Avaya CEO Talks Competition, Debt, Innovation

Avaya is pushing a new range of unified communications products, but is finding that managed services are becoming more popular among its customers who would rather turn over complex UC transitions to someone else for a predictable monthly fee, says the company's CEO Kevin Kennedy.

Avaya is pushing a new range of unified communications products, but is finding that managed services are becoming more popular among its customers who would rather turn over complex UC transitions to someone else for a predictable monthly fee, says the company's CEO Kevin Kennedy.

In a recent interview with Network World Senior Editor Tim Greene, Kennedy also talks about the impact of browser-based communications capabilities in WebRTC, the rise of applications teams in making UC decisions and his company's race with Cisco and Microsoft for dominance.

[RELATED: Avaya willing to share customers with Cisco, Microsoft in three-way networking battle]

Here is a transcript of that conversation:

Avaya recently made some service provider announcements. How will these benefit business customers?

No.1 I think the major trend that we're playing into is the capX opX trend, and within our company we have a spectrum of ways of going to market and serving that trend. The first one that I spoke about that is one of our fastest growing pieces is managed services. This is a customer - say a pharmaceutical company - that says we would like to outsource our voice network or even our data network to you. So we developed a number of years ago - I spent $25 or $30 million to have a system that would allow us to manage that network remotely or from the cloud, if you will. That's one piece, we've been in market for maybe two years. Again total contract value there is - I think on our last conference call we talked about $750 million or so over about an 18-month period.

The second is really a host of capabilities whether it's video in the cloud, contact center in the cloud and UC in the cloud. The latter two were enabled by one, getting our products virtualized although we began that process in November most recently in the contact center this month. We began to incubate those service offerings with service providers in different parts of the U.S. and Europe as well as when we bought the RADVISION asset we had a number of service providers that had become hosted service providers for low-bandwidth, high-def video. Today's announcement was really to say that we've been through this gestation process, we are in market with a number of different service offerings. The obvious ones would be UC and CC. We have a very low-end UC offering and then we also have video. For the most part whether it's a customer wanting us to migrate them or for us to start a new service with a new entry point as a cloud there's multiple capex to opex models to be chosen. Today's was a very important announcement relative to that latter piece.

How does a business decide whether it wants to do the capex or opex model?

We actually went through an executive advisory council meeting about a week ago and posed that question to about 12 customers. Interestingly enough while I thought the answer would be similar in most cases it wasn't. Businesses that were cash-rich were more than likely going to continue to buy on the capex model. There were some businesses that have made a decision that their dominant logic would be trumped by where they wanted to spend their [human] resources or did they want to retain the resources to continue to manage legacy infrastructure. Of course with human resources come test labs for release management so there are other ancillary investments. There are some that just say 'Hey, I have a set of retail stores and I want to get people up and running on low-bandwidth, hi-def video on their iPads as quickly as possible and so tell me what the opex utility model is for that.' In each case it didn't necessarily lead with optimizing cash flows over a certain period of time. It really mattered what problem were they solving for their business, and so it was actually quite different.

What's Avaya's vision for WebRTC?

The communications industry is going through a period of transition much like the computer industry did - three generations of technology computers obviously from mainframe to client-server technology to Web. Similarly our industry has certainly several generations one of which is heavy infrastructure which becomes IP infrastructure which is now becoming SIP infrastructure and all three of those exist in the industry. That infrastructure over the course of the last decade and a half we've tried to tie into big applications such as Oracle, Salesforce.com, and we tend to speak of that as communications-enabled business practices. There's a speed with which both of those forces, those communities go forward. There's a third - I kidded today my wife was the pro of connectedness in our family and quite frankly Facebook is the epicenter of that connectedness. She can stalk all of our children and our acquaintances, but Facebook will become communications enabled - applications first but communications second. Then you have applications such as Twitter which are meant as communications applications and become so much more. Those four forces are driving us. The latter two are going to be the most open and responsive to WebRTC. The other applications that are much bigger and have more behavioral patterns in businesses will probably be the slowest to adopt WebRTC. That being said WebRTC is agile enough that - let us pick a call center application. You could conceive of how WebRTC could be an on-ramp or an off-ramp to that already existing business process in our infrastructure, in the near term this concept of WebRTC being an on-ramp and off-ramp. In the longer term it may become much more than that although I think there will be new behaviors and new applications that exploit it. I think there's going to be this coexistence for quite some period of time. It will be most prominent in the top half of that in the Web-oriented applications. It will be prominent as on-ramps and off-ramps to legacy and it will evolve with new applications unto itself over the next three to five years.

