Not surprisingly, profitability has become something of a buzzword for Nortel Networks. With a trimmed-down partner network and an ever-increasing focus on convergence, Nortel last month kicked off its nPower channel training program in Australia. GEORGINA SWAN caught up with Nortel senior vice president for enterprise marketing Bob Burke and Asia-Pacific president Barry Southern.
ARN: You have cut your channel partners in the region down from about 3,000 to 130. Did you get a lot of backlash from the partners who were dropped?
Barry Southern: No, not really, because a lot recognised that they were only spending the minimum amount of dollars with us to keep the books ticking over. When we spoke to them, we said, we're not cutting you off - if you need Nortel products, you can buy them through second-tier distribution. So nobody is technically "cut off".
Had you used second-tier distributors before?
Southern: Yes, but we are re-emphasising it. The nPower program we have now is pretty much bedded down - the tools, the process, the scalability of managing our partners. Hence, we can add partners now and it doesn't really impact us. The second part of the program is how you manage that second-tier distribution, recognising that if you have two, three, four or 500 products in that tier you must be able to service and support them. So we are looking at Web-based tools and collateral. We can provide that information via a cheap and efficient methodology. That's phase two, and that's in the planning process right now.
Bob Burke: We have a similar setup in the Americas. It's a win-win for the second-tier distributors, who really are in the business of logistics and also want to expand their businesses into service and training. To have a healthy base of resellers fed into you is really a good way to go. You've got to have that direct contact with the resellers so that you can be sure they are up to speed on the latest and greatest, but having that two-tier setup is a lot more efficient for everybody involved.
Voice has traditionally enjoyed much better margins than data. As the two converge, how do you overcome that issue?
Southern: Nortel's heritage is obviously in the voice business and we really moved into the data business when we made the acquisition of Bay Networks. I have a couple of observations, number one is that it was far easier for our voice partners to start selling data than vice versa. Voice is very, very complicated. The second thing that became obvious was that voice partners enjoyed far better margin than those in the data world. The competition in there made it cut-throat, with low teen margins, and you just can't survive on that. I don't care what business you are in, you probably need 15 to 18 points of margin to break even and when you get above that, that's where you get into profitability. So I think we've discovered that our model has more margin, although it does take a little more effort on behalf of the partner. They've got to fend for themselves a bit in that if they want the margin, they have to provide the business. We do provide lead-generation programs but the reseller really needs to drive the opportunities, because once you get into that spoon-fed model, you get into cut-throat margins. We tried to stay well clear of that because our partners are only going to be successful and good for us if they are actually going to be profitable. They can't be profitable when they are bleeding for margin. It becomes win-lose, and I think some of our competitors are finding that out now.
How much of Nortel's business goes direct to the end user?
Southern: It is very difficult to split that up because there are very few instances where we actually write it on our paper. There are a few global customers that insist we take it on our paper but largely it's done through partners and we underwrite it. We don't track our business like that. We have three divisions within Nortel and they're wireless, optical, and metro and enterprise, and that covers carriers as well as the enterprise. We don't even split that up. Forty five per cent of our business now comes out of metro and enterprise but we don't know the split because we don't track it like that. I think in the future we might, but we don't track it as a segment.
How important is the enterprise market to Nortel?
Southern: The enterprise in Asia is a very strong part of our business, but it tracks at the same percentage ratios that you see around the globe. Nortel's luxury is that enterprise has always remained a relatively stable part of the mix. It's a very balanced business. For a short period of time the world was wrapping itself in glass and we became dependent on optical. But the reality is, when you look at the underlying fundamentals of the business, there are actually three very strong, stable cornerstones of the business.
Burke: Our policies as a company for enterprise are consistent around the globe. We are a channel company so we only deploy a direct touch in various numbers and configurations depending on the named accounts - the Fortune 1,000. You just have to have a presence there to make sure the Nortel solution is understood at the CXO level. Unless there is a really odd situation, we don't do it on our paper. That really makes it clear for our channels - you don't end up in one of those awkward conversations. We prefer to partner and say, here's the deal: you get certified, provide the right level of customer service and represent our brand well and you're gonna get more than your fair share of business. There's a built-in incentive to really offer a high quality of service around our brand. It's the cornerstone of our strategy and in that respect, we are different. Some other companies have over-distributed, and there's only 10 per cent margins, so you have to ask, what's in it for the channel partner? That's not much of a business. So we said, let's be different, you can make money on Nortel. It's a nice differentiation and it builds long-term loyalty. You can fight the fight with advertising dollars but I think the better play is to work on the push side and make sure channels have natural incentives.
Do you think your Australian partners have the right level of training?
Southern: To be successful in this business, training is something that has to continue and be repeated. The solutions are far more complicated today than they have ever been - and they are getting more complicated. In the not-too-distant past our voice and data partners knew their business intimately. They worked in very narrow spheres. Now we have convergent partners in both voice and data and that's a whole new ball game. It's a different skill set. So what we are doing here is the cornerstone of training. Convergence is the biggest issue among our partners so we decided to invest dollars to get it done. We plan on having four or five people who will take all this training content and over the next 12 months reinforce and build on it. Now, more than ever, you can't just sit back and say, "I've done a training course, I'm certified for the product", because the product keeps changing. The most important thing we need to do - and some of our competitors have done this effectively and used it against us - is to ratchet this up and show our partners we are committed to it.
How do you combat the ever-looming presence of Cisco?
Burke: They are a big company, there's no doubt about it. They are a sales and marketing machine. They don't put as much emphasis on technology, but they have a lot of feet on the street. We stick to what we are good at. We know we have innovative technology and network solutions, and we work closely with our partners to be profitable. We come at it in a couple of different ways, whereas they have really built a sales and marketing army. That has its good points and its downsides.
How long has the nPower program been in the pipeline?
Southern: I thought we would get this program up in a month. Here we are six months later and it has been intense. What you see in Australia has been done in Malaysia, we then go to Korea, China and Japan. But I think the payback will be worth it. The other day I had a partner come up and he had nearly lost a deal because he didn't know we had the interface. But he was on the phone to his customer saying, "they've got it, we can do this".
Burke: In the last couple of years there have been a lot of startup issues where you end up with someone who might be very familiar with the data world going in and touching a PBX or vice versa. All of a sudden somebody's writing a script for the server and "boom" it crashes, lots of data is lost and the end user is left asking, "What happened? Are you really certified?" We are jumping all over that because we can't let the end user down and it's a great opportunity for the partners. A heavy emphasis on the customer service and technical sides are the things that will win overall. It brings us more of the data business and more of the voice business, because end users trust that we understand networks and convergence.