QandA: Avaya Investing For Hosted VoIP Play, CEO Says

Avaya Chairman and CEO Don Peterson discussed the vendor’s expanded managed services strategy and the role channel partners will play in an interview with Infrastructure Editor Jennifer Hagendorf Follett at Interop Las Vegas 2006. Basking Ridge, N.J.-based Avaya launched a lineup of new hosted IP communications services and VoIP products for the midmarket at the show.

CRN: It looks like Avaya’s big push at Interop is around hosted communications services and products for the midmarket.

PETERSON: I think we would say that the whole set of announcements today is focused on the midmarket. It’s a space where we would like to be doing better. We’re doing OK, but I think there’s more room to improve. And this set of [new] things, the On Demand [hosted services], MultiVantage Express [VoIP platform] and the S8400 [Media Server] are all aimed at serving the midmarket better than we have. It’s a market that’s very price-conscious but also very interested in technology and what it can do for them. So I think [the new offerings] should hit a good spot.

CRN: Why are you launching this midmarket push now?

PETERSON: It’s not a lot more than that the products are ready. They’ve been on the drawing board and worked on, in greater or lesser detail, for about 18 months, and the market has shown interest in hosted solutions, increasingly. So we’re anxious to get that positioning there. That’s an offering that scales above and below the midrange as appropriate, but I think the biggest appetites will be in that midrange group.

In terms of the blade upgrade for the installed base of ProLogix, that’s something we needed to do. We needed small blade technology, small server technology, in order to get it into the footprint. Now we have that. The MultiVantage Express is a cost-motivated product where we’ve taken all of the applications that most midsize businesses would require, moved them onto the call platform with Communications Manager, and delivered a very cost-effective, single-box capability. We’ll see how people react to it.

CRN: What’s Avaya’s overall managed services strategy? Where do you go from here?

PETERSON: Well, historically, we’ve had a strong maintenance business. We had some telephony and network management customers, but not too many. Generally speaking, our involvement in those was pretty customized. We had difficulty in getting to a standard process so we could do it efficiently and, in the long run, reliably. So what we’ve done with Avaya On Demand is standardize that offer.

On the one level with managed services, we’re trying to bring to the market our learnings from that prior outsourcing experience with standard offers, standard billing processes, standard rates and costs, and so forth so we can extend the maintenance business and get more customers more fully involved with our offers. A lot of customers view the migration to IP telephony with some degree of concern. It is a somewhat complicated technology. It’s complex managing the dual TDM/IP telephony environment, which will almost certainly exist for a period of time in most customers, and in large customers it could exist for years. So with our managed service offering including the IP telephony migration, it’s something we think a lot of customers will find interesting.

CRN: You said in Avaya’s most recent earnings call that the uptake of managed services so far has been slower than expected. What’s been hindering it?

PETERSON: That’s a good question. I’m not sure we know precisely. There are cost savings when that happens in staffing, so there is a human reaction because there is some job loss. There’s also in some cases just a reluctance to let go of something as intrinsic and as often taken for granted--this is going to sound paradoxical--as the phone system. It takes some focus on how exactly you’re going to manage the transition and what you want to put into your investment in people to get your mind around the possibility of managed services. ... If you put the managed service out and you don’t cut your internal capability, you’re not going to get the savings that are available. That is just a slow process. It’s a hard decision for people to make sometimes. CRN: The managed services Avaya has had up until now have been more enterprise-focused?

PETERSON: They’re all management-focused in terms of the user. We will do turnkey hosted operations for a service provider, but even with those the users would be enterprises and not involve services to consumers.

CRN: What have you seen from the customer base that leads you to believe the midmarket will be more open to managed services?

PETERSON: We’ve been very well-received in our proposals to this market over the years. We’ve not always been cost-effective, and I think that is because of the customized nature of our offers. So we tried to fix the inside first, getting ourselves the tools that are needed to offer managed services more efficiently and standardizing the offers, rather than responding to very large RFPs and hoping we could distill a common average out of those.

CRN: What kind of investment has gone into the data center piece of this? You’re hosting all of this out of your own facilities, right?

PETERSON: For the most part, there isn’t a lot of predeployment that has to go in in terms of the assets that serve the users. We’ve made a significant investment in the tools to centrally manage the distributed assets and distributed services. So that’s where most of the investment has been, in the form of R&D. There isn’t a lot of capital that has had to be deployed to enter the business.

