| BUSINESSWEEK ONLINE : NOVEMBER 6, 2000 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
Lucent: Clean Break, Clean Slate? The ailing company has tossed out its CEO. That's step one Henry Schacht has already scored one victory as the newly named, and returning, CEO of Lucent Technologies ( LU). On Oct 24, the day after the troubled company announced the ouster of Richard McGinn and the appointment of Schacht, the new CEO broadcast a speech from the Murray Hills (N.J.) headquarters to about 56,000 of Lucent's 120,000 employees. Schacht, who had headed the company from 1995 to 1997, was understandably concerned about his reception at Lucent. After all, the company had just announced that the fourth quarter in a row would not meet projections, and the stock had lost 70% of its value in a year. What he got, from about 600 employees in the auditorium and an additional 1,000 in the cafeteria, was a standing ovation. ''I couldn't get through the cafeteria when I went to lunch, and that was really heartwarming,'' Schacht told BUSINESS WEEK in an interview. ''You can just feel the energy in the whole place. We're on our way.'' If that's true, Lucent's customers, employees, and shareholders can only breathe a sigh of relief. The company that could seemingly do no wrong in the first three years after it was spun off from AT&T in 1996 seriously lost its way in 2000. It has admitted that the current first quarter, normally a strong period for the firm, will be down. The stock is now trading at about $21 a share, a level not seen since 1998. And Moody's Investors Service has placed the ratings of Lucent debt under review for a possible downgrade. Worst of all, it has been completely bested by archrival Nortel Networks Corp. ( NT) in the key market for optical-fiber telephone switches. The contrast with Nortel is what stings Lucent execs the most. It was only a few years ago that Nortel was the industry dog. But then, a bet the company made in 1995 started to pay off. Nortel had decided back then to build network gear that would zap data at speeds of 10 billion bits per second through a single strand of optical fiber. Nortel's phone-company customers weren't asking for anything nearly that fast, but they liked what they saw. Today, Nortel has 45% of the exploding optical transmission switch market. That compares with just 15% for Lucent, which decided in 1996 to develop a slower switch precisely because its customers weren't asking for anything faster. Nortel hasn't escaped the market's vagaries. Its shares got pummeled after it announced slower-than-expected sales growth in the third quarter on Oct. 24. But ''slow,'' in this case, still meant an impressive 42%. And for optical networking alone, growth last quarter was almost 90%. Lucent now rues the decision to settle for less transmission speed. And the 67-year-old Schacht, onetime CEO of Cummins Engine, is quick to acknowledge that he is as much at fault as McGinn. ''Of course. I was CEO through 1997.'' Now he's determined to rectify that very big mistake. Schacht says he is planning one-on-one meetings with Lucent's customers and is reviewing all the processes now in place with an eye to streamlining Lucent's cumbersome structure. But Schacht's position is only temporary. While moving to fix what is broken, he will also be part of a search for a permanent CEO. STANDARDS. Whoever takes over, he or she will inherit a work in progress. Under McGinn, Lucent embarked on an organizational overhaul in September. To head up key divisions, it has appointed some aggressive new outsiders who are not mired in the company's bureaucratic mind-set. One of those, Chief Financial Officer Deborah C. Hopkins, age 45, arrived from the same position at Boeing Corp. ( BA) in April. She is putting in place a company-wide standard for evaluating a product's profitability, replacing the piecemeal, business-by-business method used before. The company is also chopping away at management layers, more closely tying compensation to performance and trying to better integrate its vaunted Bell Labs with product-development teams. All of this activity stems from Lucent's realization that it has to do a lot more than catch up in optical gear. Getting back into that key market sector is certainly critical. But the world's largest telecom-equipment maker actually has a more cosmic task: It must remake itself into a company that can be quick to respond to market needs, quick to deliver new technology, and far less bureaucratic. And it has to do all of this while suffering from a 20% turnover rate that is siphoning off top talent. Granted, such an overhaul has been prescribed for just about every lumbering Old Economy behemoth. But Lucent has unique problems. For all but the last four years of its 122-year history, it served as the captive equipment division of its largest customer: AT&T, the world's biggest phone company. In that role, the division that became Lucent was more likely to tell its customers what technology they needed than listen to their requirements. Its salespeople had to do little more than write up orders. And it never had to worry about satisfying Wall Street. ''Lucent had no track record of operating as a publicly traded company, and when you think about it, that transition is enormous,'' says an industry executive who has worked for the pre-independent Lucent and its competitors. ''Suddenly, your accountability to the markets is an issue, and so your planning horizons have to change. It's a totally different way of thinking and operating and Lucent just did not have that legacy.'' Lucent must also deal with a market that has changed radically in the past three years. It can no longer survive on the gold-plated, end-to-end voice networks that are its stock in trade. Voice switching is simply not where it's at today, and Lucent has been achingly slow in mastering the industry's transition to data networks. Before it was able to ramp up sales of new products, sales of its older voice switches fell off the table. ''It's not easy to grow revenue when the technology is shifting away from your big product lines,'' says Kevin Kennedy, head of competitor Cisco Systems Inc.'s ( CSCO) phone-network business and a former Lucent employee. 