Big plans

Having suffered a number of years of declining profits, allegations of financial impropriety and a declining market share, Nortel Networks is in need of a drastic turnaround. Recently appointed Nortel CEO and former Motorola senior executive, Mike Zafirovski believes that together with his management team, the opportunity exists to make Nortel great again. Tawanda Chihota reports from London.

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By  Published  September 30, 2006

For the past few years now Canada's Nortel Networks has been making the headlines for all the wrong reasons.

Restatement of financials, allegations of financial impropriety, and speculation that it appears a prime candidate for a takeover have plagued the telecoms equipment supplier for years.

Given the pace of consolidation in the telecoms supplier space and imperative to build strong, long-term relationships with operators and corporates, Nortel's perceived instability has been a real threat to the company's continued existence.

Mike Zafirovski, Nortel's president and CEO, was appointed to the position in November last year having moved from his position as president and chief operating officer of Motorola.

He has taken it upon himself to reassure the market that Nortel is turning the corner and is moving back to a period of stability and growth.

“The thing I feel best about is the management team we have put together,” said Zafirovski, at a specially convened press briefing in London last month.

“Issues arising from litigation and financial restatements are largely behind us,” he added.

Zafirovski has always held a burning ambition to head a multinational cooperation and mould it into something that reflects his own values of efficiency, profitability and focus.

Having lost the race to become CEO of Motorola to Ed Zander, Zafirovski's arrival at Nortel appears tinged with even more determination to turn around a once impressive organisation, and make it resemble its former self.

Nine months into the job and Zafirovski and his senior management team are implementing a strategy they describe as BIG — 'B' standing for business processes, 'I' standing for integrity renewal and 'G' standing for growth.

“We are instituting a six-point plan to recreate a great company.

We used to be there, we are not there right now, but we are looking to return there,” Zafirovski acknowledges.

Three of six action points are related to growth, and like most other equipment suppliers, Nortel is looking to generate significantly more revenues from services and applications as opposed to just hardware.

Things do appear to be improving, aided by the injection of new blood into the senior management team.

Orders for the first half of the year were up 22% year on year, with revenues up five points.

The company's primary plan to regenerate itself is to focus on the business areas in which it enjoys strong positions and to jettison the other remaining areas that are a drain on cash.

As such, Nortel pretty much acknowledges that it missed the 3G boat, and this is reflected in its sale of its UMTS radio business to Alcatel last month.

Instead, Nortel is looking to assume a leadership position in Next Generation Networking and 4G deployments, having backed the development of WiMAX and OFDM as definite evolution paths for network operators.

“We are focussing on next generation mobility and convergence,” Zafirovski suggested, emphasising that within this, the delivery of enterprise solutions plays a significant role.

Nortel sees enormous benefit in targeting enterprises as well as carriers.

In July, the company displayed just how seriously it was targeting the enterprise market when it announced it had entered into a strategic alliance with Microsoft based on a shared vision for unified communications.

By engaging the companies at the technology, marketing and business levels, the alliance is set to allow both companies to drive new growth opportunities and has the potential to ultimately transform businesses’ communications, reducing costs and complexity and improving productivity for customers.

The aim of the alliance is to combine Nortel's world-class network quality and reliability with Microsoft software's ease of use, thereby accelerating the availability of unified communications — an industry concept that uses advanced technologies to break down device- and network-centric silos of communication (such as e-mail, instant messaging, telephony and multimedia conferencing) and makes it easy and efficient for workers to reach colleagues, partners and customers with the devices and applications they use most.

“We believe the tie-up with Microsoft will bring over US$1 billion of revenues to Nortel,” estimated Zafirovski.

“VoIP is a US$65 billion business and growing at 6- 10% annually. I believe we can target half of that,” he added.

What is refreshing about Zafirovski's style of management is that he appears willing to face facts and accept the work that still needs to be done going forward.

He describes Nortel as a developing story, which is not yet complete and forecasts that it will take at least another 3-5 years to put things right.