When you talk about the on-ramp and the off-ramp that would be what? Using the browser instead of a client?

That's right. It's a browser-based access.

Does it change the model for what kinds of applications Avaya creates?

I think there would be applications we would build first-off in a WebRTC model before we will build it in another one going forward. Will we or will the industry spend a lot of time redoing things of the past that are already working? I'm probably disinclined to think that that would be vigorous. But I do think that at the end of the day the more ubiquitous WebRTC becomes and the more reliable its interoperability becomes those things that are easy to do in WebRTC people are just going to gravitate to it.

What do you see as the timeframe for this type of innovation?

Anything that is being driven by consumer cycles is going to move faster than slower and WebRTC falls in that category. If you think sometimes about the adoption of things like SIP or TCP/IP taking a decade or a decade and a half to gestate I think you'll see WebRTC move 50%, 75% faster. These on-ramp and off-ramp applications will occur over two to three years, and we'll see a bouquet of applications. The size of the market revenue-wise may not be huge but the possibilities will become clear. Over a three-to-five year horizon people as I said will think first about WebRTC if it can start that way. It really blossoms over a three to five-year period. But it's starting now.

The head of Enterprise Connect Fred Knight says 204 of Fortune 500 companies have nothing they call unified communications. What's the problem?

I honestly don't know the context. One challenge with unified communications is in some ways it's been a promise not fully delivered on, and so it could be in Fred's context is that for a decade or more people have set expectations in unified communications that have not been met. The context of communications is richer. The field of collaboration the choices you can make today are far richer than you could have two years ago. I can't think of a Fortune 500 company that I have spoken to that is not in the quest of implementing a unified communications solution. Those are the only facts that I can tell you from my own experience.

"In the quest of implementing it" could also mean a company that has nothing they call unified communications.

Yeah, it could.

Does company size matter when it comes to choosing managed services?

I'd say the majority of the commerce that we see tends to be from larger companies - Fortune size companies. I would say in general there are folks that need to go through a technology transition, do not want to spend the human resources themselves in going through that, are very detailed and diligent about making sure that there service level agreements are in place so that the management of the outsourcing is done well. And they are more comfortable managing that relationship than they would be going through a technology migration themselves.

So it has more to do with comfort zone than size?

It's the comfort zone because of potentially the complexity of what they have. I can think of numerous cases where people have systems from many other suppliers, they may have gone through a lot of mergers and acquisitions so they're dealing with complexity, and they're looking for people to take that complexity and migrate it to a single solution over time. That's not the only case but that is a prevalent case.

Who do you see as the decision makers for UC?

You're pointing to a very interesting rotation within customers. At one point there were voice organizations and then there became data organizations and then there became application organizations. Depending on the segmentation of the customer, increasingly unified communications is being aligned with the application side of the house as opposed to a raw infrastructure side of the house. In the middle market it's still an IT organization but certainly the chairs continue to swirl. We're of course quite comfortable in that because a good piece of our communications is the contact center, which is an application that requires you to know people's business, how you integrate with many, many pieces of the business. We really straddle what I would call voice infrastructure as well as application space. But you are correct that in many places in the industry those organizations' changes are evolving.

How does it stand now? Do you see more of the application guys?

The dominant spend in the industry is largely in the application. That's where the velocity and in the end that's where the end-user benefits are. In some tier of the segmentation if the Fortune 1000 you see an increasing alignment of spend and governance with applications providers.

Avaya scored No. 1 in North America among businesses with less than 100 phone extensions supported. Why is Avaya ahead in that market?

I don't know specifically. Generally we seek to lead in several dimensions. One is toward the low end we've recently come out with a new product, IP Office, and that particular product comes out at about 20% to 25% less cost than the two primary alternatives. We do in one server what it takes the others perhaps up to six servers to do. We boot and are up and running in about 30 minutes. It's a new product, a new product cycle. It deploys very, very quickly which is good for our partners. That's really all a partner play. It's simple because it's one box and does what others do in many, and we have priced it so it is more cost effective than our leading two competitors. If there's something beyond that to be honest I don't know. Those were the design points and we've pretty much confirmed those design points. As I've mentioned last quarter we grew either 17% or 20% quarter on quarter, and this particular product has been growing pretty well for us.

The 20% is revenues?

Yes.

For customers concerned about Avaya's financials, what can you point to given that's reassuring?

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