Nortel looks to enterprise in overhaul

If there were any doubts about Nortel Networks' commitment to the enterprise, they should be vanquished now.

Amid the layoffs, executive firings and operational consolidations announced by Nortel last week was a strategic emphasis on its enterprise business as the company looks to regain financial footing after an accounting scandal. Enterprise is one of two Nortel business units – Carrier being the other – left standing under the reorganization plan.

"We remain strong in the enterprise business; it's growing," Nortel CEO, Bill Owens, said.

Enterprise products accounted for more than 20 per cent of the company's revenue in each of the past two quarters, outpacing two of what had been four company units before the reorganisation.

Nortel was also gunning for the defence and government markets, which represented tens of billions of dollars annually in the US, Owens said. He also said enterprise operations were spared the brunt of the 3500 layoffs announced, which represents 10 per cent of Nortel's workforce. The renewed emphasis on the corporate world comes none too soon to some.

Barring such a renewed commitment, investment firm, UBS Warburg, suggested recently that Nortel consider paring down or even selling off its enterprise and optical units to reach profitability targets.

Analyst, Nikos Theodosopoulos, said enterprise and optical were a "drag" on Nortel's profitability

Nortel was also a distant second to Cisco Systems in enterprise LAN switching with a 5.3 per cent share of the $US3.3 billion market in the second quarter, according to Synergy Research.

Nortel's LAN switching revenue dropped 10 per cent between the first and second quarters, Synergy said.

Growth in the company's enterprise business has been weaker than Nortel's competitors for two years, according to UBS Warburg.

Owens said Nortel did consider spinning off or selling its enterprise business. But the synergies between enterprise and carrier, and the role the unit played as the "seed corn" for Nortel's defence and government activity, convinced the company to retain it.

"I don't think it has been in the natural DNA of Nortel to be strongly in the enterprise business," Owens said. "It hasn't had the focus and the direction that is natural for Nortel to have with its 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."

In establishing the Enterprise and Carrier business units, Nortel consolidated four units into two. The previous ones were Wireline, Wireless, Optical and Enterprise.

Owens said the streamlining reflected market realities.

"We're all heading toward a converged solution," he said.

The reorganisation would also result in a more customer-attentive structure dedicated to integrating security into the converged product set, Owens said.

Nortel estimates the reorganisation will cost $US300 million to $US400 million but will save the company $US450 million to $US500 million annually, including reductions in research and development spending and investments in long-haul optical systems.

Nortel has also fired seven more executives as the company continues to repair the damage wrought by its accounting scandal. The scandal, which triggered ongoing criminal investigations of Nortel by Royal Canadian Mounted Police, the US Securities and Exchange Commission and the Ontario Securities Commission, cost Nortel CEO, Frank Dunn, and two other executives their jobs in April.

Nortel would seek to recoup $US10 million in bonuses from the 10 terminated executives, Owens said.

In addition to its reinvigorated efforts on the enterprise market, Nortel – like its rival Lucent Technologies – is investigating opportunities in the professional services business.

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