The Lippis Report

In late July Avaya announced that it had signed an agreement with Nortel to purchase its enterprise business for $475 million. The agreement would add talent, bolster Avaya’s channel partner network, increase its presence in the growing government business and expand its product portfolio to include the computer networking gear of routing and switching. But this is not a simple transaction. On September 11th Nortel will hold a bidding process to entertain other offers with a hope to gain more value, i.e., dollars for its enterprise assets. In addition, whoever wins the bidding process must then pass anti-trust hurdles in all the countries in which Nortel conducts business. In short, it will not be until first quarter of 2010 before anyone knows who will own Nortel’s enterprise business.

Avaya is in the same place Nokia Siemens was in when they were bidding for Nortel’s CDMA and LTE access unit business in June. Nokia had placed a bid of $650 million for this profitable business unit only to loose it to Ericsson, who outbid it with a $1.13 billion offer. Siemens or its financial sponsor the Gores Group is interested in acquiring Nortel’s enterprise business too. But while it’s early in the process and there is uncertainty as to who else may have interest in Nortel’s enterprise business, IT leaders can and should prepare now for a change of ownership at Nortel.

Nortel customers are in a precarious position. Will Nortel’s new owner continue investment in its products or will they slowly enter end-of-life by allowing them to fall behind in features and function, increasing the incentive to switch to more feature rich solutions as both Avaya and Siemens offer overlapping product sets? While there is little worry that maintenance contracts and obligations will continue under new ownership (as maintenance is lucrative business), the question is who will maintain the equipment? There is no reprieve for Nortel customers large or small. If you are a large Nortel customer who has chosen to standardize on Nortel’s voice and data solutions then uncertainty abounds as there will be no other option but to wait and see who your new supplier is and to assess a massive migration plan. For IT departments that choose a mixed vendor approach your risk has been partially mitigated and there is a chance your organization has a relationship with the new owner. But be they a large or small Nortel customer, it’s highly likely that a transition plan will be required.

The unified communications (UC) market is a smaller worry than data networking infrastructure. UC is still early in the deployment cycle with Avaya, Cisco and Siemens offering cross vendor solutions thanks to SIP trunking and interface support. SIP should be at the center of transition planning for IP and TDM telephony to UC. Corporations with a Nortel data network infrastructure in place will find it more difficult to develop a slow and smooth transition and will more than likely be forced into a rapid transition. The reason is that it’s unclear if Avaya or Siemens was to acquire Nortel’s enterprise business, would they keep it? Avaya had previously provided network switches with its Cajan line only to exit the business as a single solution value proposition was most credible from Cisco. Avaya was unable to keep up with Cisco’s switch investment and most importantly Cisco certified engineers were reluctant to switch vendors as they viewed it as a career limiting decision. With Cisco owning more than 60% of the enterprise switch market, the thinking was, and is, if I get fired or decide to leave my current employer I have a much greater opportunity to find another employer, with a Cisco infrastructure providing a greater market for their skills. If Avaya, Alcatel-Lucent or others acquire Nortel’s enterprise business it’s likely they will sell the data networking business. Siemens Enterprise includes Enterasys which would benefit from Nortel’s data networking gear, talent, customers and channels.

Cisco offers a data networking safe harbor for Nortel customers as their market share affords them investment resources, large customer requirements that are fed into product development in addition to their financial stability. 3Com/H3C also offers a safe harbor as its product portfolio of data gear is full. HP’s recent switch expansion also offers a safe harbor; however it is limited to network switches and their router products are nearly non-existent.

I offer the following advice for Nortel customers to consider:

Time is Your Friend: By the end of Q1 2010 Nortel’s change of ownership should be complete and uncertainty eliminated. If your corporation can wait until the new owner is known then you mitigate the risk of choosing a new supplier that is completely orthogonal to the new owners. This option is the status quo as Nortel’s enterprise business shrank 28% year over year as Nortel reported its Q2/09 performance in August, 2009.

Separate Voice and Data: Think of voice communications and data networking transition plans differently and develop separate plans. It’s highly unlikely that any of the traditional voice suppliers will keep Nortel’s data business which means it’s highly unlikely that the new acquirer will be a “little” Cisco or 3Com/H3C offering both voice and data solutions. It’s also highly unlikely that Cisco, 3Com or HP will acquire Nortel’s enterprise business which raises the possibility that Nortel customers will be forced to change out their data gear.

Develop Data Networking Transition Plan Now: With more uncertainty around Nortel’s data networking business, Nortel customers should consider accelerating their data network transition plans by assessing data networking suppliers Cisco, HP, 3Com, Force 10 Networks, Brocade, Extreme, Juniper, Siemens/Enterasys, et al. Some will offer trade-in plans and other incentives to make the switch.

Consider UC Overlay: Nortel customers should consider utilizing their TDM telephony gear until it’s absolutely required to replace while deploying UC as an overlay. In short, offer two voice communication services, TDM and UC with investment tilted toward UC. Unless a Cisco or Microsoft UC solution is favored it’s advisable to wait until Nortel’s new owner is known before committing. This strategy offers investment in new voice technology and a trajectory for the future while receiving the highest investment return on Nortel voice equipment.

There is a school of thought that Nortel customers should start working with other suppliers now to transition their networks. The thinking is that there is no guarantee that whoever acquires Nortel’s assets will be a better company to work with and may be distracted for months digesting the new business. For this reason some are planning transition plans now with vendors. There is clearly a shift to value and safety which Cisco, 3Com/H3C and HP are enjoying among this large and growing group of ex-Nortel customers.