Emboldened Nortel finally gets to look at the future

Tech giant hopes that focusing on three core areas will fuel recovery, writes John Collins

Technology industry watchers have had little need to seek diversion in TV soap operas in recent years - the goings-on in the sector have provided more than enough real-life drama.

Accounting scandals, senior executives in the dock, rollercoaster share prices, boardroom heaves, chairmen spying on board members - if you rolled it all into a film script, it wouldn't be believable.

Among the notable names that would probably prefer to forget the first five years of this decade is Nortel, the Canadian supplier of communications equipment. Particularly badly hit by the downturn in telecoms spending, the company, which employs just over 1,000 in Ireland, slashed its workforce from 95,000 in 2001 to 33,000 today.

In late 2003, financial irregularities were unearthed and it was discovered that $3 billion (€2.4 billion) in revenues in the late 1990s was incorrectly accounted for. In 2004, chief executive Frank Dunn got the bullet for overseeing those discrepancies and his successor, Bill Owens, lasted just 18 months.

After nine months in the job new chief executive Mike Zafirovski broke cover last week in London, and briefed the press on his plans "to recreate a really great company". While other chief executives in the same position have avoided wholesale changes in the hope of steadying the ship, Zafirovski has clearly decided that it is time to rip things up at Nortel and start again.

That might not be so radical as some Californian software company with a 10-year history of ups and downs, but this is venerable Nortel, the Canadian firm whose hardware has been at the core of business communications since it was founded in 1895 as Northern Electric and Manufacturing, an offshoot of Bell Telephone of Canada.

Of the 18 senior executives that report directly to the 52-year-old Macedonian chief executive, 13 have joined Nortel this year. The company even has a chief ethics officer now, which says a lot about the shenanigans of technology execs in recent years.

One of the criticisms of Nortel in the past is that it tried to do too much in the telecommunications space. Zafirovski has pulled the focus back to three core areas where he believes the company can be a market leader: next-generation mobility; the related convergence of voice, video and data, and enterprise products, services and applications.

The week before the London event, he sold off the part of the business that enables access to 3G telephone networks to Alcatel because it did not have a strong enough foundation to deliver growth and profits.

"We've made decisions to invest in the future, but at the same time we've started making decisions to pare down our portfolio," explains Zafirovski. "Taking those funds, we'll be reinvesting in the growth areas."

The next-generation technologies that Zafirovski is betting on includes WiMax, a way to deliver high bandwidth to wireless devices, and IMS (IP multimedia subsystems), a key technology for fixed/mobile convergence.

Further into the future, he believes the company has a lead in fourth-generation (4G) mobile technologies, having already filed 70 related patents.

"We do believe that mobile video will be the next significant application," says Zafirovski. "Mobile video is going to stress the current 3G networks and there is going to be significant increase in bandwidth demands for both speeds and capacity."

If this demand for bandwidth-intensive services takes off, it will also be good news for Nortel's business in fibre optics, which will be required to provide the backhaul infrastructure.

The bad news is that even by Nortel's own admission, 4G networks won't be deployed for years - not least because debt-ridden telcos need to sweat back some of the billions of euro they stumped up for 3G licences.

"This is not something that is going to happen tomorrow - 4G is something that is going to happen in maybe five or six years time," admits Darryl Edwards, the 14-year Nortel veteran who last month was appointed president of Nortel for Europe, Middle East and Africa (Emea). But unlike 3G, he believes there will be a natural evolution towards true 4G, with demand from users driving network operators to invest.

To invigorate Nortel's business with the corporate sector, it has enlisted the help of a long-term ally - Microsoft. Over the summer, the two companies announced an alliance around unified messaging - providing a single interface for fixed-line, mobile, instant messaging, e-mail and other communications - which Zafirovski believes will benefit Nortel to the tune of €1 billion in additional software and services revenues.

"We are fully committed to the enterprise and frankly I see carriers and the enterprise being very complimentary," says Zafirovski.

"We are providing carrier grade networks known for their reliability, security, scalability. If you are a major enterprise in transportation, supply chain or manufacturing, wouldn't you want your network to have the same level of quality that carriers do?"

The third prong of the strategy involves transforming Nortel from being a company only known as a hardware player to one that also focuses on services and applications.

Zafirovski's approach certainly seems to be paying off, on the basis of recent financial statements. Second-quarter results announced last month showed a 5 per cent increase in revenues year on year to $2.74 billion, while orders swelled 22 per cent. The new strategy also seems to bode well for the company's Irish operations. The days when it was the largest employer in Galway and one of the most important multinational investors on the island are over. But the Galway operation, which employs 300, is Nortel's main software development centre worldwide. It also hosts a centre where European customers see demonstrations of how Nortel's technology might look in their environment.

Nortel's operations north of the Border in Monkstown are its main supply chain centre for the region, ensuring that hardware and software from a variety of sources are put together in the right solution for customers.

Nortel employs 7,000 in Emea to support its operations in 30 countries. The region accounts for 25 per cent of global revenues, but Edwards expects that to grow in the short term. In the first half of this year Emea revenues were $1.5 billion, up from $1.3 billion a year previously.

Edwards is particularly pleased with the fact that more than 50 per cent of Emea revenues come from next generation network technologies such as metro ethernet and IMS-based voice over IP technologies, which he believes will grow faster than the wider market rate of 6 per cent. "We are moving towards a period of hyper-connectivity, new applications and, for the first time, true secure ubiquitous broadband," says Edwards.

It might not happen overnight but Zafirovski's "forceful optimism", an outlook which he is also encouraging in his management, seems to be infecting a company that could yet succeed in finding a path that will return Nortel to the heights of the 1990s.