ShoreTel CEO: The More Market Turmoil, The Better For Us

ShoreTel is a strong-willed David in an industry full of Goliaths. Founded in 1996 in Sunnyvale, Calif., the company has staked a modest claim in the IP and unified communications spaces, working hard to differentiate its platforms from incumbent players like Avaya.

It hasn't been shy about recruiting channel partners to the cause, either, even if, as ShoreTel CEO John Combs told in a recent interview, ShoreTel still isn't being brought to the table with new customers often enough.

The company grew about 5 percent in 2009, and its most recent earnings call, for the second quarter of its 2010 fiscal year, found Combs upbeat and ready to get more aggressive this year. If there's something different about ShoreTel now than in years past, it's a sense of swagger. Competitors take them seriously -- Avaya global channel chief last fall referred to the company as "a minnow punching above its weight class" and "historically been easier than us to do business with" -- and so does the channel. caught up with Combs recently to hear about ShoreTel's hope for solution providers, and why the combined Avaya-Nortel is a good thing for its growth.

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ShoreTel posted some significant gains in 2009. I remember reading that ShoreTel had a stated goal of growing at least 5 percent in 2009, and you got there. What helped you do it?

In our business, there are basically two fundamental things you can control: product development -- and our mantra is "best product" -- and distribution. We have the best product. My investments are being made in three key areas: growing our sales team, growing our distribution partners and investing in our engineering team to enhance the product. In 2009, yes, we grew 5 percent, and candidly our objectives were much higher than that, but the economy was a challenge, and relative to other folks we did extremely well. We've grown distribution, and did a lot of lead generation activities to give our dealers prospects that they may not have found. We also added AT&T, and during the period picked up Qwest and Verizon, and Telstra in Australia. They have all been big partners.

Internally, we've built a team that has enabled us to leverage the areas we do well in. We also have a government group, too. Historically, we've struggled in the public sector, but our team has grown us from two state contracts to 18 major public contracts, and we also added a person in charge of federal accounts. None of this is rocket science. It's basic blocking and tackling and leveraging our distirbution.

How do you need ShoreTel VARs to grow with you?

Our sweet spot is the 20-to-5,000 range. We have customers that have 16,000 to 17,000 phones, but our target is the midmarket -- the expanding midmarket is what I call it. In that market, we're in about 10 to 20 percent of opportunities. When we get to the table, we win against all our competitors at least 50 percent of the time. We have a product that is brilliantly simple: customers love it, partners can make money be selling it, and we have world class customer satisfaction rates. So my main issue is simple: I'm not in enough opportunities. That's where our distribution partners will help us most.

If you're looking at opportunities vertically speaking, where are the best and richest for ShoreTel VARs?

The city and county governments have been phenomenal for us. Frankly, I was trying to figure out why that is, and the answer is that the City of West Sacramento isn't competitive with the City of Chico, isn't competitive with the City of Fresno, isn't competitive with the city of Rochester. Quite the opposite. These folks all talk to one another, so the viral nature of our products has been effective. The other common thread in verticals is the telephone intensity of the business. What I mean by that ... well, take branch banking, where we're strong. Banks make their money by loaning money. When someone wants to have a home loan, they call the local number for their branch and extend directly to the loan officer. If the loan officer isn't there or is busy, the call goes to another branch and is answered by a loan officer there, not an answering or messaging service. Things like that gain business. The branch banking and financial institutions industries are strong for us, and so are professional services, healthcare and education. The nature of our product is that it is not a location-based product. It's one system, not 18 individual systems in 18 places all tied together. If your administrator is adding John Combs' name and contact to the system, all 18 locations automatically update.

As your channel grows, what types of partners are you looking to attract? Folks with vertical specialties? Folks with strong IP and UC bases? What's the target solution provider for ShoreTel?

I'll give you a few ways to look at it. First, we have people who specialize in a vertical. We have a software development kit that allows them to customize apps for particular verticals, such as patient info systems for healthcare. That brings something unique to the customers, and that's something that they could go in with and have over other ShoreTel partners that don't have it. The next segment of partners is folks that have grown up with telecom, and then there are the ones who came from data networking -- who sold WAN, LAN and moved into IP -- and we find that their financial models match very well to ours. The other category is new for us: business applications. In cooperation with IBM in particular, we're looking to get more folks from the Lotus world -- the applications world -- and help them to integrate UC into their portfolio as well. That's a newer partner category that I'm particularly excited about.

Next: How ShoreTel Gains From Avaya-Nortel and Others

In the beginning of 2009 we saw the bankruptcy of Nortel, and we now have Avaya in control of the enterprise portfolio over there. How does the channel turmoil in both the Avaya and Nortel channels create opportunity for you?

Any time there's a new player -- a new supplier in a market as big as this -- the more disruption, the more turmoil, the better. Cisco's success in this business from the 2001 to 2009 period really helped us as well, because they were the disrupter and we were someone in the marketplace that had a better solution. That helped us a lot.