CRN: So you’re primarily using internally developed tools?

PETERSON: Yes, absolutely.

CRN: Can you quantify the investment that’s been made so far?

PETERSON: It would be a guess, but I would say $10 million to $20 million, done over a period of years. We’ve obviously had some of these tools for our maintenance business. It’s a matter of adapting them so they are coherent behind a managed service to a large enterprise but not so costly as to essentially be a custom tool, which is what we sometimes had to do in the past.

CRN: How have VARs and integrators reacted to this midmarket play? It’s a market that’s clearly more channel-focused than the enterprise side is.

PETERSON: We need the channels, I think, to be very successful here [in the midmarket]. We don’t have a huge reliance on service provider channels, though. So each of these things is incremental to us right now. If the market comes back and tells us that the market wants this [hosted] primarily or even exclusively through the service providers, that would be fine. We’re trying to see if the market also wants it from equipment providers like Avaya, and we don’t want to miss that opportunity.

CRN: But what about the reaction from the VARs and integrators you’ve been working with on the premise equipment side up to this point?

PETERSON: We certainly have put offers to them to enable them to do this. Again, nothing has taken off in a way that gives us a clear signal for what the buyer preference is. When we see that we will be able to sculpt this in the appropriate way, but right now it seems that there is some sort of demand for this type of offer.

CRN: I gathered from the previous Avaya briefing I had that there will be a wholesale offering that a VAR could put its own label on or could put the Avaya name on. How much interest is there from the VAR base in doing this under their own name?

PETERSON: Oh, I think there’s a lot. I think that to the extent that it’s marketed as an Avaya service, it will be the service direct from us. I think for anybody else it will be ‘powered by Avaya’ or ‘on top of Avaya technology.’ But it would be VAR-branded, and I think that’s the correct way for the user to see it. They should see their direct supplier as their relationship. CRN: Where are you expecting most of these sales to come through, the channel or direct?

PETERSON: I think they’ll come direct. I believe we’ll need to demonstrate a little more to the satisfaction of channels, and perhaps end users, that this can be done effectively and so forth. Once there’s greater comfort with that, then I think we’ll see channels reaching out to embrace it. Having said that, there are a lot of people in the hosting business, but most of that is going on around hosted business applications and so forth rather than voice. But there’s a lot of interest in voice. I just don’t know that it’s very big yet.

CRN: Moving away from the managed services for a minute, can you give me your assessment of Avaya’s channel business right now? What’s going right and what’s going wrong?

PETERSON: I think our channel is [growing]. It’s still primarily our traditional channel. We’ve incremented it with business development partners, and we’ve incremented it in some cases with some traditional data providers, but not too many. I think the market is increasingly open to buying voice from people who have been traditionally data vendors, and that has been a challenge for us in our channels. It’s my hope that our channel will evolve rapidly into that capability, and a lot of them are.

In other cases, they’re not as rapidly doing that and we’re going to have to look at perhaps how to tap into that supplementary data channel and/or perhaps fill in the holes direct for a period of time, or something like that. We’ve tried to create some clarity around that by segmenting the customer base between strategically named accounts, separate from territory accounts, which are all or primarily all channel except for some small accounts, which are all channel. I think that has helped. We did that about 18 months ago, but there is still some adjustment to go on in terms of where the channel’s user relationships are and getting that all lined up.

CRN: So you’re looking to bolster the data skills within the current channel?

PETERSON: I think our biggest challenge is that we do great in our installed base in the conversions, but we don’t appear in enough of the transactions. We don’t appear every time a Nortel user is thinking about updating their system. We don’t appear every time a Mitel user or a Siemens user is making a new decision. And that is largely, from my view, a coverage issue and I’ve challenged [Avaya Senior Vice President and President of Global Sales and Marketing] Lou D’Ambrosio and his team to make sure we have the coverage.

A part of that is making sure that we have a competitive product set for each of these market segments. So our midmarket announcements [at Interop] are intended to fill in that gap and make us even more attractive to our channels to be the option of choice in that space. It’s a combination of having the right thing for people to sell and having the right sellers in the marketplace. We needed to--and still need to--sharpen our tool sets in both categories. I think this is bit of a never-ending story, where these are competitive marketplaces [and] the technology evolves rapidly. So this is something that needs to be addressed on a recurring basis.