Peter Hall
Nortel's services plans are ambitious - maybe too ambitious
We had the opportunity earlier this week to meet with Nortel CEO Mike Zafirovski and senior executives George Riedel, Chief Strategy Officer, and Dietmar Wendt, President of Global Services. The discussion covered Nortel's business strategy going forward and, in particular, its focus on growing its services business.Comment: A key plank of Nortel's business strategy is to focus on selected markets where it has a number one or two position. This led to the decision, announced last week, to sell its UMTS radio access business to Alcatel. Nortel's assessment was it had a number 5 position in this market and that it would not be able to achieve the scale to make it a sustainable and profitable business going forward. We believe this business accounted for something in the region of 10% of Nortel's total annual revenue in 2005 so it leaves a large gap to fill. This leads us to the other key component of Nortel's strategy - to grow its services business and, here, Nortel has very ambitions targets. This is already a large business area for Nortel employing 10,000 of the company's 33,000 employees and accounting for about 20% of revenue. The company's target is to double the size of the services business in three to five years, and Mike Zafirovski stated that he would like to see it becoming closer to 50% of Nortel's revenue over this timescale. Nortel hired Dietmar Wendt, a former IBM senior executive, four months ago to lead the Global Services business. The business focuses on network-based services and solutions such as running and supporting networks for carriers and for enterprises. However, by Nortel's own admission, the key components of this market are growing at no more than high single figures and this is a tough market with many existing players. Maintaining its market position and growing with the market might give it half of the growth it needs in five years, so our question was where is the rest going to come from? The company has re-structured its Global Services business giving greater clarity and leadership in key growth areas, and its recently announced alliance with Microsoft is expected to inject additional growth in areas such as network implementation.It's not surprising that a network vendor such as Nortel wants to shift the revenue balance from equipment towards services. Services are perceived as more profitable going forward, being less subject to commoditisation and competition from Far Eastern vendors. However, network-based services is also becoming a highly competitive market, especially in the enterprise segment, as both IT services companies and leading telcos vie for the growing trend for enterprises to out-task or outsource their networks. Nortel has already established a strong position in running networks for carriers, both fixed and mobile, and this is a solid platform to grow upon. It has also made some headway with enterprise services, a recent win to run the global voice network for Rolls Royce being an example. However, we remain unconvinced that it can undergo such a transformation in its business in such a short period of time and question whether the company is placing too much reliance on its future as more of a services company.
