Nortel's Latest Game Plan: Fast And Simple

As Nortel's fourth CEO in just five years, Mike Zafirovski must prove why he'll be the one to make a difference. Nortel, one of the few viable alternatives to Cisco Systems for big business network routing, switching, and voice-over-IP equipment, has been plagued by years of accounting scandals and lags its top competitors in overall customer satisfaction.

Zafirovski, named to the post in November, is focused on simplification. Nortel's new global services unit debuts this week, with just 70 discrete services, compared with the previous 700. Services make up just under 20% of Nortel's revenue; Zafirovski says that with sharper focus, he can double services revenue.

The company also hopes to shed its image as a second-tier provider of enterprise data networking behind market leader Cisco. Last week, it rolled out routers for branch offices, the Secure Router series 1000 and 3120, based on technology from Tasman Networks, which Nortel bought for $99.5 million in December. Nortel says its routers can direct traffic at four times the speed of comparable Cisco routers, and at a lower cost. A high-end enterprise router based on Tasman technology is due later this year.

Zafirovski was credited with turning around Motorola's cell phone business while a top executive there from 2000 to 2005. His reorg at Nortel began with an overhaul of the executive management team, which included appointing former Juniper Networks exec George Riedel as chief strategy officer. Preliminary results for its fourth quarter ended Dec. 31 have Nortel with a net loss of $2.21 billion on revenue of $2.95 billion, compared with net income of $107 million on revenue of $2.59 billion for the 2004 fourth quarter.

Also last week, Zafirovski consolidated Nortel's Wireline Data and Enterprise Data groups into one division, with a plan to identify commonalities between the enterprise and carrier markets. That gets back to the quest for simplification, from combining and clarifying internal processes to bundling product offerings. "Everything must contribute to reduced complexity on the customer's part," says Peter Cellarius, business leader for Nortel's security, routing, and wireless businesses.

Something To Prove

As the many new faces at Nortel attempt to right the ship, they'll need to clarify how the changes will benefit enterprise customers, a group that accounted for about a quarter of its $10.8 billion revenue last year. In an InformationWeek Researchsurvey in November, Nortel ranked last in overall satisfaction compared with its top three networking competitors. Yet it's within striking distance: Nortel ranked 7.24, compared with 7.84 for Cisco, 7.81 for HP, and 7.42 for 3Com.

Nortel plans to spend $1.9 billion a year on research and development in four areas: enterprise networking, wireless, IP Multimedia Subsystem, and IP-based television. "We're committed to the enterprise market," says Dion Joannou, president of Nortel North America. "It's a priority."

Zafirovski also must grapple with the smudges left by several execs who remain under investigation for possible accounting malfeasance. Nortel this month restated $866 million in previous earnings and last month settled almost $2.5 billion in class-action lawsuits. Though he told investors during an earnings call that the most recent restatements were because of more strict rules about how Nortel does contract accounting, Zafirovski couldn't promise it would be the last time revenue would be adjusted.

Some customers say Nortel is on the right track. "We may have been a little bit concerned several years ago; now, not so much," says Frank Deluca, IT manager for the city of East Hartford, Conn. "We tend to think that they're a good, viable company." And if Zafirovski has his way, DeLuca would add simpler and faster.0