From a product, channel and market perspective, Alcatel-Lucent and Siemens Enterprise could be a fit. Here's where they complement & overlap, and how they could compete globally--and even in the U.S.
The interesting times that involve the enterprise communications market continue! No doubt you've seen the recent discussions around the potential $1.5 Billion sale of the Alcatel Lucent (ALU) Enterprise business. My contacts within ALU have provided me with insightful "We don't comment on rumors" and "No Comment" remarks. So this article is based on what I see on a day to day basis from an end user consultant's perspective.
First, a quick review of why I think a deal makes sense. In a nutshell, there are too many vendors chasing too few deals in a market where it is increasingly difficult to differentiate one's products (for basic applications) as well as deliver complex business process analysis and systems integrations. In the past few years, we've seen industry consolidation occur (Avaya/Nortel, Aastra/Ericsson, Mitel/Inter-Tel, as well as others in ACD, voicemail, IVR and related industry segments). Consolidation has also occurred in the integrator (partner) channel.
The industry consolidation also complements a key Enterprise goal, which is to simplify strategic sourcing by reducing the number of vendors they deal with. So at a macro level, there is pressure for mergers and acquisitions to create organizations that can deliver complete solutions across large geographies. Market share in North America is dominated by Cisco and Avaya, with disrupters such as Microsoft (Lync) on the horizon ready to take significant commodity enterprise voice market share.
So with that backdrop, let's analyze who are the likely contenders to emerge as key bidders for the ALU enterprise business. Brian Riggs discussed his views on No Jitter last week; I agree with Brian that some of the other voice system manufacturers are potential merger candidates, and there is potential for bids from private equity organizations as well. One could even speculate that enterprise application vendors such as Oracle or SAP could make a run (more tightly integrating CEBP into their ERP apps?). On the other hand, it's not clear to me that a firm that is at least partially focused on professional services/system integration (e.g. HP, IBM) would make sense as an acquirer, as they are somewhat vendor agnostic and have to maintain many vendor relationships.
You could make cases for companies that have traditionally been at the lower end of the enterprise market that want to move up and expand their network offerings (i.e. Mitel, ShoreTel). But as I think more about the enterprise voice vendor combinations that might work, I keep landing on Siemens Enterprise Communications (SEN). Why does an ALU combination with SEN make the most sense? Aside from some fun with combining the existing names and producing a new acronym: Siemens Alcatel Lucent Enterprise (SALE), here's the rationale:
* Earlier, I mentioned the limited enterprise communications market share that any vendor not named Cisco or Avaya has in North America. However, that is not true for other parts of the world. In EMEA, both ALU and SEN are quite strong, no surprise based on their European roots. In APAC, both vendors have announced increased sales and strong market positions. I think that a combined entity would improve the chances of "SALE" to be on more North America enterprises' strategic sourcing lists as well as bolstering its status in other parts of the world market.
* In the large Contact Center space, the highly acclaimed Genesys product could provide SEN with a new market opportunity that the OpenScape Contact Center has not been able to penetrate. Although Alcatel Lucent also offers an "in skin" basic ACD/Contact Center embedded in the OmniPCX as a low-end product, the Genesys product and customer base would be of high value to a combined entity. The Avaya/Nortel combination has significant contact center market share, Cisco continues to invest heavily in this space and the Microsoft/Aspect partnership could prove to be interesting. A combined OpenScape Contact Center/Genesys would be a formidable competitor.
* In Enterprise networking, both SEN and ALU have strong products with loyal customers, albeit with small market share in North America. Could a combined Enterasys/ALU networking business provide critical mass to be a credible and profitable contender to Cisco, Juniper, HP and others (e.g. Aruba in wireless)? In the commodity wired Ethernet space where margins are shrinking, it may be a more challenging justification. If the due diligence indicates a negative answer, perhaps this part could be spun off as a separate entity, but the potential emphasis on security, data center, cloud computing, wireless and other initiatives could prove interesting.
* In North America, both SEN and ALU have a significant presence in the healthcare vertical. This is an industry segment that appears to be strong, and once the healthcare reform uncertainty is behind us, should see significant investment in Unified Communications and other collaboration technologies where ALU and SEN have reasonable offerings. The combined installed base on which to amortize future product development could be quite lucrative.
* ALU has a strong presence in the hospitality vertical and could also represent new market opportunities for SEN.
* SEN was the stalking horse bidder for Nortel during the auction eventually won by Avaya. They have demonstrated a desire to grow in this space by making an acquisition at the right price. Nortel was perceived as too costly as Avaya bid up the price; perhaps an ALU deal might be more financially attractive.
* The indirect North American channel for both SEN and ALU is relatively weak as compared to competitors such as Cisco and Avaya. A combination of direct/indirect sales has confused end users, consultants and resellers alike. The new "SALE" entity combined with a clarified "go to market" strategy could be more attractive to channel partners in the vertical markets identified above, as well as to development partners that would be interested in writing applications for a larger installed base.
So now that I've addressed why this particular combination of SEN and ALU might make sense, let's discuss some of the challenges that the combined entity would face in terms of products, channel and market acceptance.
Products
The two companies' core IP Telephony platforms have fundamental differences in technical architecture. The ALU OmniPCX is a "traditional" hybrid system that came from the TDM world and successfully integrated IP Telephony with digital and analog devices. The SEN OpenScape platform is a "softswitch" that was one of the first enterprise class products built on SIP and session management. Borrowing a page from the Avaya/Nortel product roadmap, one could see a similar strategy of using the SIP session management core (i.e. the OpenScape platform) as the flagship while allowing the ALU OmniPCX base a graceful migration. (Note, the recently announced ALU OpenTouch architectural framework validates this approach, and the existing SEN products would likely allow the realization of this to occur much quicker than if ALU had to develop all of the pieces from scratch).