100-DAY PLAN. Few are willing to write the company off. ''They are chock-full of very, very smart people,'' says Timothy Smith of market researcher Dataquest Inc. ''They have a huge installed base and a lot of excellent products.'' And they are in an extremely robust industry. In fact, it is a measure of how deep Lucent's problems are that the firm could keep reporting dismal earnings when the overall market is so strong. Lucent is determined to pull itself apace with that market. And it may have a secret weapon: In September, Lucent named Jeong Kim to head its optical networks business. Kim, 40, is the founder of Yurie Systems Inc., a startup circuit switchmaker bought by Lucent in 1998, making him a billionaire. Clearly different from the Lucent lifers around him, Kim says he decided to stay on at Lucent because ''I can always be successful as an entrepreneur. But I love this opportunity to turn a large organization around.'' Kim has reorganized the group into 17 small divisions based on product lines, with managers closely matched to customers and compensation tied to performance. ''We are much more focused on the products than Lucent overall,'' he says. His goal: to improve time to delivery by 30%. ''I have a 100-day plan,'' he says. Kim's entrepreneurial spirit is sorely needed at Lucent, and he is convinced he already has had a positive effect on morale. He recently visited a Lucent plant in North Andover, Mass., and found general managers there very involved in suggesting ways the operation could be improved. ''They were really taking ownership of their operation. And morale was running really high. I was very encouraged.'' High morale helps, and Schacht plans to nurture it. He sees Lucent's problem now as one of ''execution, not development of the products.'' But in reality, the problem is both. Lucent has been too slow to embrace the data market and still doesn't have a competitive product in certain key markets, such as Internet routers. On top of that, Lucent has a massive credibility problem. After a full year of product delays and overly optimistic earnings projections, it must regain the confidence of both customers and investors. The company has only just started shipping optical switches that are competitive with Nortel's successful product line, and it has yet to offer a competitive product for high-end Internet transmission gear. Lucent has also spent $32 billion in stock and cash on some 38 acquisitions, with few marketing successes to show for the buying spree. EXODUS. For two years, Lucent's failures in the data and optical equipment markets were masked by strong growth in its core voice-network business. But now that business is dropping dramatically. In fact, Lucent lost $2 billion in revenues in the past three months from just two big phone companies that slowed purchases of traditional voice equipment. Lucent also ran into trouble with a controversial effort to goose sales by providing lines of credit to phone carriers to buy its equipment--$1.3 billion in credit already loaned out, and an additional $7.7 billion available. Many of these carriers are on shaky financial ground, however, and Lucent has had to move money into its reserves to cover the bad debts. CFO Hopkins is already working to rein in such handouts. She wants credit to be treated like a bridge loan, with a clear time limit, and a tougher assessment of the borrower's business plan and creditworthiness. ''We want to make sure we are lending to very strategic partners,'' Hopkins says. ''We can't do everything for everybody anymore.'' Lucent must also start regaining the trust of its employees if it wants to stem the flood of talent that started rushing out the door as soon executives' pre-IPO options vested on Oct. 1, 1999. And it hasn't done any better at hanging on to the employees that came on board with its many acquisitions. Adopted employees who have headed for the doors regularly complain that they found themselves stifled by Lucent's many-layered management. ''There are a lot of top-level people trying to get out of Lucent right now,'' one Silicon Valley headhunter says. A typical case is Ascend Communications Inc., a maker of specialized data-transmission gear that Lucent purchased in June, 1999. At the closing, Lucent passed out small kites to employees with the words ''We're Ascending'' emblazoned on them--but Ascend staffers weren't buying. The contrast between the two companies' corporate cultures quickly became evident to Ascend executives, who were used to a Silicon Valley pace of product development and marketing. ''It was clear that they were a lot more into processes than we were,'' says one former Ascend executive who left a vice-president position less than a year after joining Lucent. Today, few of the key Ascend people remain, making it more difficult to design the next generation of gear. Lucent's executives are sounding all the right turnaround noises. William T. O'Shea, vice-president for corporate strategy and business development, is in charge of a massive effort that kicked off this past summer to streamline Lucent's businesses. The goal: to encourage entrepreneurship. ''We are putting new people in charge and organizing groups to focus their energy in small teams,'' he says, rather than structuring the company in large, often uncommunicative, divisions. And the company is including Bell Lab researchers in these teams, to make sure that their inventions are properly promoted. ''We are bringing a much broader collection of people to the table internally to make strategic decisions,'' he says. O'Shea's first order of business is to recover from the bad bet in optics that Lucent made in 1997. Optical switches and related gear are the fastest-growing segment of the industry because they are capable of carrying voice, data, and video at lightning-fast speeds. Nortel has the lion's share of this market because it was first to introduce high-speed gear, called OC-192. Lucent has just started shipping its OC-192 products and so far has signed up 15 customers. ''We've produced a very competitive OC-192 product, although it's a year late,'' says O'Shea. The company also is well on its way to development of the next generation of switches, called OC-768. ''Now we have to start building our credibility with the customers,'' he says. WRONG ROAD. But the company still has a long way to go before it inspires confidence again. ''I give it a 50-50 chance,'' says Mark Lutkowitz, the head of optical networking research for Communication Industry Researchers Inc. in Charlottesville, Va. ''They went down the wrong technology road, and even if you correct everything overnight, you can't turn out these products the next day.'' Perhaps Lucent's toughest turnaround challenge is overcoming the skepticism that now surrounds everything it does. A perfect example is the assessment by many outsiders of its cutting-edge LambdaRouter. This is an optical switch that uses mirrors and fiber optics to direct beams of light over long distances without having to convert them to electronic pulses, a costly and slowing process. It's an elegant technology, and Lucent is very bullish on the product, which is being tested by Global Crossing ( GBLX) in its network. ''This is going to be a key product space for us in the future,'' says O'Shea. But Robertson Stephens analyst Paul Silverstein is typical of the outside view: He scornfully dismisses the device as ''a science project. The market demand is not there.'' Of course, that is what Lucent itself said a few years ago about OC-192--proving how difficult it can be to call the future of this market. So Lucent could still pull itself back to a leadership position in the next go-round of the technology battles. Maybe next time, it will do a better job holding on to its title. By Catherine Arnst in New York, with Roger O. Crockett in Chicago and Andy Reinhardt and John Shinal in San Mateo, Calif. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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