A look inside Nortel's locker room

Nortel Networks CEO Mike Zafirovski last week offered what he called some “locker-room” discussion of his progress in overhauling the equipment vendor.

In the next three years, he wants to grow Nortel's operating margins from 0.4% (last year) to double digits. To that end, he outlined a plan to cut $1.5 billion in spending over three years and gave some examples of efforts to redistribute research and development (R&D) dollars where they'll do the most good. For example, Nortel plans to renegotiate what it pays partners and suppliers, armed with analyses of what it actually costs those partners and suppliers to make the gear they sell to Nortel.

“With that as ammunition, you have a very different discussion with your suppliers,” Zafirovski said.

The company will also look to slash at least $400 million in extraneous R&D spending through a variety of means, including cutting products that don't have at least 20% market share. But exactly how that strategy will shake out isn't yet clear. (Nortel said it may excuse lesser market shares if the company ranks first or second in a given market, for example.) And analysts are already suggesting Nortel's ambitions — being a leader in IPTV, IP multimedia subsystem architecture and WiMAX, in addition to a continuing focus on voice over IP, metro Ethernet and optical — may be too broad. As one analyst pointed out during the call, plenty of other big vendors have stretched themselves too thin pursuing overly broad wireless and wireline strategies that were less ambitious than Nortel's.

“Do you really want to hit all those different areas or are you just feeling them out?” he asked.

Zafirovski brushed aside the skepticism, arguing that “wireless” and “wireline” networks are converging anyway (“I don't think the terminology will stay here very much longer,” he said.), as are carrier and enterprise networks. But he added, “Our strategy is not completed yet. We'll have some meaningful feedback on this well before the year is over.”

HOW NORTEL WILL SAVE $1.5 BILLION IN THREE YEARS

REFORM TEAMS	2005 EXPENSE	THREE-YEAR SAVINGS GOAL
DIRECT MATERIALS Calculating suppliers' costs and negotiating prices accordingly	$3B	$500M
SERVICES, ENTERPRISE, R&D EFFECTIVENESS Adding new services, cutting costs, Shifting R&D spending, setting prices	$1.9B	$600M
GENERAL AND ADMINISTRATIVE Cutting two management layers, Improving procurement, reducing service usage	$2B	$200M
FINANCIAL	$0.4B	$200M
TOTAL	$7.3B	$1.5B
Source: Nortel

NORTEL'S R&D SHUFFLE

R&D CUTS

Six product cancellations
$73M
2005

Three reductions in scope
$80M
2005
$39M
2006

Two sold or for sale
$11M
2005

R&D INVESTMENTS

Three increases in existing product areas
($167M)
2006

One acquisition
($11M)
2006

Source: Nortel