Alcatel-Lucent: Verwaayen's Plan

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Big changes could be coming to the executive suite, though. So far, Verwaayen has brought in only one new top manager: Robert Vrij, the former head of telecom software group Openwave (OPWV), who was named this week to head Alcatel-Lucent's North American operations. But stay tuned for more newcomers. "We will make adjustments to our teams," Verwaayen says. "You will see more coming on board."

Emphasizing Services

To boost growth, Verwaayen promises to put more emphasis on smaller but faster-growing parts of Alcatel-Lucent's business, such as its services division, where revenues grew a healthy 12.1% during the quarter. He wants to help telecom operators develop new offerings they can market to customers—everything from music downloading to Internet search capabilities. Carriers are eager to offer such services themselves, rather than ceding potential revenues to outsiders such as Apple (AAPL) and Google (GOOG).

Other telecom-gear vendors are likely to move in the same direction, but Verwaayen has put Alcatel-Lucent at the front of the pack by presenting "a strategy vision of turning itself into a service company," says Bettina Tratz-Ryan, a Frankfurt-based telecom analyst with consultancy Gartner Group (IT). "In the short term it is risky, but it is the right thing to do."

Indeed, Verwaayen's challenge is formidable. Alcatel-Lucent has been bleeding red ink for more than a year as it struggled to integrate two starkly different companies (BusinessWeek, 6/18/08) and took more than $1 billion in writedowns on U.S. activities it absorbed from Lucent Technologies in the 2006 merger.

"Brave" Look Forward

The Paris-based company has lost market share in mobile communications in the face of brutal price competition from Ericsson and China's Huawei Technologies. And it has been clobbered by global economic turmoil, as longtime customers such as Verizon (VZ) have delayed investing in new equipment. "The number of new subscribers in the mature markets in broadband is slowing down," Verwaayen says, and the credit crunch only makes things worse.

Can Verwaayen deliver a turnaround after so many months of misery? Richard Windsor, a London-based analyst with Nomura Securities, says the CEO's decision to stick with his earlier guidance on revenues and profits is "brave, given the macroeconomic outlook." Despite Verwaayen's reassuring words, additional job cuts are almost unavoidable, Windsor says. But, he adds, "One has to be hopeful. Ben Verwaayen's track record is infinitely superior" to that of his predecessor, Russo.

Matlack is BusinessWeek's Paris bureau chief. Schenker is a BusinessWeek correspondent in Paris.