Alcatel-Lucent maps out revival agenda

The year 2008 is one that networking equipment giant Alcatel-Lucent will be keen to put behind it. The company, created when France’s Alcatel bought US rival Lucent Technologies in December 2006, recorded staggering losses of C5.22 billion for the 12 months to 31 December, a 4.5% fall in revenues to C16.88 billion, and added 1,000 managers and 5,000 contractors to its roll call of surplus staff, bringing redundancy numbers for its first two years to 22,500. It also said goodbye to two of the architects of the merger, CEO Pat Russo and chairman Serge Tchuruk.

That has left new CEO Ben Verwaayen, the former BT supremo, with the opportunity to create a fresh agenda for Alcatel-Lucent: to both stop the rot and identify key areas of investment and growth – and more importantly profitable investment and growth.
Outlining his revival strategy at Enterprise Forum, the company’s annual customer and partner get-together in Paris last month, Verwaayen was purposely upbeat about the company’s outlook. “We have had our fair share of interest in how we are doing,” he said. “We are doing well. The buzz in our organisation is, I would say, very positive.”

The directions in which he intends to point that “positive buzz” centre on three key areas that relate to both Alcatel-Lucent’s technology focus and its market orientation. He wants to ramp up the company’s exploitation of unified communications (UC) and the multiple services associated with the implementation and running of such integrated voice, messaging and video technologies. At the same time, he is determined to tie product development much more tightly to market demand. And he sees huge potential in public sector communications infrastructure projects as governments across the world bankroll upgrades of networks for local government, transport, healthcare, energy and education, in many cases as part of efforts to support flagging economies.

“[Governments] are spending billions and billions in stimulus packages, not to create what we had, but to create what we need. And it’s not the physical world, but a digital world that forms the basis of a knowledge economy,” Verwaayen told the Paris audience.

Alcatel-Lucent’s head of verticals and global accounts, Dave Miller, offered more detail, explaining that the company had set its sights on an estimated C1.7 trillion-worth of government stimulus money being rolled out worldwide.

Governments, he explains, were focusing on projects that were “shovel-ready”, that would provide “good societal benefit, and put labour back to work very quickly.”
China alone, he said, plans to spend 45% of its total $586 billion stimulus plan on public infrastructure and rail projects.

Miller claimed Alcatel-Lucent has identified C10 billion in economic support packages relating to communications infrastructure. Not only does that present “a real opportunity for us in 2009”, it has the potential for wider applications that will enable the company to draw on its UC portfolio.
Verwaayen argued that Alcatel-Lucent’s adoption of UC will play a critical role in helping address the world’s twin crises.  “Some people say what you really need is a crisis [to stimulate action]. Well, guess what, we got two for the price of one.
The financial crisis of the last 12 months, and a long-standing crisis that will not go away: climate change,” he said.

“A low carbon economy is based on knowledge, and the ability to find like-minded people wherever they are and work together in real-time. The solution is in front of us: the digital economy, the knowledge economy, that brings people together regardless of where they are. It brings together their ability to do things that were impossible 20 years ago.”

Related to that is the company’s shift towards market-driven R&D. Miller explained that rather than “designing and engineering breakthroughs and releasing them to the market”, increasingly innovation will be driven from within the market. “That represents a very significant change in how we deploy and innovate,” he says.
One immediate decision has been to scale back its investment in WiMax technologies, refocusing the cash on

the enhanced-wireless DSL market opportunity, while at the same time significantly boosting investments in Long Term Evolution (LTE) – the 3G mobile upgrade aiming to achieve peak downlink data rates of 100Mbit/s.

Verwaayen certainly brings insight into the direction of some of Alcatel-Lucent’s big clients. During his six years as CEO of BT, he ramped up the telco’s Internet capabilities dramatically, backing efforts to shift away from its ‘copper and switch’ heritage with the early roll-out of its all-digital network, 21CN.

But the focus at Alcatel-Lucent will not just be on telco infrastructure: there will be a renewed focus on the enterprise and services businesses. In its most recent quarter, revenues from telecoms carriers fell 12% to b3.73 billion. In contrast, its revenue from enterprise clients of U433 million was flat year-on-year but up 12% compared to the third quarter. “The decline in the small and medium business (SMB) voice telephony market was more than compensated by slight growth in the large enterprise voice telephony market and double-digit growth in data networking,” the company reported.

Moreover, some related divisions are booming: its contact centre software unit, Genesys, showed double-digit growth in the fourth quarter.

The services side of the business is also doing relatively well. Its revenues rose 6% over the same quarter last year to C1.09 billion and were up 25% sequentially. Much of that performance stemmed from new network operation services bookings from telcos over the year, including Brazil Telecom, Orange Switzerland and BT.
There is another aspect to Verwaayen’s programme that supports optimism – several of his competitors are in much worse shape.

Most notably, Nortel Networks recently filed for bankruptcy protection following
a $5.8 billion loss for 2008.

With the global telecoms equipment and related services market expected to fall by between 8% and 12% in 2009, Alcatel-Lucent thinks it can break even at an operating level for the year – at least when profits are adjusted for impaired goodwill.
But how well the newly appointed management team can execute the strategic plan while taking C750 million out of annual running costs will determine if 2009 is a year of revival or survival for Europe’s largest technology company.

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