“We have been pretty quiet for the last eight or nine months on purpose as we were building momentum,” Zafirovski stated.

Darryl Edwards, Nortel's president of Europe, Middle East and Africa has been in the job for about two months and is excited about the prospects the region offers Nortel for further growth.

“I am excited at this point by the momentum generated in the first 30 days in my job,” Edwards said last month.

“50% plus of Nortel's revenues in Europe come from next generation technology, and 50% plus of Nortel's global revenues are generated outside of North America.”

Zafirovski says he loves what is happening in the EMEA region for Nortel, having a business that grew over the last six consecutive years despite the trials and tribulations.

Seven thousand of Nortel's 30,000 staff compliment operate out of 30 countries across the region, and Nortel executives feel confident to expect everimproving results from the region, which accounts for 25% of global revenues.

Despite its difficult recent past, Nortel intends to remain very much an independent company, and while it can clearly see the wave of consolidation occurring around it, is determined to continue charting its own course.

“Nortel plans to continue as an independent company, and we will be able to add to our assets over time,” Zafirovski said.


Zafirovski’s turnaround strategy

“The initial focus of the leadership team has been to kick-start the path to profitability and operational excellence, ensure integrity is at the heart of all we do, and increase the focus of our R&D investments.

We call this plan our BIG initiative, and it includes:

· Business Transformation

· Integrity Renewal

· Growth Imperatives

Through Business Transformation, we are targeting to deliver in excess of US$1.5 billion in operating expansion in 2008.

We will achieve this by addressing our biggest operational issues and opportunities.

In total, 120 employees are working on these initiatives and are reporting good progress.

Our Integrity Renewal plan puts the focus on how we conduct business.

It means a recommitment to the controls and checks and balances important to ensure we put ethics, integrity and corporate governance at the forefront of everything we do.

Our Growth Imperatives focus on market opportunities where the company can achieve a leadership position.

We have a team currently conducting a full review of our R&D priorities and investment areas.

Our goal is not to shrink R&D, but rather to drive strategic R&D investments to achieve our Growth Imperatives.

For example, we have made decisions to significantly increase investment in promising areas, such as IMS and WiMAX, while stopping funding for our services edge router and selling certain assets of our Blade Server Switch Business unit.

Nortel's longer-term objective: Recreate a great company

Make no mistake; our plan is to recreate a great company.

This is a journey that will take us three to five years to complete.

We call our roadmap to get us there our “6- point plan” to increase shareholder value.

The plan confronts our shortcomings head on and ensures we drive value in the Nortel brand and with all investors and stakeholders.

The first three help build a strong foundation that “allows” and enables profitable growth, the desired outcome of the last three points.

World-class management team, culture and processes There is a new leadership team (18 in total) at Nortel.

More than 80% of us have been in our jobs for less than a year.

We are combining the best inside talent at Nortel with terrific external hires who are bringing new perspectives to the company.

We've also put a premium on leadership development at all levels.

As part of our new operating rhythm, we spent a full two weeks in a “Session I” review where we looked at every organization and conducted extensive reviews of people, their development plans and our succession plans.

In the areas of development and training, Six Sigma quality teams are forming in a number of key areas across the company, and we've introduced a new programme known as “Own It!”

It's designed to empower all employees with common problem-solving tools that will lead to a more efficient, responsive Nortel.

Aggressive focus on the balance sheet, corporate governance and business/finance controls We are committed to these disciplines, are investing significantly, and have put the supporting processes for maximum sustainable impact.

· Ongoing remediation efforts including those that will lead to the removal of the five material weaknesses in our internal controls;

· Implementing the Financial Transformation project and related systems;

· Achieving the top quartile ranking for corporate governance; and,

· Aggressive cash generation / debt reduction.

Drive to world-class cost structure and quality levels (and mid teens operating margin)

Today, based on external benchmarks we are at a cost and quality disadvantage.

