Donald K. Peterson, the chairman and CEO of Avaya, came to the company from Lucent Technologies, where he was chief financial officer from 1996 to 2000. Avaya, spun off from Murray Hill, N.J.-based Lucent in October 2000, sells communications equipment, software and services, and services made up half of its US$5 billion revenue last year.
The company is considered a leader in call center technologies and has recently struck deals to grow its services, Internet Protocol telephony and wireless connectivity businesses. In this interview, Peterson, 53, spoke with Computerworld about Avaya's need for greater visibility and efforts to grow revenue, as well as its plans for capitalizing on voice as a means to browse the Web.
Q: On a scale of 1 to 10, how would you rate Avaya's success today and in each of the past two years?
At the end of our first year, which was fall of 2001, I felt like we were doing what needed to do. We had seen a small step down in revenue, about 10 percent, but earnings were up, and we were generating cash, and we made a couple of acquisitions. But then the revenue fell away from us much more dramatically than anticipated, so in the next year, instead of earnings being up 20 percent, they were down 120 percent and directly as a result of lack of revenue. So I would have given us an 8 out of 10 one year out. By the fall of 2002, I would have dropped that to a 4 or 5. And since that time, I would take us back to an 8 or towards an 8. We've done a very good job of addressing the cost issues in the company. We were perilously close to profitability last quarter, and we have said we expect to have a break even by the end of this third quarter being reported on July 24.
We are delivering on what we have said in the cost structure and have maintained our research and development investments and been able to deliver a new keel or base structure underneath each of our major product areas. We have reset the base of our MultiVantage software. We've introduced a unified communications center inside our messaging business. And we have introduced a new software core for our call center offering. And we did that while we pulled back some in absolute dollars of R&D.
Q: What level is R&D now?
R&D is right about 9 percent of revenue, which is about where it should be. We can live well with 9 percent of total revenue, keeping mind that if you looked at product revenue, less than half of total revenue, we're in the mid-teens. That's about a $400 million a year R& D flow, and that's a pretty robust program.
Q: Have you stopped job cuts at Avaya? Your workforce is nearly 19,000 now, which was down nearly 20 percent from the prior year.
We were at 34,000 full-time employees when we spun off from Lucent in late 2000 and are now at a little under 17,000 full-time employees right now, and ... part-timers and contractors would take it up to that 18,000-plus number. So, we have taken a lot out of the business. At the same time, we've been relatively successful at keeping people focused. ... There isn't the buzz of, "Let's hang the boss," thank goodness. We're kind of at where we should be, but there will be some drifting down of that number, and frankly, it will oscillate. It could come down more, but it could expand fairly rapidly if we got 10 percent more revenue.
Q: What about the economy and when you might see an uptick in revenue?
The conversation is better out there, and more of our customers are talking about the investment program, and the CEOs are talking about looking at an increase in spending. We need both an increase in spending and (to) have it spent in our space. We're getting closer to a turnaround. Overall, the economy looks like it is in the process of firming up. Government spending will be a help, but hasn't been yet in our space.
The weakness in the economy has been in capital goods being bought by businesses, and I believe that's a psychological game. If it ever opened up, you'd get into this "virtuous cycle" of people buying from each other, and you'd see good things happen. We'll start to see and talk about that increasingly towards (the) end of year and start of next.
Q: How important will Avaya's services business be in the future?
Services now makes up about half our revenues, and it's a profitable area of our business. I think services can maintain itself at least as important and could possibly become more so. Services has two areas of opportunity with one at the top line. Our services offering has been based primarily around our own product. We do maintain some other peoples' data product, but basically, it's a managed business around our product. There's an opportunity to start to support third-party products, such as maintaining third-party private branch exchanges (PBX). There's a large base that isn't obviously ours and needs service.
We spend a reasonable amount of R&D in support of service offerings. We have systems actually based on artificial intelligence-type technologies. Every time we have a trouble call, we have a learning opportunity, and we capture that trouble call and codify it in a large database that is referenceable in response to any kind of trouble report we get from any of our customers. We're sharing a problem from one case with all other cases. Today, we have over 3 million cases in that database, and what happens is that when we get a trouble call, we can solve it more quickly because of that and can also solve it often remotely. We can go into a switch and then provide a faster recovery and then send technician out for more routine service call.
Q: What products and services does Avaya do better than the rest?
The call processing is second to none with the Multivantage Communications Manager, which is the core software that runs everything. The gateways, we think, are more flexible than others because of the ability to connect digital, analog and IP phones. We make better call centers, which were traditionally called Automatic Call Distributor software and Computer Telephone Integration software, and we bundle it with a service offer that other prime vendors can't deliver. With call centers, we win more than half the bids for call centers with more than 400 lines. If you went to China or India or Latin America or Eastern Europe, chances are better than even it would be our call center.
One of our pitches in the service area is that the transition from circuit-switched to packet is going to take a while. Some statistics that are interesting: There's over a 100 million lines of TDM (time division multiplexer) PBX (circuit-switched), and the latest number I've seen is 3.5 million IP telephony lines being shipped annually. That implies about a 35-year transition to IP telephony. Well, it's not going to happen that slowly, but it's not going to happen in five years, either. There's going to be an extended period when circuit-switched networks are going to have to manage voice with and alongside packet-switched networks. So it helps we have IP products on top of traditional PBXs. We also have a gateway to sit in front of other vendors' PBXs and effectively manage those.
