Q&A: Avaya CEO Don Peterson looks ahead

Donald K. Peterson, the chairman and CEO of Basking Ridge, N.J.-based Avaya Inc., came to the company from Lucent Technologies Inc., 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 $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 Part 1 of 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. Part 2 of the discussion will be posted this afternoon. 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 we needed to do. We had seen a small step down in revenue, about 10%, 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%, they were down 120% 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 toward 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.

Donald K. Peterson, chairman and CEO of Avaya Inc.

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. What level is R&D now? R&D is right about 9% of revenue, which is about where it should be. We can live well with 9% of total revenue, keeping in 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. Have you stopped job cuts at Avaya? Your workforce is nearly 19,000 now, which was down nearly 20% 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% more revenue. 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 toward [the] end of year and start of next. How important will Avaya’s services business be in the future? Services now make up about half our revenues, and it’s a profitable area of our business. I think [the services business] 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 people’s 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. 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 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.