Fixing Nortel a bigger job than I thought, CEO admits
In an exclusive interview, Bill Owens says he discovered
more problems than just accounting irregularities
by James Bagnall
The Ottawa Citizen -- Thursday, September 09, 2004
It's not just accounting that requires fixing at Nortel Networks.
Five months into his new assignment as CEO, Bill Owens has discovered a surprisingly large number of problem areas that require his immediate attention. These range from a glut of software that is slowing the job of installing Nortel networks to a rather stunning weakness in the firm's ability to know how it's doing in any given week.
During a wide-ranging interview with the Citizen, Mr. Owens stressed that he is dealing with these problems as quickly as possible and that Nortel "is returning to be a normal business." Mr. Owens, who is scheduled to address the Ottawa Centre for Research and Innovation this morning, added that he is positioning Nortel to become one of the telecom industry's consolidators, not an acquisition target. In order to do that, he said, Nortel must consistently generate a level of profits it has rarely before achieved.
The drive for cash has important consequences. Mr. Owens expects to have cut 3,500 employees -- about 10 per cent of the global workforce -- by year-end as part of an effort to reduce the company's sales, general and administrative expenses to 35 per cent of revenues. However, Mr. Owens acknowledged that target will put Nortel's SG&A expenses "probably slightly above" those of its main competitors. "We have to then head to 30 per cent," he said. The second stage of the cost-cutting drive doesn't necessarily mean more job reductions. Much will depend on Mr. Owens' ability to get better at managing Nortel's massive library of software versions -- and being able to figure out more quickly how individual products are faring in their markets.
It sounds simple. It's anything but. Take the software issue. Nortel's long history of building optical, wireless and wireline networks means it has dozens of technology building blocks, each driven by its own software system. Each time Nortel installs a network in a corporation or a telephone carrier, its engineers must devote enormous chunks of time making sure the various software systems communicate with each other. And that's before they get around to the equally important job of adapting Nortel's products to connect with with gear built by other manufactures.
Mr. Owens said Nortel's products employ roughly 100 different versions of internally developed software compared to just 10 or so for some of its most important competitors. "This costs us a lot of money," he said.
Mr. Owens expects to reduce the number of Nortel software systems automatically over the next two or three years as currently separate voice, data and video networks converge into a single, high-speed technology platform based on Internet standards. "If, within two to three years, we can get down to less than 20 (software systems), we'll be a lot more efficient," Mr. Owens added.
He may not have that much time, though.
Ian McLaren, the chief executive of Ubiquity Software -- a Welsh startup expected to play a key role in the operation of broadband Internet networks -- said carriers are no longer willing to wait more than a year for suppliers such as Nortel to put together the technology that can breathe life into a new application or service. "They want rapid prototypes," he said. Examples of the new services made possible by high-speed Internet networks include: photo caller ID, voice-activated dialing, music streaming or even multimedia distance learning.
At the same time, Mr. Owens is grappling with an antiquated system inside Nortel for analysing how well individual products and sales people are doing. "There are a lot of businesses that can answer the question 'How did we do in product x this week?' " Mr. Owens said, "Nortel is a long way from being able to answer questions like that."
To a certain extent, Nortel is paying for its past emphasis on R&D, which has short-changed the parts of the company dedicated to running the business. For example, many units rely on manual bookkeeping entries, which makes it difficult to get an quick reading on how well products are doing worldwide. All of this is in sharp contrast with the practices of archrival Cisco Systems Inc. of San Jose, California. Cisco boss John Chambers has made a priority of internal reporting -- he gets a daily update from his key global executives.
Nortel has hired a firm, thought to be Accenture, to develop a fully automated system that should make this sort of vital information readily available to Mr. Owens. But it will probably take at least 18 months to get the business reporting system up and running. At that point, Mr. Owens estimated, Nortel should be able to count on greater efficiencies resulting in cost reductions of two per cent to three per cent.
More importantly, the new business process software (as it's known) should give company executives a stronger basis for tactical decisions involving marketing. Mr. Owens said he will seek board approval within days about his choice for a top marketing officer. "Nortel has not given enough attention to marketing at the corporate level," he added.
Mr. Owens, a former vice-chairman of the U.S. Joint Chiefs of Staff, has spent much of the past few months consulting with customers, employees and financial analysts. He has enunciated some broad principles he expects to follow -- his mantra is: "increase cash, cut costs and boost revenues." And he intends paying more attention to military markets, network security products, services and enterprise customers (i.e. large corporations that aren't carriers).
Even so, he gives the impression of a CEO not yet ready to stray very far from the R&D and product strategies in place when he arrived.
Whether that's the posture of a former military man unwilling to tip his hand before battle is unclear. What is clear is that he must deal with a fair amount of unfinished business in-house before he can make bold moves in the wider market. And that could take a while.
Interview with Bill Owens
© The Ottawa Citizen 2004
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