The shift plan

At the start of February Ben Verwaayen announced his intention to step down as CEO of Alcatel-Lucent after three years at the helm. He had given himself that period of time to turn the company around, and by his own admission, had not succeeded to the degree he demanded of himself. Shortly thereafter, Michel Combes was appointed CEO effective April 1, and has since embarked on a radical programme of change that has culminated in the detailing of ‘The Shift Plan’

Michel Combes was elevated to CEO of Alcatel-Lucent effective April 1, and has since been on a quick-fire path to repositioning the company as a specialist provider of IP networking and ultra-broadband access

Less than three months into the job, Alcatel-Lucent incoming CEO Michel Combes outlined an ambitious new strategy to overhaul the technology provider in the coming three years, repositioning it as a specialist provider of IP networking and ultra-broadband access. Alcatel-Lucent is set to focus on the high-value equipment and services that lie at the heart of the high-performance networks of the future.

‘The Shift Plan’ as the strategy has been coined, is set to mobilise the full range of Alcatel-Lucent’s assets and resources to achieve a decisive swing in the group’s industrial focus that will concentrate the company on the priorities of its telecommunications customers as they deploy next-generation networks to address the explosive growth in bandwidth-hungry data traffic. This new focus on the fast-growing business segments of IP networking, cloud technologies, and ultra-broadband access will be delivered by a management team organised around full profit-and-loss (P&L) and cash accountability.

According to Alcatel-Lucent, ‘The Shift Plan’ entails a differentiated approach to the management of high-growth businesses – core networking – as opposed to those that will be managed with cash generation as the clear priority. The ‘managed for cash’ businesses will include key wireless, fixed access and other businesses that will play an important role in the company’s medium and long-term development.

Specifically, the company expects that this will create enhanced opportunities for its LTE and FTTx businesses.

It is hoped that ‘The Shift Plan’ will capitalise on Alcatel-Lucent’s innovation assets, particularly its research laboratories, Bell Labs, while equipping the company with the appropriate means to fulfil its ambitions.

The key components of the plan include:

· A refocusing of the group’s R&D spending on IP networking and ultra-broadband access with an increased emphasis on co-development with major customers and partners, while at the same time significantly reducing spend on legacy technologies

· €1 billion (US$1.31 billion) in targeted reductions in the group’s fixed cost structure concentrated on actions to reduce sales, general and administrative (SG&A) expenses, refocus R&D and improve operational efficiencies

· Selective asset sales intended to generate at least €1 billion over the period of the plan

· Aiming at re-profiling the group’s debt (€2 billion) and, once the company has clearly demonstrated the successful execution of ‘The Shift Plan’, a future reduction in debt (€2 billion), to guarantee over the long-term financial sustainability.

Under ‘The Shift Plan’, Alcatel-Lucent is planning to grow its revenues in core networking by more than 15 per cent, from €6.1 billion in 2012 to over €7 billion in 2015, while lifting its operating margins in this segment from 2.4 per cent in 2012 to more than 12.5 per cent in 2015.

Over the same period, a strategic focus on cash management in wireless, fixed access and other businesses – emphasising investment in 4G LTE, vectoring and fibre-based access systems while significantly reducing R&D spending on legacy technologies – is expected to deliver positive segment operating cash flow of more than €250 million in 2015.

The announcement of the new strategy preceded the publication of Alcatel-Lucent second quarter operational results in which it reported that its quarterly losses more than doubled in Q213 due to write-downs despite seeing an improvement in its revenues.

The company posted a net loss of €885 million for the three months to the end of June, which included a write down of €552 million on the value of its assets, along with €194 million of restructuring charges and a financial loss of €180 million.

Revenues were however up slightly at €3.6 billion, a rise of 1.9 per cent over the previous year. Of the total, the networks division posted revenues of €3.06 billion, although there was a slight decline in wireless networks sales.

Alcatel-Lucent’s Q213 gross margin was 31.9 per cent, similar to last year and improving compared to Q113, as a result of higher volumes and a more favourable product mix.

Commenting on the Q2 results, Combes said: "We are at the beginning of our journey towards 2015 and cash remains a challenge. Looking ahead, our clear focus will be maintaining a strict and disciplined approach to implementing ‘The Shift Plan’ across all of its industrial, operational and financial dimensions."

Just as Combes assumed his new role at the start of April, Alcatel-Lucent had already begun unveiling some radical new developments that are aimed at improving the company’s operating position and related fortunes. The technology provider introduced Nuage Networks, an ‘internal start up’ that encompasses its software defined networking (SDN) strategy via its Virtualised Services Platform (VSP).

Nuage Networks unveiled an open software-based solution to address the key data centre network constraints that limit cloud services adoption.  The VSP will allow healthcare, banking, utilities and other enterprise market segments, as well as webscale companies – large Internet-based companies – and telecom service providers, to scale their cloud offers and provide instant, secure connectivity to multiple customers.

Nuage Networks believes current data centres are well equipped from an IT perspective as data centre operators can add or change virtual servers and storage almost instantly to meet customer demands, however networks are not keeping up

Trials of the Nuage Networks VSP began in April in Europe and North America. Trial customers included UK cloud service provider Exponential-e, French telco SFR, Canadian telco Telus and leading US healthcare provider, University of Pittsburgh Medical Centre (UPMC). Worldwide commercial availability is planned for mid-2013.

Alcatel-Lucent’s SDN strategy and the Nuage Networks branded portfolio builds on the cloud orchestration the company already provides with its CloudBand Management System.

Consumers and business users are driving demand for cloud computing and storage. Current data centres are well equipped from an IT perspective as data centre operators can add or change virtual servers and storage almost instantly to meet customer demands.

However, the network is not keeping up, according to Alcatel-Lucent – it has high capacity, but it is not flexible enough to make use of that capacity. Network provisioning still requires detailed technical planning, manual configuration and complex systems and processes to connect customers to compute and storage resources. SDN helps solve this problem and IDC forecasts the worldwide SDN market will grow from U$360 million in 2013 to US$3.7 billion by 2016.