Q: What is the latest development with the Proxim Corp./Motorola Inc./Avaya wireless initiative announced in January?
What happens there is you start with a multimode phone that works on GSM and 802.11b, although Proxim is trying to move us all to 802.11a as well. When the phone is in a Wi-Fi environment, it prefers the Wi-Fi network, and there's actually a handoff of the call from the public network to the Wi-Fi network, in essence, controlled by the PBX.
The PBX senses the call and creates a second connection to the phone, and the phone drops the public network and picks up on the Wi-Fi. It's our PBX, and Motorola makes the handset, and Proxim handles the wireless. It's the much-anticipated handset that you use in the office, and when you walk out of the building, you keep using it when you drive home. We don't know of anybody else doing it. It's pretty tricky to coordinate the call control.
Q: When will there be a product?
Trials, I think, this fall, and product early next year.
Q: Will big companies be the customers?
I think it's mostly big companies that will buy it, although in theory small companies would want one device.
Q: What's the benefit?
When you arrive at the Wi-Fi at work, you are no longer on the public network, and you save on that cost and have a single device and save on a second device. Carrying one phone will be a motivator for everybody. In the office, you effectively have a cordless phone that turns into a wireless phone when you leave the building. It will be interesting to a lot of people, but you never know until these things are deployed what the real value proposition will be for users. It's still on track, and I'm not anticipating a problem. The radio parts are understood, but it's the software for the call handoff, that's a little bit trickier. But conceptually, that's well understood. Research is under way in all three companies.
Q: Do you think people still want technology innovations, especially with the slowdown in the market?
The answer is all over the place, depending on the people. Young workers can't (get) enough technology, while some CEOs don't even dial their own calls, much less turn on their own PCs in the morning. I think that the willingness to pay for technology has been suspended for a while, and that's less because of skepticism about the new stuff and more a need to see the utility and payoff of the old stuff. We've gone over the crest we needed to pass to really get value out of technology. People will see value and be ready to spend again.
The Harvard Business Review article in May by Nicholas Carr arguing that IT has become strategically irrelevant may have been right about some areas of technology, but he really missed the point about networks. The value of a network is directly proportioned to the number of people on the network. That's an item of faith called Metcalf's Law. Carr's premise is that the next set of values from IT will come from driving the cost down. I believe there will still be wildly disproportionate leverage in increased networking of workers and people and that whole interaction thing. His article gave that phenomenon much too little value.
Metcalf's Law says the value of the network is equal to the square of the endpoint. He didn't have a corollary about the value of broadband vs. narrowband, but I believe there will be a multiplier from that as well. Absolutely, networks should be built at the lowest cost. But at any company, cost reduction isn't the key. It's often revenue. If you can put technologies in that drive revenue, you'll get much more leverage than if you look at things from a cost-reduction standpoint. You need to be open to impacts on the revenue line and value line.
There was probably overspending in the late '90s, and it's OK to pause and get the value out of existing investments. But we are not through with networking technology by a long shot.
Q: Do you have any technologies in mind for two to five years from now in which Avaya might lead or innovate?
One thing that has been underemphasized is the whole utility of the Web in a narrowband environment. The most serious application of that now is coming in automobiles. What's done with the OnStar system in (GM) cars could be done with an earpiece and a radio in your pocket as you walk along the street. You don't need a screen for most of the Web stuff. All the GPS questions of where's the closest library or public restroom, which is worth a fortune if you have young kids -- that's rather easy to do. What we need is a continued improvement in voice browsers.
A major leverage point ... is the average Joe walking around and not driving or working. If you find an efficient way to reach them with voice browsing, you've increased the reach of the Web by five to 10 times over without having to deploy more Web capability. Now, it doesn't drive PCs or Windows systems. The powers behind the growth of the Web have really been the people providing the interface devices. Voice is a great interface, and people have preferred voice forever. They didn't draw pictures first; they spoke first. Michael Dertouzos, the head of MIT's Computer Lab until he died last year, had the view that the perfect computer was a voice interface and some kind of holographic projection device, maybe in a pair of glasses. So if you need a picture, you shoot it out in front of yourself, and if you don't, you just talk to yourself.
Q: So you see Avaya still relying on voice in coming years?
I see us playing our biggest role in voice. I think what we'll deliver will change dramatically. Five years out, we'll be almost all software running on standard servers. Maybe some will run on proprietary blade technology to take advantage of firmware and so forth for speed, but mostly it will be software. We'll be in the terminal and appliance game, but probably there it will be software, too, voice software within other terminals. We'll continue to lead in the call center area. But the products now delivered as hardware and software such as dialers will all be software. There will be voice applications and core voice processors that are major components of other systems, and we will supply them on an OEM basis to people that supply the servers and the middleware, the IBMs and HPs and, hopefully, Microsoft.
Q: You obviously like your job, but what problems keep you up at night?
I do like my work. But struggling with the revenue line clearly has been the most stressful part of this work. In the marketplace, you encounter fear, uncertainly and doubt and the propaganda of your competitors. When you have a little bit of a problem, as we have had in the last couple of years, fighting against that is a little disappointing some days. But we're getting through that, and those days are fewer. There is huge opportunity in the business that Avaya has in front of it. Increasingly, we are getting better focused and better enabled in that regard and attracting sharp new employees to help us. People are buying into our story at a very personal level.
Q: What do you most need at Avaya right now?
Getting ourselves visible in the marketplace.