Is This Nortel's Year?

If you can count a revamped channel program, a powerful partnership with the world's largest software company and an inspiring new CEO as celestial bodies, then it seems the stars are finally aligned for Nortel Networks.

It's a cosmic occurrence that the company's channel partners have been hoping for: signs that the beleaguered telecommunications company has the wherewithal to recover from the accounting scandal, financial woes and executive turnover that have plagued it since the burst of the dot-com bubble. And signs, more specifically, that the company's languishing enterprise strategy and the channel partnerships that drive it are getting some much- needed attention.

The biggest star on the Nortel horizon these days is undoubtedly President and CEO Mike Zafirovski—or Mike Z., as he's commonly called—who is set this week to unveil a beefed-up unified communications product line at VoiceCon Spring 2007. Zafirovski joined the company 16 months ago, bringing with him a reputation for business acumen and vision honed at his previous gig as president and COO of Motorola—where the crazy-popular RAZR mobile phone debuted under his watch and revitalized the company's handset business—and throughout a 25-year career at General Electric, where he worked closely with Chairman and CEO Jack Welch.

Solution providers say they are seeing evidence of a channel revival at Nortel, and they credit Zafirovski for the resurgence.

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"It's clearly happened since Zafirovski hit town," said Tony Parella, president and CEO of Shared Technologies, a Nortel partner in Dallas that's on track to hit approximately $300 million in Nortel-related revenue this year, up from approximately $220 million in 2006. "I think before that, they had no direction. They were lost for a few years trying to dig out of their accounting problems."

Zafirovski is the first to admit that the company's enterprise strategy needs work, and he is reaching out to the channel to help put it back on track, noting that 90 percent of Nortel's enterprise business comes through partners.

"I articulated on our first earnings call that we have very good products but haven't done a good job selling and marketing those products, as well as working closely with our partners," Zafirovski said.

With that in mind, Zafirovski has anointed Nortel's enterprise business as one of his top three focus areas for improvement and growth in 2007, along with a push toward next-generation mobility and convergence and plans to grow services revenue.

"We'll be working pretty much all of this year to significantly enhance our capabilities in the enterprise space," Zafirovski said. "One of the things we're looking at specifically is increasing the velocity of new products—that's No. 1. No. 2 would be working to go from playing defense to playing offense, which includes a very bold relationship with Microsoft, and working closely with our channel partners on programs like IPT 1-2-3, where we are accelerating and simplifying the process of going from PBXes to VoIP." Partners will benefit from all of those steps, he said.

"In totality, the overall experience for our channel partners will be significantly better than it ever has been before," he said.

As part of that commitment, Zafirovski plans this week to unveil new enterprise products at VoiceCon, run by CRN parent CMP Technology, where he is scheduled to deliver a keynote. Set to debut at the Orlando, Fla., show is version 5.0 of Nortel's Communication Server (CS) 1000 IP-PBX platform. With the release, scheduled for availability in the second quarter, Nortel is opening the software to run on industry-standard servers and rolling out simplified pricing. It is also adding integration between its Multimedia Communication Server 5100 and IBM Lotus Notes. New networking gear, the Ethernet Routing Switch 2500 and 4500, will also launch. The family includes Fast Ethernet and Gigabit Ethernet switches, advanced quality of service features and support for Power over Ethernet.

NEXT: Nortel's updated partner program

The product debuts follow the March 1 launch of an updated Partner Advantage channel program that puts more emphasis on the value its 600-plus contracted solution providers bring to the table, incorporates rewards for both breadth and depth of expertise instead of just breadth, removes caps on growth incentives and adds a deal-registration initiative.

With the changes, Nortel is rewarding both volume and value by offering one discount that's tied to partner level and a separate discount that's tied to volume, said Eric Schoch, vice president of North American enterprise marketing, channels and distribution, at Nortel, Toronto. The change will increase discounts for many Nortel solution providers. For example, approximately 40 percent of the company's 143 top-level Elite partners will earn higher margins as a result of the new structure, he said.

Nortel also plans in July to publish new criteria for its Advantage, Premier and Elite partner levels, which should open up Elite status by eliminating the requirement for partners in that category to represent Nortel's entire portfolio, he said.

The company has also uncapped back-end rebates of 2 percent to 5 percent given to partners that grow their Nortel revenue. Previously, the initiative had both a floor and a ceiling. "We're now paying for every dollar of growth," Schoch said.

In addition, a deal-registration initiative offers a 5 percent incremental discount across Nortel's enterprise portfolio for new business brought in through the program.