During the recent Enterprise Connect conference, both SEN and ALU participated in my IP-PBX session. In that session, Siemens was rated the highest out of nine vendors in terms of value (functionality, architecture and cost) and Alcatel-Lucent also scored in the top half (Graph of results included at the end of the article). The conclusion here is that both vendors offer strong solutions, with SEN further along on the migration to a session-based architecture.
One additional point: The ALU E911 DASH service could prove to be valuable to the combined entity, as E911 has more attention focused on it through legislation and other mandates. The mandate for E911 appears to be picking up momentum in several states.
Once a decision is made on core architecture, then decisions on endpoints, gateways, voicemail (and related integrated/unified integrations) could be made. Both vendors offer very strong and complete messaging platforms (SEN Expressions; ALU ICS). On the surface, it appears that either would be a viable going-forward platform. A promise to support existing peripherals for an extended period of time along with upgrade discounts would likely be required to satisfy the installed base.
The large enterprise contact center offerings from both ALU and SEN are server based, support open standards and many integrations. The Genesys product family wins the day with peaceful coexistence for a limited time for the OpenScape Contact Center base. This platform would be one of the key differentiators for "SALE" going forward.
Unified Communications suites offered by both vendors are also quite good, have had reasonable market acceptance and offer all of the Presence, Fixed Mobile Convergence and integrations expected of enterprise class products. Similar to the UM discussion, both ALU and SEN products appear viable, and it is not clear yet which would emerge as the long term platform.
Of course, the devil is in the details, and deep technical due diligence would be needed to assess the impact of items such as existing integrations, product development, proprietary protocols (e.g., the ALU NOE) and how that impacts the migration.
Go To Market--The Channel
Here's one of the key challenges for each entity currently, as well as for a potential combined "SALE" entity: Both ALU and SEN use a combination of Direct and Indirect sales approaches. I believe that both have recently stated a desire to increase the indirect channel substantially. The indirect approach has won in the voice, data and video markets, as it allows the manufacturers to leverage hundreds of sales and engineering professionals that are not on their direct payroll.
As an end-user consultant, I have witnessed first-hand that the lack of strong channel partners has cost SEN and ALU opportunities to bid, as well as wins. So the question is, "Would the combination of two weak channels make a bigger weak channel or allow 'SALE' to attract better channel partners?"
I recently attended the UC Summit conference, which is primarily attended by integrators and consultants. During my conversations with management from various integrators, my thinking was reinforced as to the two key reasons that justify why a large integration partner would consider taking on a new manufacturer:
* They may be extremely unhappy with their existing portfolio of products. This could stem from many reasons and perceptions including: the product is uncompetitive (i.e. feature, price), too much competition (i.e. other resellers or the manufacturer), lack of trust in the manufacturer, or inability to make money (in product or service revenue).
* A new vendor enters the market with an extremely compelling offering in terms of product and potential to make money.
In general, the first bullet is more applicable to the potential "SALE" entity, though part of the second bullet applies as well. Let me explain.
Cisco and Avaya partners often compete with each other on the same deal, driving down margins on hardware/software revenue as well as services. It is difficult to differentiate yourself from another channel competitor selling the same exact thing, with similar references and experience. I have experienced channel partners that refused to participate in my rfp process if they were not given deal registration or additional manufacturer discount. ("Deal registration" is when an OEM vendor rewards channel partners with extra discounts for "influencing" a deal--generally when the partner invests their time to get the OEM manufacturer on the bid list).
In the instances I'm describing, it wasn't worth the channel partners' investment in pursuing the deal absent these additional incentives. It is these partners that "SALE" might be able to entice with promise of less competition and greater financial reward--if a channel program could be successfully crafted.
The Installed Base and Prospects
Using the benefit of hindsight from the Avaya/Nortel deal, we can also draw some conclusions as to what ALU and SEN should do to reduce the Fear, Uncertainty and Doubt that swirls around any merger. There are two discrete periods of time that deserve careful consideration:
* The Bidding Phase—ALU's decision about how and to whom to sell the enterprise communications division should be done in the shortest time frame as possible, with the utmost secrecy. The Nortel bankruptcy and subsequent auction seemed to play out in slow motion. At the time, we advised existing users to wait until the dust settled before making substantial investments. In addition, we were reluctant to include Nortel in new bid opportunities with the uncertainty hanging over them. The long time frame resulted in lost opportunities. We would advise existing ALU installed base to use a similar strategy and to seek information from as many sources as possible including ALU, channel partners and other end users.
* Product Roadmap Phase--Once the Nortel bankruptcy auction occurred and Avaya was announced as the winning bidder, we also advised caution until the product roadmap was well articulated, and meaningful conversations could take place that specifically addressed each of our clients' unique circumstances. Avaya did a good job expediting this phase and providing for many points of communication. I would recommend a similar approach to any prospective "SALE" combination. I would also recommend that existing users and prospects get written commitments with teeth for the specific product sets they are considering. Things change, field personnel don't always interpret HQ intentions properly, and sometimes, people are even intentionally misleading (gasp!). The notion of "Trust but Verify" is applicable here.
Conclusion
The combination of ALU and SEN would seem to make sense on a number of levels. If executed properly, it could provide the market with a competitor that has the critical mass to compete effectively with the current market leaders in voice, contact center, key verticals (i.e. healthcare) as well as the new disrupters. Not only would "SALE" need to execute nearly flawlessly on the product side, but they'd need to revitalize their channel in North America and perhaps elsewhere. What do you think?
David Stein is Principal of Stein Technology Consulting Group. He can be reached at [email protected]
Results from Enterprise Connect: IP PBX--Who Delivers the Goods?
