R&D to sacrifice.

“Beforehand they had to cut fat and even muscle,” Seiffert said. “If things get worse, they’ll have to cut directly into the bone.”

Though there hasn’t been too much evidence of such painful surgery in the vendors earnings calls, you can bet vendors are grappling with the potential effects of recession now, said Peter Jarich, wireless infrastructure analyst with Current Analysis. There are other areas vendors can target besides R&D to save money, but as R&D spend is usually a significant percentage of overall vendor revenue, if carrier spending declines drastically, they’ll have no choice but to look toward the lab, Jarich said.