What we see today is that a lot of people say, well, Nortel's demise was bad and unfortunate. That may be true. But if you look, and go back and do the research, virtually everybody that was big in that TDM [time-division multiplexing] era has struggled in the IP era. They have all had declines in sales, have all seen margins eroding and all suffered huge financial losses. That's true for Siemens. That's true for Fujitsu in Japan. That's true for Alcatel. That's true for Nortel. That's true for Avaya, NEC, Mitel, everybody. I believe Nortel is the first to go, but not the last. The key indicator that I encourage my customers to look at is what was it at the end of the day that sunk Nortel? It was their balance sheet, and $2.4 billion in debt. They had a significant cash reserve but it wasn't nearly enough to cover it. If you look at the ratios between revenue and debt that the Mitels and Avayas have right now, it's a challenge for them. Avaya's situation is even more dire. With their acquisition of Nortel, their debt is something north of $6 billion from what I can tell.

Are you doing anything formal to leverage Avaya-Nortel tumult? There's a lot of the uncertainty in both of those channels, and a lot of your competitors who aren't Avaya are actively going in to raid those channels. Are you doing the same?

Absolutely, both on the customer front and the distribution front. We have special pricing incentives for both Avaya and Nortel customers that want to convert to ShoreTel. For years and years, Avaya and Nortel were archenemies, and there's always been a bit of angst here because Nortel traditionally had a bigger market share in the U.S. Nortel people are anxious to be brought into the Avaya family, but they have to go because they have to protect a base of customers. Avaya people are anxious because Avaya is signing up their longtime competitors. I assume you're familiar with Avaya's Aura?


The approach that Avaya's taking is to take Avaya TDM systems and Nortel TDM systems and then overlay a communications system to get those to unified communications. The good news with ShoreTel is that we do that all day long, and we've been doing that forever. I can tie my ShoreTel system into virtually any TDM system, and I can provide interoperability, voicemail capabilities for entire systems, and UC desktop managers for Avaya phones, Siemens phones, Nortel phones, whatever. The nice thing about us is that I don't have to build this huge overlay on top of the equipment.

So the message to the channel and customers is: Why wait around for Aura when ShoreTel can migrate you right now?

Exactly. Their plan is to do this in the future. Our approach is, we're ready to talk to customers today.

What is the biggest opportunity for ShoreTel to gain market share? Is it in a segment or from a competitor?

The ripest by far is for us to figure out a way for prospective customers to invite ShoreTel to the table. That's what gives me angst at night: I'm simply not there often enough. If I'm at the table, I win well over 50 percent of the time. Therefore, we need to get into more deals and make improvements in our branding campaign. I've been doing this for 40 years, Chad, have been in communications forever and I've worked with a lot of great companies. I have never had as unique and as differentiated a product as we have today. My challenge is to get us to the table.

The UC space and the broader networking industry has new players popping up all the time these days. Who is the biggest new challenger?

The biggest challenger in the game right now is a big company doing something new, and that's Microsoft. They're a large organization and they have the same asset in a different area that Cisco has: they have an existing relationship with the customer. They're well positioned. Once we [ShoreTel] get a chance to sit down and say what we have to offer versus what they have to offer, we can win. We just need that chance.

You've done a lot to strengthen your strategic partnership with IBM? Why IBM, as opposed to others who might be able to help you?

I think their philosophy in partnering is much different than Microsoft's. Ask Nortel about their relationship with Microsoft and what they got out of it. I'm not being flip, I'm being serious. Microsoft's approach has been to say, we're going to interoperate with everybody, but at the end of the day, they make it very difficult to actually do that, whereas IBM is a stable partner. They're going to integrate their systems with others. The common goals between our organization and theirs is to take good care of our customers, and their approach is best-in-class products as opposed to Cisco or Microsoft, who say, we want you to buy everything from us.

You must have new growth goals for the new year. Six months down the line, what will make you satisfied?

Six months is a little near-in. Long-term, our business needs to get to a billion dollars in revenue. The transition from TDM to IP, hybrid TDM to IP, pure IP to UC, all of those things have come, and will end in three or four years. I don't mean they're going to end and stop, but just like in the 70s and 80s when the move from analog to digital happened, we're going to arrive at those things as in a more constant state in the industry. Strategically, it's fundamentally important that we make our revenue number that material number. At that point, we can satisfy our customers for the long haul and also have money to invest in R&D to keep growing.

ShoreTel continues to expand its internal resources, as you mentioned. Is it safe to say you're hiring?

We have over 100 people in our salesforce now, and our objective between this past September and this June is to have increased that by 40 percent. I interview every one of the sales people that come on board. It's a very good, very disciplined process and we're able to get a high caliber of new members on the team. We're bringing lots of feet to the organization to make it as productive as possible.