Through various Business Transformation and Six Sigma quality programmes, we are kick-starting our processes to significantly improve our quality, customer satisfaction and operating margin.

On the last item, we have opportunities to drive substantially equal improvements in gross margin, G&A, and R&D levels.

Target a minimum of 20% market share for all activities

This effort is to ensure market and thought leadership.

Ideally, we would be at 20% across all of our business categories, but today this is not the case in more than half of them.

Our challenge is to identify those areas where we can lead through increased investments and partnering.

These are not easy decisions as we balance customer relationships and revenue generation with ramp-up time for future opportunities.

This is a longer-term approach and philosophy that will help us achieve leadership.

Investor for profitable growth Growth to a vibrant business is the equivalent of water and oxygen to plants.

You grow or you extinguish.

We have and will continue to invest for growth, but with significantly higher rigor and expectations.

Our R&D spend (US$1.9 billion) as a percentage of revenues is substantial but under-leveraged as a result of spotty New Product Introduction and development practices.

Our investment levels (and capabilities) in go-to-market activities, effective partnering, and brand building have been below standards.

We are setting aggressive targets and roadmaps, including adoption of proven best practices, to create more customer value and higher internal returns for our growth investments.

Increase emphasis on service and software solutions

We have a stretch goal of doubling our revenue mix in this area.

We recognize the fundamental shift taking place in the industry and are making investments in the growth areas of our Services business, including Integration, Optimisation, Security, Managed and Maintenance services and applications.

By taking the above steps, we are building the long-term foundation for the new Nortel.

Of course, this won't happen overnight.

But I'm pleased with the progress that we've made in the past five months in each of these six areas.”

“We believe the tie-up with Microsoft will bring over US$1 billion of revenues to Nortel. VoIP is a US$65 billion business and growing at 6-10% annually. I believe we can target half of that”
“50% plus of Nortel's revenues in Europe come from next generation technology, and 50% plus of Nortel's global revenues are generated outside of North America”

Nortel to expand SMB channels

As part of its ongoing strategy to grow its small and medium business (SMB) presence in the Middle East, Nortel is working closely with its value-added distributors to accelerate the recruitment and development of new qualified SMB resellers.

The drive will initially begin in the UK, Ireland, Germany, France and Spain and will be extending across Europe, Middle East and Africa (EMEA) beginning 2007.

As well as expanding its SMB channels, Nortel is investing extensively in a themed end-to-end marketing campaign - Grow Your Business.

Think Small.

The campaign is designed to equip existing and new partners with materials illustrating how Nortel's SMB solutions can translate into bigger net profits while meeting customer cost performance and application needs.

The comprehensive campaign also offers a range of activities such as online and print advertising, targeting the end user and channel audiences, and regionally run business road shows.

A leading element of the campaign will be a localised direct marketing programme.

Nortel will be one of the first vendors to offer a targeted SMB data approach that delivers segmentation of early adopters and identifies verticals of SMB end user communities.

This is then mapped against the regional locality of Nortel's partners allowing resellers to develop highly targeted marketing campaigns that create truly new business opportunities.

"Nortel is working with SMB resellers who understand today's new world of convergence, applications and mobility and can add value to our award-winning portfolio of small and medium market solutions," said Amanda Giddins, director, distribution/indirect reseller business, EMEA.

"Nortel has been implementing a number of market initiatives this year to simplify the way we work with our SMB resellers, offering them new business opportunities with minimal up front cost and virtually no down-time through direct local Nortel support," said Giddins.

Earlier this year, Nortel introduced its new SMB Accelerate Partner Programme to make it easier to work with new and existing partners.

Becoming a Nortel SMB Business Partner brings many advantages for committed Nortel resellers including generous rewards in exchange for good business performance.

Since it was first announced four months ago, 150 new SMB convergence resellers have registered to join Nortel's SMB Accelerate Partner Programme in Europe.

Accelerate was extended to include the Building Blocks reseller margin incentive, an innovative incentive programme developed to increase SMB resellers' margins when they sell across portfolio.

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