The Lippis Report

Nortel, announced on June 20th, that it will liquidate its assets and may get less then $2B, which is less then 1% of its pre-dotcom boom valuation. This is such a sad story as $2B will be divided among holders of approximately $4.5 billion in Nortel debt, and more than $2 billion owed in severance to ex-employees and pensions to retired managers, and other obligations, according to the Wall Street Journal. While the CDMA and LTE groups are being sold to Nokia Siemens for an estimated $650M, the enterprise unit which includes its IP Telephony, UC, Routing, Switching, et al., products is being valued at less than $500 million since it’s losing money, according to people familiar with the business. As Warren Buffet said, when the tide goes out you get to see who’s swimming naked, and Nortel was very naked.

The speculation around the industry centers on who will buy the Nortel enterprise business, with all eyes focusing on Avaya and Siemens Enterprise. While I have no inside information on the matter, I doubt that either would buy Nortel’s enterprise assets since they don’t need them, and Nortel customers, channel partners and distributors have been defecting in mass over the past six plus months. The Nortel maintenance business does have value thanks to a steady stream of revenue. The bottom line for Nortel customers is that if you haven’t started to develop a migration plan, then you best get started.

In this Lippis Report I provide IT leaders with guidance on navigating network infrastructure expenditures during challenging economic cycles such as the current economy. With Nortel’s liquidation, now is the best time to question the mixed network vendor approach to diversity and redundancy as some IT leaders, pressured by lower capital budgets, seek to procure infrastructure from low cost providers as a means to make ends meet. I take the position that a common network based upon mixed network supplier platforms paradoxically increases risk, reduces network availability by increasing complexity, which increases Mean Time To Repair (MTTR) and operational cost, the highest cost component in total cost of ownership (TCO). Also a mixed network vendor environment restricts design options, increases security vulnerabilities and limits the ability to optimize application performance. A single network platform supplier is recommended for mission critical operations as this approach reduces overall TCO and complexity, increases design options, and simplifies trouble isolation, hastening resolution while optimizing operational resources. Let me explain.

The market crash of 2008 and subsequent deep recession modified business behavior and processes permanently. While the current downturn is mild compared to the Great Depression, the two periods share a common attribute, that being personal and business behavior was significantly modified and for the Great Depression this modification lasted for an entire generation. As such, nearly all business leaders have focused on streamlining business processes during the fall 2008 and winter 2009 with an eye toward reduced operational cost and preparedness for the upturn. It’s becoming clear that capital-spending behavior on IT will be similar to the period between 2000 and 2002 when capital spending on IT fell sharply from $160B to $88B, according to the US Census Bureau. Capital spending during the 2003 upturn did not fund pre-2002 IT projects, but was invested in automating new business processes via IT projects; the same is occurring now.

During this economic cycle winning IT projects include HD video conferencing, collaboration, virtualization, network security and all IT projects which reduce corporate operational spending. For example, it’s highly likely that business travel will not resume to the levels of the pre-2008 crash as business and IT leaders reap the benefits of travel cost reduction, improved business processes and the avoidance of executive wear and tear, thanks to HD video conferencing and collaboration. In fact many business and IT leaders are starting to label collaboration and knowledge sharing IT projects as “Strategic Initiatives” as they are key enablers to post-crash streamlined business processes.

A best practice among IT leaders during this and previous downturns has been the implementation of IT project pilots. While IT pilots are not new, they take on a different priority and meaning during down-turns in that they offer an IT organization the time to

develop skills, technology understanding, time to assure business leaders of their business processes, automation benefit and planning for massive roll-outs when corporate conditions are met. The key condition IT leaders are looking for is revenue growth and visibility as the indication to commence rapid corporate-wide deployment. In short, pre-2008 crash follow-on IT projects will be difficult to fund as a new set of business priorities is being set and institutionalized within new business processes.

There are many implications for the above dynamics but two, in particular are acute. First IT organizations will increasingly be directed top down versus bottom up, as business leaders press IT leaders for automation and corresponding operational results. Second, as more real time and collaboration services are deployed and embedded into business processes, corporations will be dependent upon their enterprise networks to the same degree if not more as retailers depend on Point of Sale (PoS) for revenue and business intelligence. In short, as the economy emerges from its current recession the enterprise network will emerge as the strategic business platform. In a subsequent Lippis Report we will dive into high availability and risk mitigation associated with mixed versus single vendor networks. We come down on single for many reasons.

The following recommendations provide business and IT leaders with guidance in navigating corporate network infrastructure expenditures during challenging economic cycles with an eye toward maximizing performance and minimizing total cost of ownership.

Recommendations

As during the 2000-2002 dotcom bust, many start-up operations and large firms too entered chapter 11 and 7 liquidation. The same is occurring now with Nortel being the most obvious example. There is a consolidation phase occurring in the networking industry now as evidenced by Foundry Networks merging with Brocade, HP reorganizing its ProCurve group into its TSG organization, IBM tightening its relationships with Brocade and Juniper Networks, Force 10 Networks’ merger with Turin Networks, etc. These reorganizations put in question product priorities, research and development levels and increase IT risk.

During down economic periods most IT organizations choose to procure equipment and services from independent, financially secure firms who are in charge of their own destiny; the current economic period has shown acceleration in this buying behavior. Clearly Cisco is unique with over $30B of cash and equivalents; either the number 1 or 2 market share position in its strategic markets, innovation that has only accelerated during the downturn and seasoned executive management that has proven it can navigate difficult markets. There are others such as HP, IBM with its partners, and now an enterprise re-engaged 3Com/H3C that are enterprise-network contenders. With this in mind and based upon the above discussion the following recommendations are offered for consideration:

• To reduce risk of network downtime and operational spend consider a single strategic network platform partner rather than a multi-vendor solution.
• Avoid procuring perceived low cost products for low functionality places in the network such as access as this tends to increase operational cost, the largest cost component in TCO.
• Consider selecting a network platform supplier that possesses an architectural view of high availability. Add additional weight in the vendor selection process to a supplier who conducts large-scale deployment validation and testing to achieve higher availability for an entire network.
• Consider the single network platform approach for not only dual backbone scenarios but for other mission critical network applications such as branch office and data center deployments.
• Consider equipment sparing, device high availability features and network design options as components to deliver a high availability network.
• Consider networking suppliers with the financial stamina to not only withstand periods of economic downturn but who will enjoy increased market share and customer scenarios to guide its research and development investments.