Nortel chief discusses why enterprise stays

Nortel Networks' strategic emphasis on the enterprise was somewhat surprising when the company announced its reorganization two weeks ago, given that enterprise equipment wasn't viewed as core to the telecom vendor's business. But nothing could be further from the truth, according to CEO Bill Owens, who spoke with Network World Managing Editor Jim Duffy this week.

What trends do you see emerging in the enterprise that prompted Nortel to reenergize its efforts in this market?

For Nortel, it has been apparent to me that our enterprise business, which is fairly substantial, has been a leader in terms of bundling packages, bundling solutions associated with the IP packet-switched world. What I have observed is that's kind of the direction we're all going. The integration of voice and video over IP, the integration of elements of security solutions, the integration of TV kinds of applications onto IP networks. Lots of that stuff is going on in our enterprise business. That has led us to the realization that this is an important market, but secondly that the partnerships of that marketplace are extremely important to Nortel. Watching our enterprise business both before I came to be CEO and now having seen it up front, I think that's a very important futures kind of orientation for us to have to be aware of.

Secondly, I believe that many of the large telcos are developing the reality that business enterprise is important business for them. So as Nortel focuses on many of our principal customers who are the big telcos around the world, I am aware that they are all thinking about offering their own bundles of enterprise solutions. So as we become more focused on that converged network they are becoming more focused on the fact that they can bring in more revenue by having their own business enterprise activities. And therefore it's very important not only for our enterprise business to be in enterprise but for our carrier business that we understand the kinds of solutions our carrier customers can offer over their own network. So there is this strange kind of convergence that is occurring in that area as well.

I think also in this enterprise world is the seedcorn of a very exciting government business. We have had our government business reporting to enterprise in the past. I am quite convinced that this is a huge marketplace for Nortel. Much of this market today is absorbed by the major systems integrators but Nortel has many of the products that are necessary to be an important player, if not a principal player in that marketplace going forward. And those markets are tens of billions of dollars a year just in the U.S., let alone other countries.

So I think that these areas are converging around IP-oriented packaged solutions, and for that reason Nortel needs to be engaged, understanding and growing its own enterprise business but also understanding how it affects the rest of our business. I think it's very good business for us.

What's been your assessment of Nortel's engagement in the enterprise?

I don't think that it has been in the natural DNA of Nortel to be strongly in the enterprise business. One could surmise that over the years that it hasn't had the focus and the direction that is natural for a Nortel to have with it best, biggest customers -- the major telcos of the world. But as major telcos have become more interested in enterprise and bundled IP solutions, so have we. As the core of Nortel becomes interested in bundled IP solutions that takes us back to the enterprise business. So my observation of it is that it has been less in the core in the past but growing to be in the core of Nortel's business going forward.

I'd also observe that it probably doesn't have the mass to be optimally positioned in the marketplace. We know that, and you can imagine that we would do whatever we can to make certain that it has the mass to be able to engage the tens of thousands of customers around the world to whom we could be successful in selling enterprise products.

When you were formulating your strategic plan, did you consider spinning off or selling the enterprise business?

Well, honestly, I just want to do the best thing I can for Nortel. It is in my heart to keep my mind open for all opportunities and alternatives. If there is a single sort of Owens management style it is to try to expand our mindset to be thinking of all opportunities. So it would not surprise you that in almost any area of business inside Nortel, there might be a lot of discussion going on in terms of the blue-sky possibilities of how to best benefit then shareholders of Nortel. So of course I thought about that. If the right set of conditions came along and the opportunity was there and it was best for the shareholders, I wouldn't rule out anything like that being done. But there are no immediate plans to do that now.

Analysts say growth in Nortel's enterprise business has been lagging Nortel's peers for two years. Do you have a timeframe in mind for reversing this trend before you again consider strategic alternatives for the business?

I think a good time to talk about this would probably be after we release our audited financials at the end of September. You'll see a plan for 2005 that has a growth in enterprise that is meaningful. We're putting in place many of the elements of that business plan as we speak. I'd rather wait for a couple of weeks to have a little more detailed discussion about where we've been, and then probably into October as we look at the business plan for 2005. But I'm pretty bullish on how it's going to do in the next year.

Of Nortel's four business units -- wireline, wireless, optical and enterprise -- where is the lion's share of the 3,500 layoffs coming from?

Enterprise is not as affected as the carrier side. You'd find that future R&D -- R&D associated with a converged network -- is far less affected than legacy R&D. Less R&D is going into upgrading our legacy systems, but we will continue to support them. More of the job cuts are coming out of management by a significant amount as a percentage than out of the general workforce. Less of the cuts are coming out of the sales and marketing force than they are out of all other areas. You would find strong R&D being added in the area of Internet security, which I believe is a critical marketplace for us going forward.

We have generated a list of the names of about half of the people who would make up that 3,500 and are continuing on a daily basis to generate that list, and that will be available in about two weeks. We'll try to get that out to the press as soon as we know precisely the number of jobs that will be taken from given areas but the intention is to have it implemented substantially by the end of 2004.

You mentioned that enterprise was spared the brunt of the reductions, and I've seen reports that state wireless was relatively untouched. That would leave wireline and optical...

That's a little bit too general. One of the critical areas where we found a lot of synergies is when you take those three business areas -- wireline, wireless and optical -- and merge them into a common carrier business. Each of those business areas before had its own HR staff, its own finance staff, its own IT staff and several other functional staffs. When you put the three together you find the synergies among them. That is a substantial amount of the savings that we've announced in SG&A (sales, general and administrative) and in some cases even in R&D because each of those entities had its own R&D functions. So the synergies of putting those three together resulted in considerable cost savings and that of course means that if you were an HR person working for wireless you might be asked to leave. But that doesn't mean we focused on wireless, if you know what I mean. So some of these are SG&A kinds of reductions that are functional staffs and not meaning that we're taking that support away from any one of the entities. Wireless has been relatively spared as compared to the other two disciplines, wireline and optical.

UBS Warburg says your wireline business declined 15.5 percent in the first half of 2004 compared to Lucent Technologies Inc.'s 8.7 percent drop. Have you lost momentum in areas such as carrier VoIP?

VoIP has continued to be of great interest. I can't address how it is Q1 to Q2, but I can tell you that in my discussions with the CEOs of major telcos out there, there's a great deal of interest in the Nortel VoIP product. The fact that we have been known for and do provide in this case a "five nines" reliable VoIP product is not going unnoticed by the major telcos. So I believe it will be a substantive market for us. It is lumpy because in some sense the telcos themselves are not moving aggressively into a packet-switched sort of VoIP world. So I don't think we've quite gotten to the tipping point where we see them just aggressively heading in that direction. I have not sensed that it is waning in that VoIP marketplace. We have had several substantive wins. I think that a good time to evaluate that is going to be at the end of September.