"I am budgeted to spend 15 percent to 20 percent more in discounts and rebates to my partner base in 2007, and that could go up based on their performance," he said.

This will help address one of Nortel's highest hurdles: the buildup of data/voice convergence skills in its partner base.

"Many of their partners are not stepping up to the new converged environment. TDM [Time Division Multiplexing] is the only way they know," said Kristian Guntzelman, chief innovation officer at G and G Interconnects, a former Nortel partner in Cincinnati that now works with Avaya.

Schoch concedes that many of Nortel's partners have struggled to make a full transformation to convergence but said the new incentives as well as free sales training are helping.

The company is in a good position to make a comeback, said Frank Kobuszewski, vice president of the technology solutions group at Syracuse, N.Y.-based CXtec, which sells convergence solutions based on 3Com, Cisco Systems and Nortel products.

"I'm more optimistic than I have been in a long time," said Kobuszewski. CXtec's Cisco solutions are its top convergence seller with Nortel at No. 2, he said. While Cisco outsells Nortel 2 to 1, the interest level in Nortel is on the rise, he said.

"Customers with traditional Nortel telephony in place are asking more now about sticking with Nortel and upgrading with Nortel rather than just ripping it all out and going with Cisco," Kobuszewski said. Cause for more optimism is the fact that 75 percent of CXtec's Nortel customers are still running legacy gear, leaving a huge opportunity for VoIP migration, he said.

Nortel's fourth-quarter U.S. IP telephony sales rose 34 percent year over year. The company maintained its No. 3 spot but outpaced No. 2 Avaya, which grew 22 percent, according to Synergy Research Group. "If Nortel can continue to build on its success, you will see them eat at the market share of the others and we'll see a fight at the top between three players instead of just Cisco and Avaya," said Ryan Olsen, Synergy senior analyst.

NEXT: The Microsoft alliance

Help in driving market-share gains should come from the Innovative Communications Alliance (ICA) Nortel formed with Microsoft last summer to bring joint unified communications solutions to market. That deal is expected to add $1 billion in new revenue to Nortel's coffers through 2009 from product sales and services, and the channel is a key part of the plan.

"The future for our customers is integrating the desktop with the network with the applications, and if our channel partners can't do that, they'll never be able to meet the needs of these transforming enterprises," said Dion Joannou, president of Nortel's North American business. "So we're working very hard with them and with Microsoft to get them trained, to make sure they understand the road map and to link them up with Microsoft partners as well so we have an ecosystem."

The first offerings from ICA are scheduled for availability this year, starting with the CS 1000 integration with Microsoft's wares, followed by other rollouts in the fourth quarter.

Nortel partners and the industry are anxiously awaiting the release of these products to find out just how real the partnership is and how big of a threat it will be to Cisco and Avaya.

"It remains to be seen how serious Microsoft really is or how long Nortel will be the Microsoft favorite," said Robert Keblusek, senior vice president of business development at Sentinel Technologies, a Cisco and Microsoft partner in Downers Grove, Ill. The Microsoft partnership could be a game-changer for Nortel, but Cisco still has an advantage because of its vast experience in the IP space and the integration of its communications products with its routers and switches, he said.

Partners will also see new products this year stemming from a 25 percent increase in R&D spending from 2005 to 2006 and a shift of almost $100 million in R&D funds from the carrier side to the enterprise side of the house, Joannou said. Products from Nortel's joint venture with Korea-based LG Electronics will also hit the North American market this year, including low-end key systems, video phones, SIP phones and in-home WiMAX products, he said.

With Nortel's channel and product pieces seemingly falling into place, Zafirovski is also turning attention to the vendor's service business, which now accounts for 20 percent of the company's roughly $11 billion in sales. "We want to double that as a percentage of revenue over the next three to five years."

The plan raises the specter of channel conflict, but Zafirovski said Nortel's services will be largely complementary to what its solution providers are offering.

He's also still working to settle down Nortel's financial house, which is still not entirely in order. The company last week said it will issue another restatement of earnings and delay the filing of its 2006 annual report. In February the company said it will cut 2,900 jobs throughout the next two years and will shift 1,000 positions to lower-cost locations. That disclosure came one day after the company said Executive Vice President and CFO Peter Currie will step down at the end of April.

Nortel partners said they are unfazed by the departure and just want Zafirovski to continue on the path he has laid out.

"It has come across for the customers that he's doing good things, but speed up. Don't waste time," said Kobuszewski. "The window is continuing to close, and Cisco knows that." So does Mike Z.