NECESSITY MOTHERS REINVENTION

Economic catastrophes and strategic misfires—embodied last week by Nortel’s second huge layoff —force technology giants to shrink their ambitions.

Every eon or so, a species-altering event occurs. With Nortel Networks' announcement last week that it would eliminate an additional 20,000 jobs—on top of the 30,000 already slashed—and elevate its chief financial officer to the CEO spot, that phenomenon is playing out in the telecom equipment provider space.

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The upheaval in technology sectors will produce completely different life forms.

Since the first of the year, Nortel and Lucent Technologies have each cut their work forces by about half, collectively changing the lives of about 100,000 total former employees. Over the same period, Alcatel eliminated 23,000 jobs, Siemens 8000, and Tellabs and Telcordia slashed 2500 between them.

Even Cisco Systems, once thought impervious to the ravages of economic slowdown, showed cracks in its armor by eliminating 8500 jobs, sustaining its first-ever quarterly loss and reorganizing product development.

According to Bob Atkins, vice president of Mercer Management Consulting, equipment vendors are the victims of the sharpest downturn in telecom history. “The growth rate has gone from 20% to 30% per year, to negative 20% to 30%,” Atkins said. “This is a huge change—one that is unprecedented on this scale.”

Being an equipment vendor is “not for the faint of heart right now,” said Harry Carr, CEO of Tellium. “In 25 years in the business, I have never seen anything like this.”

As a result, Nortel, Lucent and the rest of the equipment vendors must reinvent themselves to not only survive—the most immediate consideration—but also thrive in an environment that is far different than it was a year ago.

The return to basics with an emphasis on core competencies already has begun. Nortel's outgoing CEO John Roth said the company will hone its focus in on the optical long-haul, wireless and metro equipment markets.

Incoming CEO Frank Dunn—the erstwhile chief financial officer who will take over as CEO Nov. 1—was more direct: “We are focusing on cash-driving [initiatives].”

Lucent also is narrowing its scope to the top 30 service providers worldwide, a company spokesman said. Likewise, Tellabs is doing a thorough evaluation of its strategy, said Stephen McCarthy, senior vice president of marketing for Tellabs. Already, the company—which bought Salix in 1999 for $300 million in stock—abandoned the softswitch market because customers “were holding back,” McCarthy said.

Christine Heckart, president of TeleChoice, said a number of vendors failed in their attempts to become versatile. “A lot of them are undergoing an identity crisis because they are going in a lot of directions at once,” she said. “Consequently, they lost their ability to be the best at any one thing.”

Heckart added that all successful companies have one thing in common: They first figure out what they do best.

Too many vendors tried to determine key markets and then tailored their strategies and products to go after those markets. “It's the ‘follow the lemmings’ approach, and it's a mistake,” Heckart said. “It's the difference between having a solid foundation or no foundation at all.”

Once those decisions are made, it's crucial to stay the course, said Hilary Mine, executive vice president of Probe Research. “There was a time when Lucent was kicking Nortel's butt in optical,” she said. “In fact, Nortel didn't even have an OC-3; they had to take an OC-12 and dumb it down. But they stayed with it, and now it's clear it was the right decision.”

Consolidation, one of the preferred vehicles to growth, may become a strategic exit path. Heckart said equipment vendors actually have been reinventing themselves for the past three to five years, but “that was in a highly competitive industry that had lots of players and buyers.” Now that competitive carriers have become an endangered species and a dearth of new interexchange carriers are entering the fray, equipment vendors are being forced to recreate themselves all over again.

“If they can't get into the few remaining big [carriers], then the equipment vendors are going to have to align quickly with somebody who can get into them,” she said. “We're going to start seeing lots of consolidations—or bankruptcies.”

There could be any number of possible pairings, according to Mine, including a Nortel/Lucent collaboration. “If SBC can buy Ameritech, then anything is possible.”

Given Lucent's and Nortel's current financial positions, more likely pairings are those that would marry either company to a large entity with a lot of cash looking to expand its product portfolio—or eliminate a competitor. Vendors that could pursue that scenario include Nokia, Ericsson, Cisco and Siemens. “The rest are too weak,” said Atkins, who added that given the flimsy financial state of the sector, any vendor-to-vendor merger might be too risky. “There could be some serious trouble if they were to encounter any glitches in the integration process.”

Consequently, a merger of an equipment vendor with a behemoth that exists on the periphery of telecom is a more practical—and intriguing—possibility. Don't be surprised if it happens, Mine said. She pointed to the existing relationship between Nortel and Microsoft, companies that worked together previously on open routing and computer telephony initiatives.

“And Lucent might look toward the computer industry, specifically IBM,” she said. “They have similar cultures and a commonality of customers.”

Regardless of the evolution, surviving equipment vendors will be reborn into what is still a healthy environment, said Desh Deshpande, co-founder and chairman of Sycamore Networks. Deshpande hinted that Lucent and Nortel would be among the survivors.

“The amount of investment that goes into networks is huge—$40 billion to $50 billion a year,” Deshpande said. “Things slow down, but [spending] doesn't dry up. If you're Lucent or Nortel, that $40 billion a year is what keeps you going.”
Reporting by Liane LaBarba in Dallas, Lynnette Luna in Denver, Vincent Ryan in New York, and Toby Weber in Chicago.